the perecentage depletion is not limited to the value of the mineral itself, as taken from the ground, but to the "commercially marketable mineral product"-to tile to brick, to finished cement, to pulverized talc and tale crayons.

If all taxpayers are to be put upon the same footing, percentage depletion should, at least, be curtailed: Percentages should be lowered and the new per centages allowed only until the remaining capitalized costs have been recovered 9. Life insurance: Deny to taxpayers the right to deduct interest on loans made to pay premiums on life insurance policies.

Life insurance policies have tax appeal, and are often sold to high-bracket tax payers primarily on that basis. Companies are offering policies with high cash surrender values during the early years, and will loan most of the money for premium payments without collateral other than the policy. Insurance agents state, as the loan interest is deductible for income tax purposes, you are in effect paying premiums at an unusually low cost. In turn, predeath interest earned on the policy passes free of income taxes to your beneficiary; and, if the policy is to be paid to your spouse for a period of years under a policy option, she may receive up to $1,000 a year of tax-free postdeath interest. This all makes life insurance a significant tax haven, especially when the proceeds may pass free of estate tax by lifetime assignment of the policy.

The soundness of a business or family plan should not hinge exclusively on a tax gadget. Where possible trading on tax avoidance should be discouraged Extreme abuses could be prevented here by denying to taxpayers the right to deduct the interest paid on loans for life insurance premium payments.

10. Withholding: Require withholding of income taxes on dividends and interest.

The Treasury is reported to be losing hundreds of millions of dollars through the failure of taxpayers to report their dividends and interest. This could be corrected, without major business or administrative inconvenience, by a required withholding procedure.

11. Internal Revenue Service: Provide for the strengthening of the Interna Revenue Service.

Studies are already underway on the administration of the internal revenue laws. As one of the reports states: "The task of the Service is without a doub the most sensitive of any task in the Federal administrative structure."

A determined effort should be made to strengthen the Service, with particular reference to perfecting its auditing procedures.

12. Long-range projects: Appoint a paid Commission to redraft a proposed new code; reappraise advisability of creating a Court of Tax Appeals.

Two long-range projects are submitted as further means for improving ou internal revenue laws:

First, consideration should be given to appointing a salaried Commission charged with the responsibility of making a detailed study of our Internal Revenu Code, and preparing a draft of a proposed new statute. The 1954 statute repre sents an attempt to attain clarity and certainty by detailed specification of myria controlling rules. We may have erred too far in this direction, and experienc under the statute is indicating that drawing series of precise lines creates hard ships, complexities, and opportunities for tax avoidance. Such a Commission might consider carefully the possibility of culling from the existing body of lay the basic and underlying principles which govern our tax system. It migh then be possible to draft a statute built around a clear statement of these prin ciples, but without the minutiae of detail characteristic of the 1954 code.

Second, but related to the above proposal, a reappraisal should be made the advisability of creating a Court of Tax Appeals, to have exclusive appellat jurisdiction in the review of all noncriminal Federal tax cases. Such a court' decisions would be final, except where an occasional constitutional issue wa involved. The existing problems of unresolved conflicts among the circuit and between the Tax Court and courts of appeals, would be eliminated. Suc a judicial hierarchy automatically assuring decisions of nationwide authorit would provide greater certainty in interpreting and administering our tax law It would also be the available machinery for constant and final interpretatio of a statute drawn in more general terms and based upon flexible, fundamenta principles.

IV. CONCLUSIONS

The foregoing recommendations are in response to the kind invitation of th committee for my "views-amicus curiae-of the need for revenue revision an the direction which it should take." As someone else has discussed taxatio

of foreign income, I make no mention of this difficult problem. Nor do I go into the question of taxing interest on State and municipal bonds: as a matter of priority, this complex issue can await further developments and may be alleviated in part by lowering the higher income-tax brackets.

A group of outstanding tax practitioners recently reported that the "single most important factor of successful Federal tax enforcement in this country is taxpayers' attitude."

As I stated at the outset, it is my view that this attitude is being adversely affected by high and artificial rates, complex laws, widespread emphasis upon tax avoidance, sporadic enforcement, and unjustifiable discrimination in our tax laws. We have reached a danger point which strongly evidences an undermining of the tax morality of large numbers of people. Yet I believe these threats can be met by adopting amendments aimed primarily at eliminating tax preferences and favors-amendments focused on creating a revenue system which is fair, equitable, neutral in impact between similar dollars of income. Only in this manner will taxpayer confidence be restored.

Mr. CAPLIN. I would like to inform the committee of my appreciation of the new procedure adopted in these hearings. I think it is a real sound contribution and consideration.

The CHAIRMAN. The late chairman of the committee conceived the idea, and it will stand, I hope, as a symbol to his fine work in this committee over a number of years.

Our next witnesses are the advisory group on subchapter C. I see most of the members of that group present with us this morning. We have four of them listed as engaging in the discussion, but if the other members of the group would care to do so, they may also come to the witness table.

Let me introduce the members of the panel. This is the group of advisers to the Subcommittee on Internal Revenue Taxation who were appointed and worked so diligently over such a long period of time in an endeavor to make recommendations for improvement in subsection (c) of chapter 1 of the Internal Revenue Code.

Mr. Norris Darrell is the chairman of the group.

Mr. C. Rudolf Peterson is the vice chairman.

Mr. Edwin S. Cohen is a member of the panel.

Marvin K. Collie, the only member of the panel absent, is from Houston, Tex.

And most members of the committee, of course, readily recall Mr. Kenneth Gemmill from his former activity in the Treasury Depart

ment.

Mr. Samuel J. Lanahan will also be recalled by many of us who remember that he at one time was a member of the staff of the Joint Committee on Internal Revenue Taxation.

And Mr. Leonard L. Silverstein has been a witness before the committee on several occasions, and I am sure most members of the committee recall him.

We are sorry that Mr. Collie was unavoidably detained today and could not join your very outstanding group.

Mr. Darrell, I recognize you as chairman of your group to proceed in such a manner as you desire.

STATEMENTS OF THE MEMBERS OF THE ADVISORY GROUP ON SUBCHAPTER C: NORRIS DARRELL, CHAIRMAN (SULLIVAN & CROMWELL), NEW YORK CITY; C. RUDOLF PETERSON, VICE CHAIRMAN (LEE, TOOMEY & KENT), WASHINGTON, D. C.; EDWIN S. COHEN (ROOT, BARRETT, COHEN, KNAPP & SMITH), NEW YORK CITY; SAMUEL J. LANAHAN (WILMER & BROUN), WASHINGTON, D. C.; KENNETH W. GEMMILL (BARNES, BECKERT, PRICE, MYERS & RHOADES), PHILADELPHIA, PA.; AND LEONARD L. SILVERSTEIN (COOPER & SILVERSTEIN), WASHINGTON, D. C.

Mr. DARRELL. Thank you, Mr. Chairman.

We appreciate very much the opportunity to appear to speak about our report, our study and our recommendation with regard to subchapter C, which, as you all know, relates to corporate distributions and liquidations, reorganizations, and carryovers.

Our organizational meeting was held in Washington, December 3, 1956, and thereafter we held meetings in Washington from time to time for periods of from 1 to 4 days. We held in all 12 Washington meetings, extending over a total of 22 days. In addition, members of the group-all busy practicing lawyers-were of course called upon to do a very considerable amount of homework and, indeed, during the summer of 1957, some of the members of the group gathered together at a quiet place where they would not be disturbed, and devoted themselves exclusively to the implementation of the basic decisions arrived at by the group. They did this for periods ranging from 10 days to 6 weeks, foregoing in the process all or part of their normal vacations. It was only as the result of efforts of this sort that we were able to make such progress as we have made.

I would like to call your attention particularly to the last paragraph of our transmittal letter where we acknowledged the very helpful service of a number of outside people, lawyers, accountants, associates, Internal Revenue Service, the Treasury and Mr. Stam and the staff, and I want to particularly emphasize here that we had very unusual cooperation and help from Mr. Stam and he allowed us to have as our secretary Arnold Johnson, who worked most diligently and ably, and I do not think we could have gotten along without him, and we deeply appreciate that help.

Our printed report, accompande by a document in bill print from containing drafts of the statutory amendments which we recommend. was submitted to the subcommittee under date of December 23 last. and it was promptly transmitted to your committee. We earnestly request that our report and the amendments proposed therein, as well as any timely supplemental report and proposals we may submit, be given careful consideration by your committee in connection with any contemplated revision of the 1954 code during the current year. Our group, I am happy to say, acted with unanimity, though in our deliberations varying points of view were expressed and considered, in approving our report and the proposed amendments. None of the seven members of the group appended any reservation or qualification.

You will note that we have proposed amendments to or the revision of some 30 statutory sections. In order that your committee may have a better understanding of our proposals, three of the members

of the advisory group who have been most active in its work will explain to you, after I have finished, the basic nature of and the reasons for the more important amendments we have recommended in the various parts of subchapter C. Mr. C. Rudolf Peterson, vice chairman, will deal with part 1, relating to corporate distributions. Mr. Edwin S. Cohen, who also served as counsel to the group, will deal with parts 2 and 3 relating to corporate liquidations and corporate organizations and reorganizations. Mr. Samuel J. Lanahan will explain our recommmendations with respect to part 5, relating to carryovers. And Mr. Gemmill and Mr. Silverstein are on hand to step in and help out as much as they will.

Before turning the floor over to them, however, it might be helpful to your committee if I supplemented somewhat the comments made in our letter of transmittal of December 23.

From the outset of our deliberations, we have been fully conscious of the widespread complaint that the Internal Revenue Code, with its precise detailed line-drawing provisions, is too complicated. Our initial query therefore was whether we should recommend departure from existing statutory policy in this area and suggest a much more simply worded subchapter C, leaving implementation to Treasury regulations and the courts, or whether we should limit our recommendations to improvements in keeping with the basic policy presently reflected in subchapter C. We concluded to pursue the latter course. Subchapter C governs all kinds of complicated corporate transactions conducted by the more sophisticated taxpayers in a highly developed business economy. The tax law must apply to this area in such manner as not to hinder appropriate business transactions and at the same time to protect the revenues. Under high tax rates such as we have today, businessmen cannot risk carrying out important corporate readjustments unless there is reasonable certainty that an unforeseen heavy tax liability will not be incurred. Such certainty cannot be obtained under a simply worded statute limited primarily to statements of general policies and principles, for such a statute would leave the burden of interpretation to the courts in the final analysis, except to the extent final interpretative authority is given to administrative officers. Recognizing all this, Congress in subchapter C of the 1954 code sought to provide greater certainty through expanded and more detailed and precise statutory provisions. We concluded that it was preferable to limit our recommendations to improvements in keeping with the policy reflected in subchapter C, in the belief that with these improvements the wisdom and ultimate acceptability of such policy can be better tested.

Our recommendations are therefore designed primarily to remove unintended benefits and hardships in the existing subchapter C, to effect greater coordination and consistency between its various interrelated provisions, to reduce the importance of form upon the tax consequences where substantially identical results are obtained and so far as possible to achieve greater clarity and understandability of this intricate subchapter and greater simplicity in concept.

We have not attempted to deal with the important problem of effective dates of the proposed statutory changes. As a matter of general policy, we believe that statutory changes should be effective prospectively only. Moreover, with respect to changes such as those proposed in section 382 with respect to carryovers, the new provisions,

if adopted, should probably not be effective with respect to transactions involving significant changes in ownership occurring before the proposed enactment of the new rules is officially announced. Where businessmen have proceeded on the reasonable assumption that the 1954 rules will govern the carryover of tax attributes, they should not be penalized, after having taken action in good faith, by the substitution of a new set of rules for determining the tax effects of the transaction.

Finally, may I say on behalf of the advisory group that, while we have endeavored to do the best we could during the time available to us, we recognize that the difficulties and perplexities under subchapter C are such that our report and the accompanying document containing the proposed statutory amendments could undoubtedly be improved with further study and consideration. We, therefore, do not present them in dogmatic fashion as final and definitive but as subject to modification and improvement. We intend ourselves to give further consideration to some of the recommendations made in our report, as well as to certain matters not referred to therein, with a view toward submission of such supplemental report as may seem appropriate. Meanwhile, we believe it highly important that, before definitive action is taken by the Congress, interested persons should be afforded as much time as possible to enable them to make a thorough study of our proposals and to submit their comments and suggestions with respect thereto.

Thank you.

I would like now to turn the presentation over to Mr. Peterson. The CHAIRMAN. Mr. Darrell, before we proceed to Mr. Peterson's discussion of part 1, relating to corporate distribution, let us bring this matter into just a little closer focus, if we may.

Mr. DARRELL. Yes, sir.

The CHAIRMAN. In 1953, this committee conducted exhaustive hearings. In the course of those hearings, suggestions were made to the committee with respect to changes in corporate distributions and corporate liquidations, as they then existed in the code of 1939.

This committee and its staff, including the staff of the Treasury. worked very diligently, and Mr. Gemmill was then with the Treasury. in developing what we considered to be better solutions of the problems found in this area of the code of 1939.

However, the legislation that was reported by this committee and which passed the House was very materially changed in another body. So that the work that was done here was not actually enacted into law.

What you are suggesting, in a general way, is more in the direction of a return to what we were proposing here in this committee with respect to subchapter C in connection with our work in 1953 and 1954. Is that not true?

Mr. DARRELL. Mr. Chairman, I am very glad you brought that out. That is true.

One of the principal proposals that we are recommending is precisely the one that was adopted by your committee in 1953. We have made a few changes in it that are not vital, which we think will clear up the trouble that was then encountered.

The CHAIRMAN. In a general way, the advisory group feels that what we developed here in the committee in 1953 in connection with