The Internal Revenue Code of 1954

voluntary muscle control.

The condition may be severe or very mild; many muscles may be affected, or only a few. The lack of control may be in the arms, legs, tongue, speech mechanism, eyes, or it may affect the hearing. The extent of the disability varies widely and may affect the entire range of muscular activity.

Cerebral palsy occurs most frequently at birth but it may happen at any time before birth, or in childhood or adult life as the result of an accident, illness, or infection. Anyone may be affected by the condition, regardless of age, race, economic standing, or environment.

Estimates indicate that there are some 550,000 persons in the United States who are suffering from cerebral palsy, 200,000 of whom are under 21 years of age. While I am aware of the fact that the parents of the cerebral palsied would benefit if the suggestions made in this statement were adopted, yet I like to make it clear at the outlet that this plea is presented not only on behalf of the parents of the cerebral palsied but for all of the parents of the mentally retarded and physically disabled who are unable to attend a regular school.

On August 6, 1953, Mr. William E. Mallett, president of United Cerebral Palsy of Mississippi, Inc., a member of the board of directors of United Cerebral Palsy Associations, Inc., the national organization, and the father of a cerebral palsied child, testified at the general revenue revision hearings held by the Committee on Ways and Means of the House of Representatives. At that time Mr. Mallett spoke for all of the mentally retarded and physically disabled children and made a plea for a specific tax exemption of $600 for a taxpayer supporting a dependent who is permanently disabled. He called the attention of the committee to the fact that there is now in the Internal Revenue Code a specific exemption of $600 for a blind person and he expressed the opinion that he was unable to recognize the difference between a blind person and one who is permanently disabled.

This testimony is particularly pertinent to that part of the report of the Committee on Ways and Means of the House of Representatives which accompanied H. R. 8300 under the title of "X. Special Itemized Deductions for Individuals or Corporations * * *. C. Child-Care Expenses, section 214," found on page 30.

The committee's bill provides for a new deduction for child-care expenses paid by a working widow, widower, or divorced person, or a working mother whose husband is incapacitated. It states the child must be below the age of 10 (or 16 if the child is physically or mentally unable to attend a regular school).

It would seem to be elementary that a mentally and physically defective child who is unable to attend a regular school would require much more attention and care during his or her adolescent period (which for the purpose of discussion we shall assume reaches to the age of 21), than that of a child of 10.

Why, therefore, should this effort on the part of the Ways and Means Committee to afford relief for these unfortunate parents stop at the age of 16?

It has been suggested to me that it may suffice if I, as executive director of United Cerebral Palsy Associations, and by reason of my familiarity with the problem, were to make a definite statement that the age limit for the relief of the parents of the mentally retarded and physically disabled should be increased from 16 to 21 years. I discussed the problem, if there is one, with Dr. Glidden L. Brooks, medical director of United Cerebral Palsy Associations, and we agreed that it would be helpful if we were to obtain the opinion of someone who is a recognized authority on the subject.

Dr. Brooks was fortunate in obtaining an opinion from Dr. George G. Deaver, professor of clinical rehabilitation and physical medicine, director of children's service of the Institute of Rehabilitation, New York University Medical Center. Dr. Deaver's opinion is attached to this statement and made a part thereof. Risking the criticism that may be directed at me because of repetition, I feel that I should restate the following part of Dr. Deaver's letter:

"The definition should most certainly encompass such children during the adolescent period since the majority are totally dependent for their daily care upon the parent until at least the age of 21 years. Not only is this so but because they are handicapped such individuals constitute a much greater burden of care from the standpoint of time, effort, and expense than any normal child under the age of 10."

We all realize that the ideal treatment of this problem would be for this relief to extend beyond the age of 21 because that certainly is not the age when these unfortunate parents must stop paying for this care and attention, but we

income. For example, dividends accounted for approximately 11 percent of the income of the average shareowner earning $5,000 and less than 20 percent for those earning $30,000.

It is interesting to note that Senator Walter F. George said in 1949:

"The law should be changed to allow a credit to the individual stockholder for taxes already paid by the corporation. As a starter, we should provide a credit of a certain percentage-say 10 percent or perhaps 16.6 percent, the amount of the first-bracket individual income tax. Ultimately we should exempt dividends from taxation completely."

Rather than being discriminatory against wage earners, I would say that these provisions will be a step in the direction of restoring a tax balance between the various forms of income received by wage earners.

In view of the importance of dividend relief I am at a loss to understand the reasons behind the move to strike this provision out of the law and substitute higher exemptions unless the reasons be, as I have stated, strictly political. Raising exemptions means only a slight increase in the workers' "take-home pay" on the average of 50 cents per week per exemption. It will not create more jobs, increase productive facilities, or lubricate our great economic system. The raising of personal exemptions by even $100 will throw us back into substantial deficit financing. That is the reason, gentlemen, why the President of the United States and the Secretary of the Treasury are fighting so hard against this move.

Gentlemen, we believe there is no more propitious time than the present for removing complex confusion, inequities, discrimination, and gross unfairness from the Internal Revenue Code. We therefore earnestly request that the provisions in H. R. 8300 relating to dividend income be retained in their present form, since they alleviate by far the grossest injustice in the present law. As I stated before the House Ways and Means Committee, "the best incentive device is a tax code that stimulates thrift. Double taxation of dividends is destructive of the very incentive that Congress is desirous of creating and upon which our future depends. A dividend tax credit would cost the Government only a small fraction of what it would gain through stimulation of day-to-day efforts to earn more and save more. Savers and investors are essential to our way of life. We cannot have big industry without them."

The CHAIRMAN. Is Mr. Landman here? Are there any other witnesses who are scheduled to appear this morning?

We will meet at 10 o'clock tomorrow.

(By direction of the chairman, the following is made a part of the record :)

STATEMENT PRESENTED ON BEHALF OF UNITED CEREBRAL PALSY ASSOCIATIONS IN CONNECTION WITH H. R. 8300 ON THE SUBJECT OF-X. SPECIAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS—C. CHILD-CARE EXPENSES (SEC. 214)

GENERAL STATEMENT

Mr. Chairman and members of the committee, my name is Karl K. Van Meter. I reside in New York City and I have been the executive director of United Cerebral Palsy Associations for about 3 years.

Gentlemen, I am truly grateful for the privilege of presenting this statement to you on behalf of the thousands of mentally retarded and physically disabled children and teen-agers in the United States.

United Cerebral Palsy Associations, Inc., is a nonprofit membership corporation, organized in 1948-the only nationwide organization devoted exclusively to a united attack on cerebral palsy. Its humanitarian work is supported by voluntary public contributions. Its officers and board of directors serve without compensation of any kind. National headquarters are at 369 Lexington Avenue, New York City.

United Cerebral Palsy comprises over 200 affiliated State and local organizations throughout the United States.

United Cerebral Palsy and its affiliates are dedicated to an all-out effort to help the cerebral palsied to take their rightful places alongside their more fortunate brothers and sisters-part of the never-ceasing struggle to preserve our freedom and the concepts we hold dear. America's youth must be strong.

Cerebral palsy is the general term for a group of disorders caused by injury to the motor centers of the brain which result in the loss or impairment of

voluntary muscle control. The condition may be severe or very mild; many muscles may be affected, or only a few. The lack of control may be in the arms, legs, tongue, speech mechanism, eyes, or it may affect the hearing. The extent of the disability varies widely and may affect the entire range of muscular activity.

This testimony is particularly pertinent to that part of the report of the ComImittee on Ways and Means of the House of Representatives which accompanied H. R. 8300 under the title of "X. Special Itemized Deductions for Individuals or Corporations * * *. C. Child-Care Expenses, section 214," found on page 30.

Why, therefore, should this effort on the part of the Ways and Means Committee to afford relief for these unfortunate parents stop at the age of 16?

Risking the criticism that may be directed at me because of repetition, I feel that I should restate the following part of Dr. Deaver's letter:

would be thankful if your honorable committee would give us the relief asked for in this statement.

NEW YORK UNIVERSITY-BELLEVUE MEDICAL CENTER, INSTITUTE OF PHYSICAL MEDICINE AND REHABILITATION, New York, N. Y., April 19, 1954.

Dr. GLIDDEN L. BROOKS,

Medical Director, United Cerebral Palsy Associations, Inc., 369 Madison Avenue, New York, N. Y.

DEAR DR. BROOKS: Thank you for bringing to my attention the provision relative to the term "child" as defined in the report of the Committee on Ways and Means of the House of Representatives which accompanied H. R. 8300, a bill to revise the internal-revenue laws of the United States, in which it refers to a presumably normal person who has not attained the age of 10 years, or one who has not attained the age of 16 years and who because mentally or physically defective is not able to attend a regular school.

I am in agreement that setting the age level for the mentally or physically handicapped child at 16 is not a realistic approach to this very serious problem. The definition should most certainly encompass such children during the adolescent period since the majority are totally dependent for their daily care upon the parent until at least the age of 21 years. Not only is this so but, because they are handicapped, such individuals constitute a much greater burden of care from the standpoint of time, effort, and expense than any normal child under the age of 10.

I share your conviction if such measure of tax relief is to be provided single parents of this unfortunate group of children it should be as liberal as is commensurate with good governmental policy.

Clerk, Senate Finance Committee,

Senate Office Building, Washington, D. C.

DEAR MRS. SPRINGER: I enclose for submission to the Committee on Finance three copies of a memorandum recommending some minor but significant changes to section 402 of the proposed Internal Revenue Code of 1954 reported by the Ways and Means Committee of the House of Representatives as H. R. 8300.

A similar memorandum was submitted to the Committee on Taxation of the Association of the Bar of the City of New York, and, on page 66 (first 2 full paragraphs) of its first report to the Senate Committee on Finance, that committee recommends the adoption of the changes I have suggested. I am, however, forwarding the enclosed directly to you since, due to lack of time and space, the association of the bar report does not set forth the detailed reasons for the changes.

I am also sending copies of this memorandum to the American Bar Association in the thought that that association might wish to go on record in favor of the changes I have suggested.

Very truly yours,

G. BARRON MALLORY.

MEMORANDUM RE SUGGESTED CHANGES TO SECTION 402 OF THE PROPOSED INTERNAL REVENUE CODE OF 1954

The proposed Internal Revenue Code of 1954 (H. R. 8300), as reported by the Ways and Means Committee of the House of Representatives, includes a provision (sec. 402) purporting to cover the taxability of beneficiaries of employees' trusts. Section 402 (a) provides in part as follows:

"(1) GENERAL RULE.-Except as provided in paragraph (2), the amount actually distributed or made available to any distributee by any employees' trust described in section 501 (e) which is exempt from tax under section 501 (a) shall be taxable to him, in the year in which so distributed or made available. ***” [Emphasis supplied.]

The report of the House Committee on Ways and Means (H. Rept. 1337), at page 42, states in part as follows with respect to section 402 of the proposed code: "Covered individuals would be taxed on benefits as they receive them, to the extent such benefits exceed their own contributions. ***" [Emphasis supplied.] There is an evident conflict between section 402 and the Ways and Means Committee report. Under the proposed code, beneficiaries of employees' trusts are regarded as taxable on benefits "made available" to them, whereas the Ways and Means Committee says in its report that they are taxable only on benefits "as they receive them." It is suggested, for the reasons mentioned below, that the Senate Committee on Finance urge that section 402 (a) be amended so as to bring its provisions in conformity with the interpretation set forth in the report of the House Ways and Means Committee. This can be accomplished through the omission from the legislation as finally enacted of the words "or made available" appearing twice in section 402 (a) (1).

Under section 165 (b) of the present Internal Revenue Code, beneficiaries of employees' trusts are taxable when their benefits are "distributed or made available." In three actual cases, with which the undersigned is intimately familiar, the Internal Revenue Service has taken inconsistent positions with respect to profit-sharing plans having identical provisions allowing the withdrawal by members during the course of their employment of payable units.

In one case the Internal Revenue Service, some time ago, issued a private ruling to the effect that units that became payable to employees who continued their employment were not "made available" unless and until the units actually were withdrawn, provided the employees would suffer a penalty upon withdrawal thereof. The employee's loss of the following was considered a sufficient penalty: (a) the share of tax-free trust earnings otherwise creditable for the year of withdrawal and in the future to withdrawn units, and (b) the share of forfeitures (upon severance of employment by members whose credits are not fully vested) otherwise creditable in the year of withdrawal and in the future to withdrawn units. Other penalties (not taken into account by the Service but nevertheless real ones) suffered by a withdrawing employee are the loss of the privilege to report the value of withdrawn units at long-term capital gains tax rates (sec. 165 (b) I. R. C.) instead of at ordinary income-tax rates and the investment advantage of participating in a large fund which generally benefits through expert investment advice.

In the other two cases, which were more recent, the argument was made that the employee whose withdrawal right accrues should not be taxed on the constructive receipt theory since these penalties represented a substantial bar to withdrawal. However, in one of these cases, the Internal Revenue Service has now taken the position that these penalties are not sufficient to avoid the application of the constructive receipt doctrine. In support of its position, the Internal Revenue Service cited G. C. M. 27580, dated December 5, 1952, in re: Electro Refractories & Abrasive Corportion (unreported).

Mr. Isidore Goodman, technical adviser to the pension trust branch, covered the question in an unofficial speech before the American Pension Conference on February 4, 1954. With respect to this speech, the following is reported in the Prentice-Hall pension and profit-sharing service (Rept. No. 7, vol. XV, dated February 19, 1954):

"Here's Mr. Goodman's answer: 'Under section 165 (b), we consider the payable units as income currently taxable to the employee unless he makes an election, before they actually become payable, to have their receipt deferred.' He needn't make this election once and for all, Mr. Goodman continued, but may do so annually, before the date each year when employees can draw from their profit-sharing accounts. The annual election may take the form of a notice to the employer from a participant that the participant doesn't wish to draw anything from his account on the regular yearly withdrawal date. This type of election insures that the employee won't be taxed on the value of the additional payable units credited to his account that year."

It is understood that since the delivery of the speech referred to, Mr. Goodman has taken the position that the election must be filed by the employee within a "reasonable" time prior to the accrual of the withdrawal right.

It is respectfully suggested that the uncertainties should be resolved at this time through clarifying legislation. Employers and employees, in cases where their pension or profit-sharing plans contain provisions permitting withdrawals during employment, have no crystallized rule to follow. Mr. Goodman's views are helpful but do not eliminate the uncertainty because (a) they are unofficial and, until a revenue ruling is issued on the subject, the agents in the field are

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