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STATEMENT OF HENRY P. ISHAM, PRESIDENT, CLEARING
INDUSTRIAL DISTRICT, INC., CHICAGO, ILL. Mr. Isham. Mr. Chairman, my name is Henry P. Isham. I am president of the Clearing Industrial District, Inc.
, Chicago, Ill. My company is usually considered the first in the field of industrial realestate planning
Over the years a discrimination has crept into the administration of of the income tax laws. This discrimination operates at a disadvantage to individuals and corporate dealers in the liquidation of investments in real estate. It is difficult for the dealer-investor in real estate, in contrast with the dealer-investor in other forms of equity, to be taxed on a capital gains basis instead of a current income basis.
The report of the House committee on the proposed Internal Revenue Code of 1954 clearly recognizes this difficulty and, in particular, the discrimination against a real-estate dealer in contrast to a security dealer, in establishing the fact that he purchased a piece of property as an investment and not as stock in trade held for sale to customers in his regular course of business.
Section 1237 of the proposed code recognizes that a dealer can also be an investor, but corporations are excluded from any benefit thereunder. This does not seem fair. Corporations are almost a necessity in any large long-time investment in real estate. This is because of the large amount of money involved, not only in the original purchase, but in carrying for years nonproductive property and paying the realestate taxes thereon, and because of the difficulties otherwise encountered upon the inevitable death of individuals.
I have a fundamental objection both to section 1237 and 1238. Under these sections absolutely on one is entitled to the capital gains treatment, no matter what he bought the property for or how long he held it, if at any time during his ownership any substantial improvement to the property was made by him or even by a city or a public utility.
Let me drive home the injustice of this prohibition and the harm it will do to our economy, which is so largely based upon the investment of savings of the people in real estate.
Senator Carlson. The chairman has now arrived and I relinquish the chair.
The CHAIRMAN. Sit still, Senator. Go ahead.
The famous Hetty Green owned a square mile of land halfway between the center of Chicago and its southwest limits. She owned it from approximatley 1870 to 1915. For these 40 years she blocked all special assessments for city streets, sewers or water mains through or around her property. This left this property for 40 years a vacant field and a trash dump. This action on her part also paralyzed any growth or proper use of the property on the area outside of it.
Sections 1237 and 1238 say that by such actions and by such action only she is entitled on sale of the property to treatment on a capital gains basis. Now, in contrast, my grandfather and
some of his friends in 1898 organized a company now known as the Clearing Industrial District, Inc. They purchased 8 square miles of poor and largely unused farmland adjacent to the city limits. This purchase was clearly an investment in the future growth of the city of Chicago.
Like Hetty Green, we paid real-estate taxes thereon for years. Like Hetty Green, we received no revenue therefrom for years. Unlike Hetty Green, we not only cooperated with the city in its normal growth, but we installed at our own expense a sewer system to drain the property, roads to reach part of the property, made water available, and permitted public utilities to extend their gas mains and electric transmission lines so their services would be available. This we deemed advisable regardless of the eventual disposition of the property.
Now, in contrast to Hetty Green, both under existing law and under section 1237, we seem to be faced with a tremendous burden in establishing our right to a capital-gain treatment on the sale of all or any part of this investment which we have owned for 56 years.
Senator CARLSON. Mr. Isham, this Clearing Industrial District, Inc., is that a corporation or an investment trust of real property?
Mr. ISHAM. It is a corporation. Under Illinois law for a while a corporation couldn't own real estate. For that period of our owner:ship we had a land trust.
Can anyone seriously contend that all of this property retained under 1 ownership for 56 years is stock in trade or property held primarily for sale to customers in the ordinary course of trade or business?
The CHAIRMAN. What is the answer to that?
Mr. SMITH. The Ways and Means Committee is having a conference on this, and we are looking into it.
Mr. ISHAM. In addition to the exclusion of corporations, there is this very basic hurdle of the prohibition of improvements.
The CHAIRMAN. Please tell us about the rest of the hurdles.
Mr. ISHAM. Can anyone seriously contend that the sales price of a vacant piece of land is current income to anyone who has paid carrying charges on it for 56 years?
The CHAIRMAN. Mr. Smith, I would like to have that explained pretty carefully in executive session.
Mr. Isham. It may be a little out of line, but if you held property for 56 years, you may have bought it for $100 an acre; 56 years later you sell it for $10,000 an acre; $9,900 is considered current income, and if you don't get the capital-gains treatment, you pay 52 percent of that $9,900.
The CHAIRMAN. That seems strange to me. But, go ahead. I am not your counsel. Go ahead.
Mr. Isham. Why, merely because the investor is a corporation or because he installs a sewer to convert swampland into dry land, should there be any doubt about his right to the eventual capital-gains treatment after holding property for a period of 56 years?
In a country such as ours, investment of the savings of the people has played a most important part in its growth. These savings have found their way into real property in greater volume than in all the other forms of equity ownership. Investment in real estate should be encouraged, not discouraged.
You are now rewriting the income tax law. One of the stated purposes is to take out those inequities which are discriminating in some way on one group, or another. I hope I have demonstrated convincingly one of these inequities, an inequity that is not in the public interest. I hope you can find some way of correcting it. All I am
asking is that an investor and a dealer in real estate be accorded substantially the same treatment as investors and dealers in other forms of property.
Senator CARLSON. Thank you very much.
Mr. Isham. May I ask permission to file for the record a prepared statement?
Senator CARLSON. The statement will be put in the record, I assure you.
Senator FLANDERS. Mr. Chairman?
Senator FLANDERS. I would like to make one remark. First, I find this Hetty Green situation very embarrassing because she was a citizen of the State of Vermont.
Mr. ISHAM. She lived in Chicago for quite a while, but, Senator, in a parody of the popular song, "You can have her-she's too tight for me."
Senator FLANDERS. She had her residence in Bellows Falls and she didn't keep up her property any better there than she did in Chicago.
Now, one thing that I hope we can make out of this point, which seems prima facie to be well taken, is whether it introduces or whether it clarifies that sort of a no-man's land in the holding of real estate which exists between that applicable for capital-gains treatment and that applicable for current profits.
Senator CARLSON. We thank you, Mr. Isham.
EXPLANATION OF SECTION 1237 OF H. R. 8300 RELATING TO INVESTMENTS IN REAL
ESTATE BY DEALERS IN REAL PROPERTY, SUBMITTED BY HENRY P. ISHAM, PRESIDENT, CLEARING INDUSTRIAL DISTRICT, INC., CHICAGO, ILL.
This memorandum explains that impact and injustice of section 1237 of H. R. 8300, the pending Internal Revenue Code of 1954, upon the Clearing Industrial District, Inc., a corporation which purchased about 4,000 acres southwest of Chicago in 1898. A major portion of this large tract of land, together with other land subsequently acquired, has been held for investment, and the gradual increment in value over a long period of years would appear to be the kind of income for which capital gain treatment was intended. Yet, section 1237 of the bill offers no assurance that gain or loss upon the liquidation of this investment will be treated as capital gain or loss.
Dealers in other types of property, including dealers in securities, may make investments in property like that which they hold for sale or for use in their business, but dealers in real estate are subjected to an ever-increasing burden of administrative controversy with the Internal Revenue Service and litigation in the courts to establish their claim to capital gain treatment for real property held by them for investment. Section 1237 prescribes rules under which an unincorporated dealer in real estate will be recognized to have an investment in real property and, upon sale or exchange, to have any loss and that part of any gain in excess of 5 percent of the selling price subject to the general provisions of subchapter P of the new code, relating to capital gains and losses.
The report of the Committee on Ways and Means suggests that the purpose of section 1237 is to insure that real estate dealers should be given opportunities to segregate investments in real estate from any real estate business activities and to receive capital gain treatment on the disposition of such investments in much the same manner that dealers in securities now receive capital gain treatment on securities identified as held for investment purposes. The avowed beneficial purpose of the bill, however, is nullified by the following major defects in section 1237 :
(1) Exclusion of corporations.-Section 1237 is inapplicable to investments by incorporated dealers in real property although corporations and individuals are generally accorded roughly the same treatment under other capital gain provisions of the Internal Revenue Code.
(2) Prohibition against improvements.-Capital gain treatment under section 1237 would not be available in regard to real property upon which any “substantial” improvement is made during the period held by the taxpayer. Apart from the uncertainty as to what would be a substantial improvement either to raw land or land upon which a building or facility has been constructed prior to acquisition by the taxpayer, it is questionable tax policy to preclude the addition of improvements to property which should be made without regard to the ultimate disposition of the premises.
(3) Penalty requiring treatment of capital gain as ordinary income.-Although the taxpayer meets all the other restrictive requirements of section 1237 (b) as to identification, holding period, and failure to make substantial improvements—so there can be no question about his having a bona fide capital asset investment—he is required to treat as ordinary income any gain upon disposition to the extent of 5 percent of the selling price. This penalty applies forever, even though the taxpayer may hold the property for 10, 15, or 20 years from the date of identification and even though the property may, on the date of disposition, clearly come within the definition of capital asset or property used in the trade or business under sections 1221 or 1231 of H. R. 8300.
While the primary business of Clearing Industrial District, Inc., is the construction, management, and leasing of improved industrial property, it has also held, solely for investment, land owned for many years by Clearing. On some of the land held for investment there have been no improvements whatsoever. In some cases improvements have included some or all of such betterments as sewers, roads, utilities, and similar additions which an owner of real estate might make without regard to the ultimate use which will be made of the land. It is our view that the capital gain provisions of the Federal tax laws were intended to apply to the liquidation of such investments. Otherwise the taxpayer who sells a tract of industrial real estate would not be allowed to retain sufficient capital to reinvest in other real estate which he thinks may be a good, long-term investment today.
The limitations of section 1237 are as onerous in their terms as the burden under existing law of convincing internal revenue agents that a real estate dealer can have bona fide investments in real property. It is our recommendation, therefore, that capital gain treatment should be applicable to gain or loss from disposition of real estate held for a period of time, whether it be 6 months or 5 years, without regard to identification, improvements made prior to the prescribed holding period, or other restrictions or limitations. Surely any gain accruing over a period of several years should be entitled to capital gain treatment. This would be accomplished under attached alternative draft A.
If this is not feasible, we urge that section 1237 be stricken from H. R. 8300 so that the staffs of the joint committee and the Treasury Department may consult further with the taxpayers whose interests would be adversely affected by its passage. If even this is asking too much, we respectfully suggest that section 1237 be clarified at least to leave real estate dealers in no worse position than they are today with regard to investments in real estate held by them. This would be accomplished under attached alternative draft B.
ALTERNATIVE DRAFT A-SUGGESTED AMENDMENTS TO SECTION 1237 OF H. R. 8300
RELATING TO DEALERS IN REAL PROPERTY
Section 1237 of H. R. 8300 (relating to dealers in real property) is hereby amended to read as follows: “SEC. 1237. DEALERS IN REAL PROPERTY
“(a) GAINS AND LOSSES.-In the case of a dealer in real property, gain or loss from the sale or exchange of real property shall, notwithstanding the provisions of section 1221 and section 1231, be considered gain or loss from the sale or exchange of a capital asset or of real property used in the trade or business, as the case may be, if such real property was held by the taxpayer for more than [any period from 6 months to 5 years), and if no substantial improvement was made in such real property during the period it was held by the taxpayer or members of his family (as defined in section 267 (c) (4)), by a corporation controlled by the taxpayer, or by a partnership which includes the taxpayer as a partner.
“(b) DEFINITION OF SUBSTANTIAL IMPROVEMENTS.—As used in this section, the term 'substantial improvements' shall not include any improvement completed more than (whatever holding period is provided in subsection (e)] before the sale of such real property; or any improvement resulting from clearing, leveling, grading, paving, or drainage operations; or any improvement (other than connection of facilities to, or their installation in, any building or structure above ground level) necessary to make generally available throughout such real property services of a type customarily provided by a governmental agency or a public utility.
"(c) EFFECTIVE DATE.—This section shall apply only with respect to sales or exchanges of property occurring after the date of enactment of this title.”
ALTERNATIVE DRAFT B-SUGGESTED AMENDMENTS TO SECTION 1237 OF H. R. 8300
RELATING TO DEALERS IN REAL PROPERTY
Section 1237 of H. R. 8300 (relating to dealers in real property) is hereby amended as follows:
1. By amending subsection (b) (1) to read as follows: “(b) REQUIREMENTS With RESPECT TO TIIE PROPERTY.-SUBSECTION (a) SHALL
APPLY TO REAL PROPERTY IF
(1) After the date of enactment of this title, but before the expiration of the 30th day after the date of its acquisition or before the expiration of th 90th day after the date of enactment of this title, whichever is the later, the taxpayer has elected to have the gain taxed in accordance with the provisions of this section and such real property has been clearly identified (such election and identification to be made in the manner prescribed by the Secretary or his delegate or, in the absence thereof, in the taxpayer's
records) as real property held for investment; and." 2. By adding as subsection (f) the following:
“(f) EFFECT OF FAILURE TO IDENTIFY.-In case of the sale or exchange of property as to which the taxpayer has not made the election and identification prescribed by the provisions of subsection (b) (1), none of the provisions of this section shall apply to the determination of taxable gain or deductible loss."
3. By redesignating subsection (f) as subsection (g) and amending it to read as follows:
“(g) EFFECTIVE DATE.—This section shall apply only with respect to sales or exchanges of property occurring after the date of enactment of this title.”
Senator CARLSON. The next witness is Miss Patricia McGerr. We are happy to have you with us this morning, and you may proceed in your own way.
The CHAIRMAN. Off the record.
STATEMENT OF PATRICIA MCGERR, MYSTERY WRITERS OF
Miss McGERR. My name is Patricia McGerr and I represent the Mystery Writers of America. I would like to explain first that while: we are an organization of about more than 400 members, with about 325 of these professional writers, which sounds like a relatively sinall organization, what we have to say about this bill, about the economics of writing in general and the inequities to which we object, applies: equally to the authors of books in other fields. So that in speaking for ourselves, we are actually, I think, speaking for the authors of all books.
Our immediate concern, of course, is with section 107 (b) of the present Internal Revenue Code, and the new section 1301 of H. R. 8300,, which provides that an author who has spent 36 months on 1 work and receives 80 percent of the income from that work in a single year may,, for income tax purposes, spread that income over the same number of: years he has spent in writing this particular work.