provided in section 37 with respect to taxable income derived from sources within any foreign country (determined under part I)—

(1) as branch income includible in gross income under part IV;

(2) as compensation for the rendition of technical, engineering, scientific, or like services;

(3) as dividends from a [foreign corporation] corporation operating in a foreign country if—

(A) the earnings and profits used in the payment of such dividend (including the earnings and profits of the year in which the dividend is paid), determined under subchapter C (sec. 301 and following) have been accumulated after December 31, 1953, and are earnings and profits of a year the gross income of which year—

(i) has been derived to the extent of at least 95 percent from sources without the United States,

(ii) has been derived to the extent of at least 90 percent from the active conduct of a trade or business through a factory, mine, oil or gas well, public utility facility, retail establishment, or other like place of business situated within a foreign country, and

(iii) does not consist of more than 25 percent of gross income derived from the sale of articles or products manufactured in such foreign country and intended for use, consumption, or sale in the United States,

but the credit shall apply only to the dividend or portion thereof paid out of earnings and profits conforming to the provisions of this subparagraph; and

(B) at the date of the declaration of the dividend and during the whole of the respective years in which were accumulated the earnings and profits specified in subparagraph (A)—

(i) such domestic corporation, either alone or in association with not more than three other domestic corporations, owned more than 50 percent of the voting stock of such [foreign corporation] corporation operating in a foreign country, or (ii) such domestic corporation owned not less than 10 percent of the voting stock of such [foreign corporation] corporation operating in a foreign country, and the trade or business of such domestic corporation was related to the trade or business of such [foreign corporation] corporation operating in a foreign country by reason of the rendition of technical, engineering, scientific, or like services or assistance, incident to the operation of the trade or business of such [foreign corporation] corporation operating in a foreign country; and

(4) as interest from a [foreign corporation] corporation operating in a foreign country if, throughout the year in which the interest is paid, such [foreign corporation] corporation operating in a foreign country fulfills the income requirements in paragraph (3) (A), and such domestic corporation fulfills one of the alternative requirements in paragraph (3) (B). (b) For purposes of subsection (a)

(1) the term "trade or business" does not include—

(A) the operation of an establishment engaged principally in the purchase or sale (other than at retail) of goods or merchandise, or

(B) the maintenance of an office, or employment of an agent, other than a retail establishment excepted from subparagraph (A), to import or facilitate the importation of goods or merchandise; and (2) a dividend received by a [foreign corporation] corporation operating in a foreign country from another [foreign corporation] corporation operating in a foreign country shall be deemed to be income derived from the active conduct of a trade or business for purposes of paragraph (3) (A) (ii) of subsection (a) if—

(A) the earnings and profits used in the payment of such dividend conform to paragraph (3) (A) of subsection (a), and

(B) at the date of the declaration of the dividend and during the whole of the years in which were accumulated such earnings and profits such [foreign corporation] corporation operating in a foreign country owned more than 50 percent of the voting stock of such other [foreign corporation] corporation operating in a foreign country.

(c) LIMITATION. The aggregate amount within paragraphs (1), (2), (3), and (4) of subsection (a) in the case of any foreign country for any taxable year

45994-54-pt. 3- -34

shall not exceed the taxable income for the same taxable year from sources within such country.

(d) CERTAIN CORPORATIONS INELIGIBLE FOR CREDIT. The credit provided in section 37 shall not be allowed in the case of a corporation, which for the taxable year

(1) is allowed a deduction under section 922 (relating to Western Hemisphere trade corporations);

(2) is subject to the tax imposed by subchapter L (sec. 801 and following relating to insurance companies);

(3) is allowed the deduction provided in section 941 (relating to China Trade Act corporations);

(4) is a regulated investment company (as defined in section 851 without the application of subsection (b) (1) thereof);

(5) is a personal holding company (as defined in section 542); or

(6) is a shipowners' mutual protection and indemnity association to which section 526 applies.

The CHAIRMAN. Mr. Brennen.

STATEMENT OF WILLIAM S. BRENNEN, NATIONAL PATENT COUNCIL

Mr. BRENNEN. My name is William Brennen, and I speak for the smaller manufacturers, inventors, and researchers associated with the National Patent Council,

I would like to address my remarks today to the subject of capital gains treatment of income from patents, as provided in section 1235 of H. R. 8300.

In view of the deep significance of

The CHAIRMAN. Tell us a little bit about the patent council.

Mr. BRENNEN. We are an association of inventors and patent holders and patent attorneys. We have about 1,500 or 2,000 members scattered throughout the country.

The CHAIRMAN. An advisory organization?

Mr. BRENNEN. An educational nonprofit organization.

The CHAIRMAN. Thank you.

Mr. BRENNEN. In view of the deep significance of its subject, we assume that the 5 minutes allotted us at this hearing reflects a determination upon the part of the committee and its staff to give full and serious attention to the written statement requested by your committee and here presented in the requisite number of copies.

The CHAIRMAN. Every one of those statements submitted for the record is carefully analyzed by the staff, and the whole matter will be brought to our attention in executive session.

Mr. BRENNEN. I would like to request that our statement submitted already in full be made a part of the record.

The CHAIRMAN. It will be made a part of the record.

Mr. BRENNEN. America's superior economic and defensive strength has grown out of a broader and more tenacious pattern of law, providing incentives for creative and productive effort, than exists or has existed in any land. Now that our Nation is threatened by devices for destruction built upon our own creations, we can ill afford to neglect even the slightest opportunity to stimulate, with hope of individual reward, all Americans to invent, prepare for production, and produce new and better things for national defense and for the enrichment of our daily lives.

The statement herewith submitted is based upon the deep and intimate experiences of generations of creative and productive citizens—

long consecrated to high diligence in advancing our strength to live well and resist aggression. The compelling social and economic portent of the forces discussed has been attested the hard way by citizens inspired to sacrificial effort only by the hope of earning and accumulating, under protection of our patent system, a competence against a rainy day.

For the past few years we have been taxing away the fruits of diligence. We substitute a deep discouragement, not only of the inventor but also of the man whose savings so often are required to support the inventor and his inventions-until they can be refined and produced in form for greatest service to our people. Our race with foreign enemies for vital technological advantages makes imperative that we withhold no reasonable modification, of taxation of income from patents, that will stimulate the individual to help advance our progress in that race.

Section 1235 of H. R. 8300 provides for a capital gains allowance on patent income for the inventor alone. The driving force of our patent system has come out of the fact that rewards for inventive and productive achievement have not been limited to the inventor alone. These rewards have been shared by others whose help, financial and otherwise, has been indispensable in encouraging the inventor to believe that his efforts, usually sacrificial, would be rewarded.

Frequently, the inventor risks his time and effort, while his associate in the venture risks savings already earned. Only the promise of patent protection and fair tax treatment can give either a hope that will hold fast through disappointments common to all such projects. Tremendous public benefit can be anticipated from the increased incentive resulting from a preferential tax treatment being given to income accruing to the inventor or to any or all associated with him in ownership of the invention. To this end, it is proposed that such income be excluded entirely from gross income subject to taxation. As a minimum alternative, it is proposed that such income be designated as qualified in full for a capital gains allowance. Naturally, the income accruing directly to the inventors, licensees, or assignees from the manufacture, sale, or use of the patented product would remain fully subject to ordinary income tax.

Moreover, no one can predict during what years, if ever, an invention may prove productive of income.

Section 1235, as it now stands, more often would force an inventor, and his risk-taking associates, to accept a very meager return, if any, throughout the "first 5 years," which are normally profitless years, devoted to tedious efforts to give the invention correct design, facilities for production, and market penetration. For maximum public benefit from enhanced inventive incentive, this period should be extended to the full life of the patent.

Resultant impetus to invention and production can readily provide an increase in income from taxes. Resultant increment in strength for national defense could be the deciding factor in determining at last whether we shall have anything left to tax, or have left any power as a sovereign people to levy or abate taxes.

Your serious attention to our recommendations and our supporting brief is most respectfully requested.

The CHAIRMAN. I may say that 5-year provision has come under a lot of criticism and is being carefully studied by the staff.

Mr. BRENNEN. I can well understand that the law as it is right now, is more favorable to the inventors than the proposal which, according to the House, was to increase inventive incentive. And many of the inventors feel quite to the contrary, that it actually decreases it, rather than increases it.

The CHAIRMAN. We will give that careful consideration.

Senator FLANDERS. May I make an inquiry: You made a suggestion here that those who would furnish funds for the development of the invention, as well as the inventor, should share in the capital gains treatment.

Mr. BRENNEN. Yes, sir.

Senator FLANDERS. How would that apply to a situation like that of an inventor whose funds were provided by and whose patents were assigned, say, to the Du Pont Co. ?

Mr. BRENNAN. We have mostly small inventors in our association, but I don't see that it would make any difference. Senator FLANDERS. It must be universal.

Mr. BRENNEN. I think it should.

Senator FLANDERS. As it is restricted in its terms.

Mr. BRENNEN. The same treatment should be provided. However, I call your attention to the statement that I made, that income arising from the manufacture of an invented product would be normal income and, to a great extent, the so-called big corporations that finance inventors make their money out of producing products.

Senator FLANDERS. I can see a little bookkeeping problem there, and I am quite interested in the matter of increasing that term of 5 years. I am not so clear on extending it to the financial support of the invention.

Mr. BRENNEN. If I could take about 1 minute

The CHAIRMAN. Senator Flanders is an inventor.
Senator FLANDERS. I have 39 patents in my name.

Mr. BRENNEN. Then, if I may, instead of talking in terms of du Pont, may I talk in terms of a small inventor, working in his barn, who is financed by the widow next door, who puts her last thousand dollars into his invention because of her confidence in him, and she takes in return a share of his invention.

The CHAIRMAN. Off the record.

(Discussion off the record.)

Senator FLANDERS. I might say that one of the most interesting periods of my life was acting as a designer for a French Canadian inventor, whose wife paid my salary by dressmaking. And my duties were, first, to put the invention into a suitable design and, second, to shoo off the creditors at the front door while the inventor ran out the rear door into the lumberyard. So, I have had some experience with those shoestring projects.

Excuse me. That is all extraneous.

Mr. BRENNEN. On the benefit of that experience, I don't think my remarks could add anything.

Senator FLANDERS. And the companies in existence today are just prosperous. And that was in the year 1903, 50 years ago.

The CHAIRMAN. The committee is very much interested in the general subject.

Mr. BRENNEN. If there is anything further in the future we could do, I would be only too happy to submit further information.

The CHAIRMAN. Senator Flanders will give us all the information we need.

Mr. BRENNEN. Thank you.

(The prepared statement of Mr. Brennen follows:)

STATEMENT OF WILLIAM S. BRENNEN

I am William S. Brennen, speaking for smaller manufacturers, inventors, and researchers associated with National Patent Council. I live at 5 Peter Cooper Road, New York City. I speak upon the subject of capital-gains treatment of income from patents as provided in section 1235 of H. R. 8300.

In view of the deep significance of its subject, we assume that the 5 minutes allotted us at this hearing reflects a determination upon the part of the committee and its staff to give full and serious attention to the written statement requested by your committee and here presented in the requisite number of copies.

America's superior economic and defensive strength has grown out of a broader and more tenacious pattern of law, providing incentives for creative and productive effort, than exists or has existed in any land. Now that our Nation is threatened by devices for destruction built upon our own creations, we can ill afford to neglect even the slightest opportunity to stimulate, with hope of individual reward, all Americans, to invent, prepare for production, and produce, new and better things for national defense and for the enrichment of our daily lives.

The statement herewith submitted is based upon the deep and intimate experiences of generations of creative and productive citizens-long consecrated to high diligence in advancing our strength to live well and resist aggression. The compelling social and economic portent of the forces discussed has been attested, the hard way, by citizens inspired to sacrificial effort only by the hope of earning and accumulating, under protection of our patent system, a competence against a rainy day.

We are taxing away the fruits of diligence. We substitute a deep discouragement, not only of the inventor but also of the man whose savings so often are required to support the inventor and his inventions, until they can be refined and produced in form for greatest service to our people. Our race with foreign enemies for vital technological advantages makes imperative that we withhold no reasonable modification of taxation of income from patents, that will stimulate the individual to help advance our progress in that race.

Section 1235 of H. R. 8300 provides for a capital-gains allowance on patent income for the inventor alone. The driving force of our patent system has come out of the fact that rewards for inventive and productive achievement have not been limited to the inventor alone. Those rewards have been shared by others whose help, financial and otherwise, has been indispensable in encouraging the inventor to believe that his efforts, usually sacrificial, would be rewarded.

Frequently, the inventor risks his time and effort, while his associate in the venture risks savings already earned. Only the promise of patent protection and fair tax treatment can give either a hope that will hold fast through disappointments common to all such projects.

Tremendous public benefit could be anticipated from the increased incentive resulting from a preferential tax treatment being given to income accruing to the inventor or to any or all associated with him in ownership of the invention. To this end it is proposed that such income be excluded entirely from gross income subject to taxation. As a minimum alternative, it is proposed that such/ income be designated as qualified in full for a capital-gains allowance. Naturally, the income accruing directly to the inventors, licensees, or assignees from the manufacture, sale, or use of the patented product would remain fully subject to ordinary income tax.

Moreover, no one can predict during what years, if ever, an invention may prove productive of income.

Section 1235, as it now stands, more often would force an inventor and his risk-taking associates to accept a very meager return, if any, throughout the "first 5 years" provided-perhaps profitless years devoted to tedious efforts to give the invention correct design, facilities for production, and market penetration. For maximum public benefit from enhanced inventive incentive, this period should be extended to the full life of the patent.