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.

STATEMENT OF JOHN W. ANDERSON, PRESIDENT, NATIONAL PATENT COUNCIL ON H. R. 8300-SECTION 1235 THEREOF APRIL 21, 1954

My name is John W. Anderson. My residence is 578 Broadway, Gary, Ind. This is the statement referred to by Mr. William S. Brennen, representing National Patent Council, in his brief oral references already heard by your committee. Copy of Mr. Brennen's presentation is attached hereto, for your convenience in reference.

I speak in my own behalf as a citizen; in behalf of the Anderson Co., manufacturers, Gary, Ind. ; and in behalf of National Patent Council, Gary, Ind., of which I am president.

The council is a nonprofit, nonpartisan, educational organization of smaller manufacturers, inventors, researchers, and other professional groups active in the fields of science, research, and invention. Smaller manufacturers associated with the council operate in many different industries throughout the Nation. I am president and active administrative head of the Anderson Co., Gary, Ind., which I founded in 1918. My company is in its 37th year of uninterrupted research, product development, and manufacture. Hundreds of millions of products, embodiments of patented inventions perfected in its laboratories, have served and are serving citizens of America and of all other civilized countries. Its products, original equipment on millions of motor vehicles, boats, and aircraft-and available through thousands of retailers in every State serve outstandingly in the fields of public safety, economy, and convenience as well as national defense.

I have served, during the past 30 years, as president of other national associations of manufacturers and am at present affiliated with a number of national manufacturers' associations. I was cofounder, an officer, and a member of the board of directors of the Automotive Council for War Production of Detroitthroughout World War II. During 3 consecutive years of World War II, I served as president of Motor and Equipment Manufacturers Association, a national association with headquarters in New York City. I have represented industry on various advistory committees of Government. I have had wide opportunity to study, in practical experiences at creative and productive levels, the forces that propel our industry.

What men similarly experienced have found to be the basic propulsive forces of our economy I could not perhaps bring to your sympathetic understanding more acceptably than by making a part of this statement the attached copy of my address of April 19, 1950, to the annual congress of the National Society, Daughters of the American Revolution, assembled in Constitutional Hall, Washington, D. C. May I quote from that address, as reflecting its theme, the following:

"In God's primal law-the law of self-preservation-is rooted every beneficient law of man.

"The will to survive demands that it be served with promise of advantage through achievement.

"Security for the Nation can be assured only through productive achievement of the citizen-at labor within a stable pattern of recorded law protecting his production.

"There is no other road to security.

"A citizenry without individual incentive to labor diligently for honest personal profit is doomed."

"Among our institutions offering the citizen inducement to extraordinary effort is, for example, that granting the right by patent to exclude others, for a period of 17 years, from the manufacture, sale, or use of his inventions.

"That incentive has kept creative leaders working a hundred hours a week to produce inventions that have made it possible for millions to enjoy, for a 40hour workweek, the highest standard of living known to man.

"Today those inventions preserve our health and extend our span of life. "They weave the cloth that clothes us. They make our shoes.

"They wash our clothes. They plant and tend our crops and harvest them. "They package and preserve our foods.

"From baker's bread to building brick, try to name a single product, fabricated by man, that has not been made better or cheaper because of patented inventions, either embodied in the product or employed in making it."

(Note every product distributed by the income-tax favored cooperative store has been made more useful, more desirable, by the labors of inventors.)

"The touchstone of liberty is incentive to produce-thus to serve the needs of all.

"Only as we keep watchful of our liberty-keep strong to fight all those who would destroy incentive to labor long for honest profit-may we deserve our priceless heritage.

"Planners in Government who preach that survival of our Nation and its people can be assured in any other way are ordering-in stupidity or greed-our sure destruction.

"To survive we must return to the faith of our fathers.

"We must return to respect for the divine truth upon which our fathers based our Constitution."

The planners of our Nation long since have given incentive-destroying effect, in our Federal tax laws, to their lack of understanding of the traditional American concept of great rewards for great creative achievements. Leveling tactics in taxation, erecting a ceiling in limitation of rewards, as was inevitable, have leveled incentives and ambition-somewhat in proportion. Thousands of creative men, discouraged by punitive policies of taxation, long since have relaxed their efforts to create with marked reduction in potency of factors for growth of propulsive power in our economy.

Creative men are most sensitive to proofs of lack of appreciation on the part of beneficiaries of their efforts. That characteristic is but a natural result of the tensions that must be maintained by creative men in concentrations essential to success of their projects.

Only the catalytic power of invention-in practical applications of the forces of our newest sciences-can make our Nation truly secure. Invention is a function solely of the individual. Corporations do not-cannot-invent. Incentive to invent must be tailored to the nature of the individual-to his instinct for self-preservation-for personal security. Such incentive should be most lavishly inspired in times of greatest danger to our Nation.

Only by exciting to sacrificial individual effort our citizens capable of creative achievement, may we make overpowering our defenses against those killers of the earth who walk always behind us-with borrowed weapons in their handsthose enemies whose infiltrates among us strive constantly to divert our thinking from those fundamental truths upon which our fathers framed the basic concepts that have made and kept us strong.

Gentlemen of the committee, the inventors of America long have felt what they have considered to be a will on the part of our Congress to discriminate against them, in a discrediting way, by extending capital-gains and depletion allowance advantages to those who merely deal with, and manipulate—while they deplete age-old resources of our Nation created by natural processes. They understand why it is considered in the public interest to treat woodlands, oil, and mineral deposits as deserving special consideration in the method of applying taxes. Much risk and heavy investment is required in exploration for oil and minerals. Great losses may be encountered. Deposits when finally discovered and put into production are steadily depleted, although they may remain productive for a great deal longer than the average productive life of a patent.

Even a cursory investigation of the business of recovering oil and minerals will make clear that each such operation is greatly facilitated today, as compared with practices of just a few years ago, through contributions by inventors of new tools, equipment, methods, and processes which, until quite recently, were less than a glint in the inventor's eye.

The money invested each year in America, in nonproductive experiments incidental to the development of inventions, greatly exceeds the cost of all the dry holes put down by the oil industry. Such experimental disappointments leave no

spectacular scars visible to the casual traveler. However, they must be paid for out of productivity of the less-frequent inventive projects that mature into salable and useful things.

May we point out one significant difference? The oil deposit, the mineral deposit, that is not discovered today will remain intact for discovery tomorrow. The inventive discovery of the creative mind comes out of nowhere. As a rule it results only from mental diligence inspired by a hope of individual reward. It may lie dormant and unformed in a human mind-to be lost forever when that human is lost-unless that human is excited and encouraged, by hope of gain, to nourish the germ of thought and give it, through labor, its chance to live and grow in usefulness.

History discloses convincingly that when any nation destroys incentive of free citizens to labor long hours to invent, produce, and distribute new and better things, that they may profit, from a share of benefits they bring their neighbors, that nation defies the primal law and works its own destruction.

Witness layer upon layer of lost civilizations whose production expanded, whose cultures deepened and whose strengths for survival were enhanced-until exactions and extortions, made or permitted by government, left their citizens no hope that productive diligence would be rewarded.

That all these things are true of course has long been known to you. It is, however, sometimes difficult, when caught in the churning forces of current national problems, to hold fast to fundamental things.

Once we are reminded that our patent system, through hope of reward extended to diligent citizens, becomes the goose that lays the golden inventive eggs of our economy, it becomes quite clear that, if pressure must be applied to that goose, its neck should be avoided.

The neck of the master goose that must continue to produce strength for national security is inventive incentive. Our plea to you today is that such incentive be given the stimulus which must result from removal of the pressure of discriminatory taxation. Let's resolve not to continue to tell the inventor that he somehow is less useful to our public than the man who gambles in the stock of the prosperous corporation his inventions have established. The man who trades in stocks need benefit nobody but himself. The creator of a successful invention to earn and receive a profit from his efforts-perhaps extended over years of self-denial--must benefit the public.

An examination of the House Ways and Means Committee report on H. R. 8300 reveals that the committee members were fully aware of the national advantage to be gained by increasing inventive incentive by reducing taxation on patent income. In their own words, they explain the purpose of the new section to be "to provide a larger incentive to all inventors to contribute to the welfare of the Nation."

Unfortunately, contrary to their avowed purpose, the committee has not only failed to increase incentive but, conversely, has actually decreased the area within which patent income will be treated as capital gains.

Under the existing law, most courts have granted capital-gains treatment to all patent holders, inventors, and financiers alike, during the full life of the patent. It is true that some people, seeking to reduce this incentive, contend that only amateur inventors are entitled to such treatment, but the courts in most recent cases have refused to accept this interpretation.

H. R. 8300 (sec. 1235), as it is proposed, would restrict capital gains to the actual inventor alone and would limit even his benefits to a 5-year period. Obviously such an approach can have only one result-a reduction of the incentive of the inventor to create and of the financier to produce.

While the very thought might outrage the cultured sensibilities of men who. from their high places in the world of planning, would wish us always well, according to their understanding of our needs, you will find among conscientious and patriotic men in the world of practicalities a strong conviction that you should make all income from patents free entirely from all Federal or other tax. To do so, they believe, would give to invention in America such tremendous impetus as would create new jobs for millions and would create new corporate and other income yielding to our National Treasury far more in taxes than would have been removed, by such tax remission, to end discouragement of our investors. Even the tax remitted, or most of it, would be devoted at once by the inventor to investment in facilities and opportunities for further extensions of creative effort.

By this one simple stroke we could make certain that we would outdistance all competing nations in our race for survival against whatever hordes of misguided peoples might be led to attack us.

Authors of ideological distortions that obscure-in fact, may be intended to obscure the basic forces by which our survival must be forged may fight hard to obstruct and prevent enhancement by such a simple expedient of the magic that can be wrought by harnessing our progress to man's most propulsive instinct, fired by the law by which he seeks for himself individual advantage and security.

It is proposed that section 121 of part III: Items specifically excluded from gross income, be renumbered section 122 and that there be added in numerical sequence to part III a section to be designated as section 121, reading as follows: "SEC. 121. GAIN FROM THE SALE, EXCHANGE, OR LICENSE OF PROPERTY CONSISTING OF A PATENT OR APPLICATION THEREFOR.

"(a) Gross income shall not include any amount received from the sale, exchange, or license of property consisting of a patent or application therefor, or any undivided interest therein, including any part of the rights in such patent or application."

We here propose, as a minimum alternative to the remission of all such taxes on patent income, as above suggested, that all income received from the sale, exchange, or licensing of patents be treated as capital gains. To this end we propose that section 1235 of H. R. 8300 be stricken in full and that there be substituted therefor the following:

"SEC. 1235. SALE, EXCHANGE, OR LICENSE OF PATENTS.

"(a) GENERAL.-Gain from the sale, exchange, or license of property consisting of a patent or application therefor, or any undivided interest therein which includes a part of all rights in such patent or application, shall be deemed gain from the sale or exchange of a capital asset if, and only if—

"(1) Such proceeds of such sale, exchange, or license are received by the seller or licensor during the life of the application and/or patent. For purposes of this paragraph, any proceeds due and payable within such period and which have been deferred by reason of failure of the purchaser or licensee (or any successor thereof) to fulfill a contractual obligation relating thereto shall be deemed to have been received within such period."

If additional supporting documentation is desired by the committee or its staff, or by any member of either, we shall be happy to supply it upon request, as promptly as its availability will permit. Respectfully submitted.

JNO. W. ANDERSON, President, National Patent Council.

The CHAIRMAN. Mr. Brainerd. Mr. Brainerd, sit down and be comfortable and identify yourself to the reporter, please.

STATEMENT OF ANDREW W. BRAINERD, ATTORNEY, CHICAGO, ILL.

Mr. BRAINERD. Mr. Chairman, distinguished gentlemen, my name is Andrew Brainerd, an attorney from Chicago. I am here to speak briefly to you about sections 923 and 951, being business income from foreign sources.

I am a partner of the Chicago law firm of Baker, McKenzie, Hightower & Brainerd, a firm which has for some years specialized in the field of private international law. In the course of that work, we have had occasion repeatedly, if not constantly, to deal with those of our internal revenue laws which deal with business income and business activities in foreign countries, as well as with the laws of foreign countries which govern that type of income.

Now, I appear here today, gentlemen, at the expense of our firm. No one group of industries has sent us down, nor has any company or group of companies. We represent perhaps 50 companies in different aspects of American industrial life, from the heavy-goods industry to cosmetics, for example, and from machine tools to farm products, which are refined and sent abroad.

Also, I am an unofficial representative of about 6 or 8 foreign trade groups scattered throughout the Middle West, groups such as the Board of Export Managers of Chicago, having some 600 members, and other groups which have gone on record as opposing certain portions of these sections, which I wish to discuss briefly with you today.

I have, incidentally, prepared a formal memorandum, which has been presented both to Mr. Stam and to the Treasury Department, which I would like, at the conclusion of this brief testimony, to have incorporated in the record.

The CHAIRMAN. It will be incorporated.

Mr. BRAINERD. Thank you, sir.

Now, gentlemen, anything I have to say today is predicated on the assumption that it is the wish both of the President and of Congress, including yourselves, that there be some type of tax incentive offered to American foreign trade and investment. In other words, if that is not the fact, then what I have to say is entitled certainly to no consideration. But it is our view, based upon the experience which we as a group collectively have had, and with all of the industries that we represent, that these sections in their present form will give an incentive to perhaps less than 10 percent of the broad range of American industry that is engaged in foreign trade.

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I want to explain precisely why: First of all, gentlemen, there are two words in section 923: "retail establishment." We have been repeatedly asked how they got into the law. None of us is able to understand why or how, or where or who put them into the law. Because you and I know, gentlemen, that retail establishments form no part of American foreign trade.

I believe that the Treasury is fully aware that the definition of a retail establishment is just what is set out in a number of Supreme Court cases. The definition has been adopted by the Bureau of the Budget, for example, the Bureau of the Census, and other agencies, that a retail sale is a sale for personal or household consumption. That is the definition repeatedly accepted.

On the other hand, a wholesale sale is one either for resale or for industrial or commercial use.

Now, if you think with me for just a moment, what companies are there who sell in foreign trade in retail establishments?

The CHAIRMAN. We have some subsidiaries of American companies operating in Brazil, for example.

Mr. BRAINERD. Yes, sir; there are a few. I think Sears, Roebuck & Co., F. W. Woolworth, possibly Singer Sewing Machine. But look at what American industry really is. I am talking about heavy equipment, for example, all types of machinery, motors, all types of products that go for sale to industry. All those are excluded, sir, from that category.

Now, I am glad you mentioned Brazil, sir, for this reason: Yesterday there appeared before this body a very distinguished and respected authority in this field, a gentleman by the name of Richard Momsen, an attorney who has lived in Brazil for over 40 years. He is a director of the American Chamber of Commerce for Brazil, here specially to address you on this subject. He testified before this group that less than 20 percent of the companies that are actually in operation in Brazil will benefit by this law. Now

Senator FLANDERS. Twenty percent will not?