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investments. The only requirement to get regular capital asset treatment is that such securities be identified as securities held for investment.

Section 1237 of the bill purports, according to the report (p. 84), to offer similar treatment to real-estate dealers. However, there are additional requirements imposed with respect to real-estate dealers, the most important of which is that property designated as investment property must be held for at least 5 years in order to enjoy the benefits of capital asset treatment.

The additional requirement for a 5-year holding period, instead of a 6-month holding period, would appear to be discriminatory and without justification, especially, since under decided court cases, if a real-estate dealer can establish that a particular piece of property was in fact held for investment, he may now enjoy long-term capital gains and loss treatment if he has held the asset for a 6-month period.

While tax provisions relating to real-estate dealers are not of primary concern to the NAM, this provision does, by extending the holding period, run counter to NAM policy on capital gains and indicates the possibility of more restrictive treatment for capital assets in other areas and in other industries.



Section 117 (f) Internal Revenue Code now provides that amounts received on retirement of bonds with interest coupons or in registered form shall generally be considered as amounts received in exchange therefor. Accordingly, bonds issued at a discount, which discount may be in lieu of interest, and redeemed at par, results in the discount being treated as capital gains and, in effect, converting ordinary interest income to capital gains.

Section 1232 is designed to treat the original discount at time of issue as interest. This is done by prorating the original discount over the life of the bond and then requiri each holder of the bond to include as ordinary income his pro rata part of the discount as ordinary interest if he sells the bond for more than he pays. If the bond is sold at less, the whole difference is capital loss.

While there is merit in the idea underlying the proposal, it does not seem desirable in its present form. In this connection, it may be noted that: (1) Investors are not always in a position to know the original issue price. (2) The purchase and selling price of an intermediate holder is a reflection of market conditions and has little, if anything, to do with original discount. Thus, in a rising market when a bond issued at par rises to 102, a bond issued at 98 may sell at par.

A portion of the gain would be attributable to the original discount. (3) If a bond is purchased at 98 and sold at 98, apparently a proportionate part of the original discount would still be includible as interest. In such case, and indeed in all cases under this section, there is no apaprent provision for adjustment of basis accordingly. (4) There is a de minimus rule so that this section shall not apply if the issue of discount is less than one-tenth of 1 percent per year for the life of the bond.

The CHAIRMAN. Mr. Sprague.



Mr. SPRAGUE. My name is Kenneth B. Sprague. I am an officer of American & Foreign Power Co., Inc., located at 2 Rector Street, New York City.

I wish to express my company's appreciation for the opportunity of appearing here today to present our position in connection with those sections of H. R. 8300 which relate to the taxation of income from foreign sources. At the outset, may I say that we believe the provisions relating to the taxation of foreign income represent a major step toward encouraging investments in foreign countries, and strongly urge their adoption.

American & Foreign Power Co., Inc., is 1 of the 2 largest investors of private United States capital in Latin America, and the largest single public utility enterprise operating in the Central and South American countries. These operations are conducted through 51 subsidiaries, of which 9 are incorporated within the United States. The subsidiaries serve approximately 2,500,000 electric customers and have total assets aggregating almost $1 billion,

To date, this company has been responsible for the exportation from the United States of electrical equipment and other materials with an estimated value of more than $500 million. The effect of these purchases has been felt throughout our country; and the company's present program of property improvements and expansion will result in at least $1 billion in United States exports to these Latin American countries during the next 10 years. Our experience has been that as more electric power becomes available, expenditures will be made by the countries in which this development occurs for United States materials and equipment which will be required to build and operate factories, mines, and other establishments.

The demand for refrigerators, stoves, water heaters, motors, and household appliances will

be greatly stimulated and encouraged by the higher living standards that come with the availability of electric power.

We believe that sound changes in the tax treatment of foreign income to United States private investments in foreign utilities will help provide the incentive for further expansion of these activites with coresponding benefit to the United States economy.

The tax incentives provided in section 923 and related sections, in their present form, should be of considerable aid to the economic development of foreign countries. However, there are one or two modifications in H. R. 8300 which we would like to suggest which would have little effect on tax revenues but would make the provisions of sections 923 and 951 more equitable. To the best of my knowledge, these suggestions have not been brought to your attention by any other witness appearing before this committee.

First, discrimination against companies receiving interest and dividends from United States incorporated subsidiaries. As you know, United States companies invest and carry on a trade or business in a foreign country either (1) through a branch operation, (2) through a foreign-incorporated subsidiary, or (3) through a domestically incorporated subsidiary.

The provisions of section 923 give an allowance of credit in the form of a 14-point reduction in the tax rate when income is derived from a branch or a foreign subsidiary, but when interest and dividend income is received from a domestically incorporated subsidiary engaged in exactly the same business, operating in the same manner, in the same territory as a branch or a foreign subsidiary, and meeting all the earnings and stock-ownership requirements of the section, a parent company

does not receive this allowance of credit, simply because the place of incorporation of the subsidiary is in the United States.

The CHAIRMAN. Just a moment, please. What is the staff's position in that matter? Mr. SMITH. I don't think it has been considered. Mr. SPRAGUE. I don't think it has been mentioned.


The CHAIRMAN. Go ahead.

Mr. SPRAGUE. Thus, the country of incorporation of the paying company establishes the criterion for the tax relief. Where a domestically incorporated subsidiary operating abroad, in all respects meets the same earnings and business character tests as a foreign subsidiary, and a parent company meets the stock-ownership standards specified in section 923, it seems clearly inequitable and, in fact, almost paradoxical to deny tax relief to a parent company on the sole ground that a subsidiary was incorporated in the United States.

In other words, to obtain tax relief under this section, the place of incorporation of domestically incorporated subsidiaries would have to be changed to a country outside the United States. We feel that such a result is neither within the spirit nor intent of the proposed tax relief.

It has been suggested that the parent corporate stockholder of a domestically incorporated subsidiary operating in Latin America is afforded tax relief under existing and proposed code provisions pertaining to Western Hemisphere trade corporations.

rations. This, of course, is not true.

The provisions relating to Western Hemisphere trade corporations have been and will continue to be highly beneficial in the economic development of Latin America, and have, in themselves, demonstrated the value of tax incentives in relation to foreign trade. While the Western Hemisphere trade-corporation provisions apply a tax rate of 38 percent to the net income of such corporations, it should be emphasized that this reduced tax rate does not apply to the United States parent receiving income from the Western Hemisphere trade corporation.

Under both the existing law and under the proposed law, the parent company is taxed at the full 52-percent tax rate on interest from a Western Hemisphere subsidiary. This is the same tax rate imposed under existing law on the interest from a foreign incorporated subsidiary and which is to be changed under the proposed law.

In other words, the deduction for interest paid is allowed at 38 percent to the Western Hemisphere subsidiary, but the same interest, when received by the parent corporation, is taxed at 52 percentand section 923, as now drawn, affords no relief from this inequity.

As we understand it, the intention of section 923 and related sections is to allow tax relief on interest and dividends which are derived from the earnings of foreign enterprises meeting the tests specified in that section. We take no exception to these tests for relief. However, the bill, as drawn, does not extend this intended tax relief to the parent company of a domestically incorporated subsidiary operating in Latin America, even though all the tests of section 923 are met.

We realize that dividends from a United States subsidiary are not subject to the same tax as those from a foreign subsidiary; hence, this statement is directed primarily to the taxation of interest income which, under existing law, is subject to the same tax rate whether received from a foreign subsidiary or from a domestically incorporated subsidiary.

As previously stated, American Power has 51 subsidiaries which operate wholly within 11 Latin American countries, rendering a public service vital to the citizens and economy of each country.

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It seems to us that interest received by American Power on its investment in domestically incorporated subsidiaries operating in such countries should have the same tax relief as now provided in H. R. 8300 for interest and dividends received on investments in foreign corporations.

The proposed change could be readily accomplished by deleting from section 923 the words “foreign corporation" wherever they appear and inserting the words “corporation operating in a foreign country.” We are submitting herewith a suggested section 923 which incorporates this modification.

Secondly, deferred income from foreign sources. Part IV of subchapter N of the income-tax provisions relates to deferred income from sources within foreign countries. The report of the Ways and Means Committee on H. Ř. 8300, at page 76, indicates that the basic purpose of those provisions is to permit a domestic corporation an election to defer tax on the profits of its foreign branches similar to the manner in which taxes are deferred on the profits of foreign subsidiaries.

Under section 951 of part IV, it seems clear that where the requisite qualifications specified in subsection (a) are met, deferral of income may be elected as to

(a) Foreign branch operations of a domestic corporation, or

b) All operations of a domestic corporation whose entire business is conducted within a foreign country. However, subsection (c) specifies certain corporations which are ineligible for the deferred-income treatment, included among which are Western Hemisphere trade corporations. The exclusion of this class of corporation from deferred-income treatment appears to have no logical basis. Moreover, such exclusion evidently was not intended by the Committee on Ways and Means, since the committee report on H. R. 8300, at page A260, states:

"A corporation which simultaneously qualifies for the benefit of the treatment provided by part IV and for the special deduction allowed by section 922 may choose either of such benefits in the alternative."

It seems fairly obvious that the intention of the House was to permit deferral of tax on all income of the character specified by section 951 derived from foreign sources, whether earned by a branch, a domestically incorporated subsidiary, or a Western Hemisphere trading corporation. This recognition of the need for reinvesting earnings in a foreign country without first being subject to United States income tax is a new and most constructive principle in the taxation of foreign income, since it increases the amount of earnings available for reinvestment. This is especially important to a company such as Foreign Power, which could not possibly meet the rapid growth of demand for electric power in Latin America unless it reinvested a major part of its foreign earnings.

It is suggested, therefore, that section 951 be revised so as to make it clear that Western Hemisphere trade corporations are not to be excluded from the deferred-income treatment. This could be accom

. plished by deleting in its entirety subparagraph (2) of subsection (c) of section 951.

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Thirdly, foreign tax credits. American & Foreign Power Co. and many other taxpayers have urged, and continue to urge, that the "per country limitation” upon the credit for foreign income taxes should be removed. The present bill cancels the "overall limitation" on foreign tax credits. While we have no particular objection to such cancellation, in passing we would like to state, it is our feeling that if income is earned within the United States it should be subjected to United States income tax. One result of the elimination of the "overall limitation” would be to permit a domestic corporation having United States income but a loss in a foreign country to offset the foreign loss against United States income, thereby reducing the United States tax otherwise payable on United States income.

As to the "per country limitation,” there are a number of reasons why that limitation operates inequitably in the American & Foreign situation. I shall mention but one. Foreign Power, in order to meet ever-increasing capital requirements, has found it necessary to make substantial borrowings from sources within the United States, which borrowings apply to its operations as a whole. We feel that it is fundamentally unsound to be required, under the “per country limitation,” to compartmentalize artificially the taxable income from these foreign countries and, by this procedure, curtail the credit for taxes paid in such countries, when all of such earnings, treated as a whole, must be used to pay fixed charges on indebtedness incurred to carry on the overall operations.

In several countries where the subsidiaries operate, the effective income-tax rate on the net income segregated to the respective countries under the per country limitation is substantially higher than the United States tax rates upon such net income, but the excess foreign income tax may not be taken as a credit against the United States tax imposed upon our total foreign net income. The original and basic purpose of the foreign tax credit provisions is to avoid double taxation of foreign income, but under the “per country limitation,” as it now operates, when the total of the foreign and United States taxes paid on foreign income exceed the United States tax rate on the same foreign income, that purpose has been seriously impaired.

We respectfully recommend, therefore, that your committee revise H. R. 8300 so as to eliminate the “per country limitation” and reinstate the “overall limitation” with respect for foreign income-tax credits. This would allow a company operating in several foreign countries to treat foreign income taxes paid on foreign income as one total for credit purposes and, at the same time, leave undisturbed the United States income tax on income derived from within the United States.

Thank you, gentlemen.
The CHAIRMAN. Thank you very much.
(The accompanying statement of Mr. Sprague follows:)


(Matter in brackets to be deleted; new language in italics) SEC. 923. BUSINESS INCOME FROM FOREIGN SOURCES.

(a) ALLOWANCE OF CREDIT. In the case of a domestic corporation (other than a corporation described in subsection (d)), there shall be allowed a credit as

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