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circles, as they would serve to prevent legitimate transactions which, in many cases, would result in business and job expansion. Our views on this subject are set forth in exhibit D. Our overall recommendation is that the provisions in question be amended to permit without tax the legitimate reorganization of corporate structures by statutory merger, consolidation, or by practical merger and liquidation, without reference to the size of the corporations involved. In this connection, there should be no discrimination against corporations which are not "publicly held," as defined in the bill.
Moreover, to the extent that the bill when revised and perfected changes present rules for corporate reorganizations, parties affected should have the opportunity to elect in respect to any 1954 transactions whether they shall be taxed under the provisions of the 1939 code or the 1954 code.
Preferred stock bail out: There is attached a short statement, exhibit E, on section 309 dealing with redemption of nonparticipating stock. We strongly recommend that the penalty tax not apply to stock issued for adequate consideration.
As a minimum, we believe that section 309 (c) must be amended so that the presumptive issue date of January 1, 1954, applies only to stock issued for an inadequate or for no consideration.
Redemptions of stock to pay death taxes: Section 303 of the bill supplants section 115 (g) (93) of the existing code, enacted in 1950 to prevent death taxes from forcing the liquidation at a loss of closely held family corporations.
However, the protection afforded by the original provision, and included in the pending bill, does not extend to situations where there is, after the death of the owner, a substitution of stock for the stock owned at the date of death. To make the law consistent with its avowed intent, it is recommended that section 303 be amended to apply equally to substitute stock held in the decedent's gross estate. A fuller explanation of this proposal is included in exhibit F.
Accrual of real property taxes: Section 461 (c) represents a desirable step toward the determination of taxable income in accordance with generally accepted accounting principles. However, in making the new rule for accrual of real property taxes mandatory, a taxpayer who has been keeping his books in accordance with existing law may entirely lose his deduction for real property taxes during the transition year.
This situation, and alternative solutions, are explained in exhibit G. Reserves for estimated expenses: Section 462 also brings tax accounting into closer conformity with generally accepted accounting principles. It leaves open the question, however, whether a taxpayer would be allowed to deduct actual expenses during the transition year, as is provided in present law for bad-debt reserves.
This section should be clarified so as to leave no doubt on this score. A fuller explanation is given in exhibit H.
Penalty taxes on intercorporate dividends and on consolidated returns: For many years, nearly all business groups, including the NAM, have recommended elimination of the tax on 15 percent of intercorporate dividends and the 2-percent penalty tax on consolidated returns. The President's tax message proposed removal of these penalty taxes over a 3-year period, but such removal is not provided in H. R.
8300. We do not see how the purposes of this legislation can be accomplished without the complete elimination of injustices of this character. We therefore recommend that the President's proposals be carried out.
In this connection, the purpose of allowing a credit for intercorporate dividends is defeated in the case of corporations having a net operating loss. The result is that the corporation pays tax on 100 percent of the dividends received in the loss year. As explained in exhibit I, we recommend elimination of this discrimination against corporations with fluctuating incomes which receive dividends from other corporations.
Prepayment of corporate taxes: Mr. Chairman, I now come to a provision which is of the most serious concern to many corporations; namely, the requirements of declaration and payment of estimated tax provided in sections 6016, 6074, and 6154. It is conceded that these provisions would not be harmful in the case of corporations whose working capital position is such that they are able to set aside tax accruals in cash and perhaps buy tax anticipation certificates.
In other cases, however, corporations need all cash available for current working purposes. The operations of many such corporations have already been adversely affected by the speedup in corporate tax payments effected in the Revenue Act of 1950. We do not believe there is any method by which the further speedup can be confined to corporations which would not be financially embarrassed by its application, whether they be large or small.
We don't accept the idea that the elimination from this provision of a certain amount of income satisfactorily solves that problem. Accordingly, we strongly oppose any change in law which would require payment of any part of the corporate tax in advance of the 15th day of the 3d month following the end of a taxpayer's taxable year.
Additional reasons for taking this strong stand are: First, the fact that prepayment would have but slight effect on the amount of revenue received by the Government in any fiscal year, and second, the problem of imbalance in the revenue flow as between the first and second 6 months of the Government's fiscal year can be partially solved by excluding tax anticipation certificates from the statutory debt limit.
As we have previously suggested, the problem of imbalance was intensified by the speedup in corporate tax payments enacted in 1950, and cure should not be sought by compounding the hardship thus inflicted on corporate taxpayers.
This completes my testimony. I have not touched on many of the points included in our specific recommendations-some of which have, and some of which have not, been incorporated in the bill. We believe all of our recommendations are well-founded and merit your sympathetic consideration.
We would not want our testimony, in which we have proposed changes in H. R. 8300, to be construed as any lack of confidence in this legislation as a whole. Our only aim in appearing here is to aid the Congress in arriving at the best possible solutions of some very difficult problems. I hope that this testimony and accompanying material will serve that purpose.
Thank you, sir.
The CHAIRMAN. Thank you very much.
(The exhibits of Mr. Maytag follow :)
SPECIFIC RECOMMENDATIONS FROM FEDERAL TAX PROGRAM OF THE NATIONAL ASSOCIATION OF MANUFACTURERS
(As approved by the association's board of directors October 29, 1953, and revised February 4 and 5, 1954, and April 14, 1954)
I. THE CORPORATION INCOME TAX
(a) Rate revision.'-Although the National Association of Manufacturers has opposed continuation of the 52 percent combined corporate rate beyond March 31, 1954, it now recognizes that some continuation is necessary in view of budget conditions and to permit needed tax reforms. However, the 5-percentage-point reduction in the normal corporate rate which was scheduled to take effect on March 31, 1954, should not be postponed for more than 1 year.
(b) Excess-profits tax.—So-called excess-profits taxation is now almost universally recognized to be unsound in principle and inequitable in application. With expiration of the present tax on December 31, 1953, such a tax should never again be enacted regardless of fiscal emergencies.
(c) Rates on smaller corporate income. The present high level of corporate tax rates makes imperative some differential in favor of corporations with small incomes as an aid to the beginning and development of business. To this end, the exemption of $25,000 from surtax in present law is approved, but there should be no increase of this exemption and no further graduation of the corporate tax.
(d) Intercorporate dividends.-The credit for dividends received from corporations subject to the Federal income tax should be increased from 85 to 100 percent.
Computation of the net operating loss deduction should not discriminate against corporations with fluctuating incomes receiving dividends from other corporations.2
(e) Consolidated returns.-The additional tax of 2 percent on the net income reported in consolidated returns should be eliminated.
(f) Undistributed earnings (sec. 102).-The policy with respect to retained earnings shoud be changed so as to accept the decisions of management regarding the proportion of earnings to be retained for valid business reasons.
(1) The burden should be upon the Government to prove that the taxpayer was formed or availed of for the purpose of preventing the imposition of surtax rates upon its shareholders or the shareholders of any other corporation, through the medium of permitting earnings or profits to accumulate instead of being divided or distributed.
(2) The tax should apply only to that part of the undistributed net income which is unreasonably accumulated.
(3) Dividends paid within 75 days after the close of its taxable year should, at the taxpayer's election, be deducted in computing section 102 net income for such year.
(g) Payment date. The payment of any part of the corporate tax should not be required in advance of the 15th day of the 3d month following the end of the taxpayer's taxable year.
(h) Profit-sharing and stock bonus plans.-That the tax treatment of profit sharing and stock bonus plans permit recognition of length of service and employee contributions, in addition to wages, as the basis for allocation of employer contributions to participants in such plans.
(i) Corporate reorganization.-Tax law with respect to corporate distributions and changes in corporate organization and ownership should not penalize nor discourage legitimate business transactions.
1 Revised April 14, 1954.
2 Added April 14, 1954.
3 Added February 4, 1954.
4 Added April 14, 1954.
II. THE INDIVIDUAL INCOME TAX
(a) Rate reduction and range of progression. Following the scheduled rate reduction as of January 1, 1954, the first emphasis should be on narrowing the range of progression and the second on further reduction of the first bracket rate. The first step in narrowing the range of progression should be a 25-percent reduction of the progressive element of each bracket rate. As budget requirements permit, there should be additional percentage reductions of the progressive element, and further reductions of the first-bracket rate. The goal should be a limited range of progression. The proposed constitutional amendment outlined in section VII sets a range of 15 percentage points whenever the topbracket rate exceeds 25 percent.
(b) Personal exemptions.-There should be no increase in personal exemptions, as such action would further narrow the base of the individual income tax, concentrate the burden of the tax on fewer citizens, and postpone perhaps indefinitely the opportunity for rate reduction.
(c) Double taxation.―The present high tax rates on individual and corporate income intensify the impact of double taxation. Resolution of this problem should have high priority in the list of needed tax reforms.
(d) Withholding.-The extension of withholding of tax to forms of income other than wages and salaries would cause serious hardships to thousands of small-income recipients by collection of money as taxes when there is no tax liability in fact, and hence should not be authorized.
(e) Installment payment date. The time for payment of the fourth installment on the declaration of estimated tax should be extended from January 15 to January 31.
III. ESTATE AND GIFT TAXES
Estate and gift taxes should be removed from Federal use. Pending such action, rates of tax should be reduced, levies on transfers between spouses should be eliminated, and the rules of application should be designed to avoid hardships or inequities to estates consisting principally of stocks of closely held corporations.
In addition, the following rules with respect to survivors annuities under pension should be adopted:
(1) The value of pension benefits and any death benefits paid to a survivorbeneficiary through exercise of a joint and survivor annuity option, under any qualified or previously qualified pension plan, should not be subject to estate tax.
(2) There should be no gift tax by reason of the employee exercising his right under a qualified or previously qualified pension plan to choose a joint and survivor option.
IV. EXCISE TAXES
(a) Excise-tax law, regulation, and administration should be designed to achieve equity consistent with revenue goals, and to minimize enforcement and compliance burdens and costs.
(b) Except for the alcoholic beverage and tobacco taxes, the present system of Federal excises should be replaced by a uniform excise tax preferably at the manufacturers' level to be levied on all end products of manufacture, including those produced and sold by any Government owned or operated facility, except food for human and animal consumption; drugs; seeds, fertilizers, insecticides, fungicides, and defoliants; books, pamphlets, and music in raised print used exclusively for and by the blind; and religious articles. There should be no other exceptions to the end-product rule not required as a matter of administrative procedure. This replacement should be made as quickly as possible, but no later than April 1, 1954, the time when the excise tax increases included in the Revenue Act of 1951 are scheduled to expire, and the rate should be set so as to maintain the existing level of excise tax revenues.'
(c) The rates of tax on alcoholic beverages and tobacco should be reduced to those in effect prior to the last World War II increases.
5 Revised April 14, 1954.
V. REFORMS AFFECTING ALL TAXPAYERS
In addition to the specific recommendations relating to particular taxes, there are matters of concern to all taxpayers, whether incorporated or not, which should be included in a general program of recommendations. These are presented here.
(a) Business net income.-Greater recognition should be given to the results of business accounting in the determination of business net income. That is, where management is following accepted, standard accounting procedures, modified consistently in some cases to reflect the taxpayer's own operating experience, the results should be conclusive as to the net income.
(b) Depreciation.-There should be establishment of adequate and realistic provision for depreciation and obsolescence. TD-4422 and bulletin F nullify this principle and should be rescinded as soon as possible in favor of a policy which will eventually authorize the taxpayer to deduct the cost of depreciable property in accordance with his judgment as to its useful and competitive life. The depreciation claimed by the taxpayer, if computed in a consistent manner, shall be accepted, unless the Government proves that it has no reasonable relationship to the useful and competitive life of the property. To minimize the short-run impact on revenue, this goal could be achieved by a series of steps. Nothing in the foregoing shall be construed as denying the taxpayer the right to deduct accelerated amortization of emergency facilities.
In moving toward the goal set forth above, there should be no arbitrary restriction on the use of depreciation methods. Specifically, provision should be made for use of the "sum of the digits method" as well as the declining balance and straight-line methods.
(c) Major repairs, etc.-Taxpayer's consistent policy of expensing major repairs, intangible research, development and exploration costs, tools, jigs, dies, and fixtures, shortlived capital assets, and the like should be accepted for tax purposes.
(d) Current reserves.-Reasonable additions to reserves created to fulfill future obligations arising from current operations, such as reserves for product warranty, cash discounts, self-insurance, inventory losses, and advertising commitments, should be recognized for tax purposes."
(e) Depletion.-The high levels of production and consumption of our natural resources impose a heavy burden of exploration and development upon our extractive industries. The policy of percentage-depletion allowances should be continued.
(f) Capital gains and losses.-Experience with capital-gains taxation proves that the revenues produced are not commensurate with its discouraging and harmful effects upon production and the investment and reinvestment of risk capital. Pending the complete elimination of capital-gains taxation, it is recommended that
(1) The rate of tax be reduced; and
(2) Excess of capital losses over capital gains should be deductible. maximum tax benefit should be limited to the maximum rate applicable to longterm capital gains.
(3) Relief provision with respect to disposition of business assets should be so amended as to allow its benefits to apply to self-insurors in whose respect casualty losses largely sterilize the benefits.10
(9) LIFO. The last-in, first-out (LIFO) method of inventory pricing should be modified to provide for the use of cost or market, whichever is lower. Whenever the market value is lower than LIFO cost at the end of a year, this lower market value should become the new LIFO cost base for the succeeding taxable year.
(h) Retroactive taxation.—A retroactive imposition of increase of taxes cannot be justified under any circumstances, and is vigorously opposed.
(i) Tax favoritism.—
(1) Federal taxation of all competitive enterprise should be fair and equal, and no tax favoritism should be shown any competitive group, whether it be private, corporate, cooperative, or association.
(2) In the case of corporations not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual, the Federal income-tax exemption privilege should be eliminated with
8 Added April 14, 1954.
Revised April 14, 1954.