or condemnation or threat or imminence thereof, a purchase of public utility property or of stock or securities of a public utility or holding company (whether or not representing control of such public utility or holding company) shall be considered a purchase of such other property or such stock; and a payment in complete or partial retirement or cancellation of securities representing indebtedness of such taxpayer shall also be deemed a purchase of such other property or such stock for the purpose of computing the gain to be recognized under this paragraph, but not for the purpose of computing the basis under subsection (c); provided, however, that the gain to be recognized shall not be less than the amount by which the total gain realized on the involuntary conversion exceeds the total of such purchases of such other property or such stock without regard to the said payments in retirement or cancellation of securities representing indebtedness. (B) Period Within Which Property Must Be Replaced.-The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending— (i) one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or (ii) subject to such terms and conditions as may be specified by the Secretary or his delegate, at the close of such later date as the Secretary or his delegate may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe. (C) Time for Assessment of Deficiency Attributable to Gain Upon Conversion. If a taxpayer has made the election provided in subparagraph (A), then (i) the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on such conversion is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary or his delegate is notified by the taxpayer (in such manner as the Secretary or his delegate may by regulations prescribe) of the replacement of the converted property or of an intention not to replace, and (ii) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of section 6212 (c) or the provisions of any other law or rule of law which would otherwise prevent such assessment. (D) Time for Assessment of Other Deficiencies Attributable to Election. If the election provided in subparagraph (A) is made by the taxpayer and such other property or such stock was purchased before the beginning of the last taxable year in which any part of the gain upon such conversion is realized, any deficiency, to the extent resulting from such election, for any taxable year ending before such last taxable year may be assessed (notwithstanding the provisions of sec. 6212 (c) or 6501 or the provisions of any other law or rule of law which would otherwise prevent such assessment) at any time before the expiration of the period within which a deficiency for such last taxable year may be assessed. (E) Definitions.— (i) As used in this subsection, the term "public utility" means a corporation engaged in the furnishing or sale of electric energy, gas, water, telephone or telegraph service, or sewerage disposal services, or transportation on intrastate, suburban, municipal, or interurban electric railroad, or on an intrastate, municipal, or suburban trackless trolley system, or on a municipal or suburban bus system if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of the District of Columbia or of any State or political subdivision thereof; and (ii) as used in this subsection, the term “holding company” means a corporation whose principal purpose is investment in stock or securities of a public utility. (b) RESIDENCE OF TAXPAYER.-Subsection (a) shall not apply, in the case of property used by the taxpayer as his principal residence, if the destruction, theft, seizure, requisition, or condemnation of residence, or the sale or exchange of such residence under threat or imminence thereof, occurred after December 31, 1950, and before January 1, 1954. (c) BASIS OF PROPERTY ACQUIRED THROUGH INVOLUNTARY CONVERSION.-If the property was acquired, after February 28, 1913, as the result of a compulsory or involuntary conversion described in subsection (a) (1) or (2), the basis shall be the same as in the case of the property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made. This subsection shall not apply in respect of property acquired as a result of a compulsory or involuntary conversion of property used by the taxpayer as his principal residence if the destruction, theft, seizure, requisition, or condemnation of such residence, or the sale or exchange of such residence under threat or imminence thereof, occurred after December 31, 1950, and before January 1, 1954. In the case of property purchased by the taxpayer in a transaction described in subsection (a) (3) which resulted in the nonrecognition of any part of the gain realized as the result of a compulsory or involuntary conversion, the basis shall be the cost of such property decreased in the amount of the gain not so recognized; and if the property purchased consists of more than one piece of property, the basis determined under this sentence shall be allocated to the purchased properties in proportion to their respective costs. (d) Subject to the provisions of subsection (b), the provisions of this section shall be applicable in respect of all taxable years ending after December 31, 1953, and all taxable years ending prior to January 1, 1954, in which a disposition of the converted property occurred if any part of the replacement pursuant to the provisions of this section is made after December 31, 1953. (e) CROSS REFERENCES. (1) For determination of the period for which the taxpayer has held property involuntarily converted, see section 1223. (2) For treatment of gains from involuntary conversions as capital gains in certain cases, see section 1231 (a). ILLINOIS STATE CHAMBER OF COMMERCE, To the Senate Finance Committee: Our basic position in regard to this bill is that it very materially improves the present Internal Revenue Code and that it should therefore be adopted. Before adoption, however, it should be amended in the particulars enumerated herein for correcting various inequities and for overcoming certain impractical features. In proposing amendments we have been guided by certain definite criteria. Our primary concern is with those sections deemed to be of widespread interest; no comment is made in regard to various specialized problems. The approach has also been to develop recommendations for correcting features found to be of an impractical or inequitable nature. In accordance with these criteria we are making no comments about the many desirable provisions in the bill. Neither Such are we addressing ourselves to questions of rates or types of taxation. matters, in our opinion, should not be allowed to confuse the question of making changes of a purely technical or administrative nature. And finally we are not urging inclusion of substantive changes for items not already dealt with in the bill. The various sections of H. R. 8300 for which amendments are proposed are as follows: Section 167 (c) and (e). 172. 275. 309, 336, 359, 391, and 771– 461_ 472 and 1321. 501 and 505. Depreciation. Topic Net operating loss deductions. Deductibility of interest on income debentures. Pension, profit sharing, and other employee bene- 642-675, 2031, 2032, and 2515_-. Federal income taxes of trusts, estate taxes, and Recommendation.-Amend section 167 (c) to permit use of the declining balance and other methods provided in section 167 (b) for all tangible property acquisitions after December 31, 1953, except acquisitions of pre-1954 additions from closely related taxpayers. Explanation.-The requirement that section 167 (b) methods of depreciation shall be limited to property new in use after December 31, 1953, is motivated by the desire of Congress to promote the construction and sale of capital additions. Success in this objective is essential to provide production facilities of the magnitude and efficiency required to meet the needs of our Nation. However, it appears that insufficient consideration has been given to this matter from the standpoint of the purchasers of new depreciable property. A purchaser who is willing to expand his plant capacity should have the benefits of the declining-balance method, and other methods, whether or not he acquires new assets as such expansion will also tend to increase employment. In this connection it is understood that rebuilt property would qualify as new property, but that property which is merely reconditioned would not be so classified. The elimination of the new requirement would also eliminate the many controversies which are sure to occur on the question of whether property has been rebuilt or was merely reconditioned. All taxpayers should be permitted to use more liberal depreciation methods regardless of when the property was acquired. It is recognized, however, that the extension of the subsection (b) provisions to all property regardless of when acquired would create certain technical problems in changing over and would also result in such a substantial loss of tax revenue to the Government that Congress might not want to approve a change of this nature. The suggestion above to exclude acquisitions of pre-1954 items acquired from related taxpayers should take care of the Ways and Means Committee's fear that "the application of the new methods to used property might artificially encourage transfers and exchanges of partially depreciated assets motivated only by tax considerations." (b) Section 167 (e) Recommendation.-Eliminate the provision permitting the Internal Revenue Service to require a change in a rate of depreciation where it determines that the useful life of any property differs from that used by the taxpayer by more than 10 percent. Provide instead that the taxpayer shall have full discretion in adopting rates and methods of depreciation applicable to the conditions existing in his business. Also provide that in the event of any proposed change in the rate or method of depreciation the burden of proof shall be on the Internal Revenue Service. 45994-54-pt. 3- -37 Explanation. The recommended substitute provision is in accordance with the new administrative policy which was announced last year by the Commissioner of Internal Revenue. So far as can be determined the new policy has been effective in eliminating most depreciation controversies. The Ways and Means Committee in its report states that the provision in the proposed subsection (e) is not intended to affect the present Internal Revenue Service administrative policy in anyway nor is it intended to be a statutory substitute for that policy and indicates that the bill provides for protection should the Internal Revenue Service withdraw its present policy. The committee states further that "it is hoped that by providing a minimum statutory leeway for the taxpayer in making his estimates of useful life, most of the needless friction in this area will be eliminated." This hope may not be realized. It is understood that there is a belief on the part of engineering personnel in the national and field offices of the Internal Revenue Service that if subsection (e) remains in H. R. 8300, the engineering section of the Service will be back in business, but that if this subsection is eliminated in its present form, the administrative policy in effect since last year not to disturb depreciation deductions will continue to be followed. This would be a logical development. Also, it appears safe to assume that in some instances there might be a tendency by Revenue Service examiners to propose large depreciation rate changes than would otherwise be made in order to exceed the 10 percent provision in subsection (e). 2. NET OPERATING LOSS DEDUCTIONS Recommendation.-Eliminate the adjustments required by section 172 (d) (2), (5) and (6) in regard to converting a net operating loss to a net operating loss deduction, and to recomputing the taxable income of years through which a loss is carried. Explanation.-Section 172 of H. R. 8300, in its present form, represents an improvement on section 122 of the Internal Revenue Code in two ways: (1) It extends by 1 year the period to which losses may be carried back, and (2) it reduces the number and extent of adjustments which the 1939 Code section 122 requires in converting a loss to a net operating loss deduction. An example of an adjustment which is required under current law is that for tax-exempt interest. Such interest both in the year of loss and in the year to which the loss is carried must presently be recognized to reduce the amount of the net operating loss deduction. Proposed section 172 would eliminate the adjustment for tax-exempt interest entirely and would eliminate other adjustments required by current law in the year to which a loss is carried. While proposed section 172 represents an improvement over current law, it does not go far enough. In order to equalize the Federal income-tax burden among taxpayers with steady profits and taxpayers with fluctuating profits, an objective discussed in the House committee report, all adjustments to taxable income except those which concern items of income or expense not related to a trade or business should be eliminated. Only by this method will taxpayers with fluctu-. ating incomes receive the benefit of provisions dealing with such subjects as percentage depletion, capital gains, and the dividends received credit to the same extent as taxpayers with steady profits. 3. DEDUCTIBILITY OF INTEREST ON INCOME DEBENTURES Recommendation.-Delete section 275 and incorporate in section 163 (which deals specifically with interest deductions) intended limitations on the deduction of interest payments made to holders of corporate securities. In no event should the deduction for interest on corporate securities outstanding prior to the effective date of H. R. 8300 be affected by the new bill. Explanation.-Section 275 disallows the deduction of amounts paid with respect to nonparticipating stock as defined in section 312 (d). Section 312 deals with the definitions relating to corporate distributions, and is interrelated with several very complex sections in subchapter C. In attempting to correlate the disallowance in section 275 with the definitions in section 312, the code as it stands unnecessarily complicates the determination of what is and what is not deductible interest. Section 163 allows a deduction to both individuals and corporations for interest paid or accrued on indebtedness. If it is intended to restrict or limit in any way the deduction allowed for interest on corporate indebtedness, it would seem that such restriction or limitation should be incorporated in section 163 along with the other limitations presently contained therein. There is no reason for excluding the proposed limitation from section 163; in fact, it should be included properly to comply with one of the basic objectives of the bill-to have all related provisions appearing together. As presently written, section 275 confuses rather than clarifies the taxpayer's position with respect to payments made on corporate obligations, and very substantial amounts of interest which have been deducted in the past without question are to say the least jeopardized by the combined effect of section 275 and 312 (b), (c), and (d). If there are corporate securities which are made to appear to be indebtedness solely to obtain an interest deduction under section 163, but are in fact some variant of an equity security, this situation should be taken care of precisely and simply by defining the word "indebtedness" as used in section 163. 4. CORPORATE REORGANIZATION PROBLEMS-SUBCHAPTER C (a) Sections 391 and 771 Recommendation.-Eliminate the March 1, 1954, effective date for subchapter C and make this subchapter apply only to taxable years beginning after December 31, 1954. Alternatively, and at a minimum, provide that subchapter C will not apply to transactions which take place prior to 90 days after the enactment of the bill. Explanation.-H. R. 8300 makes a complete structural revision of the law relating to corporate distributions, liquidations, and adjustments. Many such adjustments have, no doubt, already been agreed upon, or are in process, all in reliance upon laws now in effect. Obviously, taxpayers so involved should not be penalized by retroactive application of the proposed statutes which make many substantial and exceedingly technical changes in the existing law. The inclusion of the retroactive provisions in the bill make it inevitable that proposed corporate adjustments, refinancing, etc., be held in abeyance pending enactment of the bill. This, it is believed, will unnecessarily restrain business transactions and may impose substantial hardships where corporate adjustments have already been agreed upon. (b) Section 359 (a) Recommendation.-The classification of corporations in section 359 (a) into publicly held corporations and nonpublicly held corporations is wholly arbitrary, serves no useful purpose, and should be eliminated. Explanation.-It appears from the House committee report that the committee was concerned about the use of reorganization procedures by closely held corporations for the purpose of getting tax benefits for shareholders, rather that to promote the business purposes of the corporations. To guard against such practices (which it is noted the committee does not state categorically exist), it is proposed to adopt several arbitrary rules. First, it is proposed to classify corporations into two groups: (1) Publicly held corporations, and (2) nonpublicly held corporations. The nonpublicly held group includes those corporations in which 10 or fewer shareholders own 50 percent or more of the stock. A more than 50-percent owned subsidiary would fall in this group, although it obviously is quite different from a family closely held corporation. All other corporations are publicly held corporations. Second, it is proposed to establish an arbitrary size limitation on reorganizations where one, or both, of the parties thereto falls in the nonpublicly held classification. By this device, corporations falling within the range of specified sizes will automatically be regarded as qualifying for tax deferment, whereas those without the size limitation will be regarded as serving a stockholder purpose and tax deferment denied. It is submitted that the proposed policy is not only unsound, but that the procedures proposed to make it effective will seriously restrict corporate reorganizations which have bona fide business purposes, rather than stockholder purposes. (c) Section 359 (b) and (c) Recommendation.-Eliminate the arbitrary and discriminatory requirement that the shareholders of an acquired corporation must obtain an interest of 20 percent in the participating stock of the acquired corporation, in the case of corporate adjustments where 1 or both of the 2 parties thereto falls in the nonpublicly held classification. |