est of 50 percent of the outstanding stock of the surviving corporation, these rules are operative. We feel that section 382 should set up entirely objective standards to achieve the policy we have been discussing.

However, it is not possible to take care of all types of cases with rules such as these. For example, a corporation with net operating loss carryovers may have sold all its operating assets, and while it has assets of genuine value, such as cash or securities, it is not a going business. It is not operating. Therefore, our report recommends a change in another area to take care of this type of case.

That is in section 269. We recommend that that section be amended to provide for a presumption that there was a tax avoidance acquisition if after the acquisition the business of the corporation is substantally changed. In the case I described, someone would be willing, of course, to pay a substantial consideration for the stock of the corporation, but the business of the corporation would be changed by investment of the assets, and the net operating losses carryover would then be eliminated by section 269.

The CHAIRMAN. Mr. Lanahan, at that point, are you also recommending the elimination of the present presumption?

Mr. LANAHAN. That would replace it, Mr. Chairman.
The CHAIRMAN. You are recommending that?

Mr. LANAHAN. Yes. That concludes my discussion.

The CHAIRMAN. Let me ask one further question with respect to this limitation on net operating loss carryover. As I understand the present code provisions relating to operating loss carryovers, there has been considerable criticism that they do not contain a single unitary statutory statement or policy.

Help me just a little bit on that point, will you? What is the basic policy underlying the advisory group's recommendation in this area? Mr. LANAHAN. The basic policy that we are proposing is to allow net operating loss carryovers where the consideration paid for a business or the stock of a corporation is such an amount that the acquisition is an acquisition of a business, and which should have its tax attributes go along with it unimpaired.

The CHAIRMAN. That is what you do, Mr. Lanahan. But what is the theory for doing it, the underlying theory?

Mr. LANAHAN. The theory is that in the acquisition of a corporation's stock, since the corporation is a separate entity, where its stock is acquired its tax attributes should continue to adhere to that corporate entity if it is a substantial going business and the amount of the consideration does not indicate that it is merely a tax avoidance. acquisition.

The CHAIRMAN. But what are we trying to do? What is the theory? What is the underlying theory that we are trying to accomplish?

Mr. MASON. What is the policy you are trying to establish in these mergers? That is what you are wanting, is it not, Mr. Chairman? What is that policy or theory?

Mr. DARRELL. There are several aspects of that policy. Normally when stock changes hands-it may change hands 100 percent, 80 percent, 60 percent, 40 percent-and the company goes on as before, it is a question of where to draw the line. In making a new rule to limit what prior losses of that corporation may be used thenceforth where

there is a change of ownership, we have said a 50 percent change in ownership is a good dividing line.

If 50 percent changes hands, then we would put in a new rule which would limit the use of that company's prior losses in appropriate situations.

We said to ourselves where should we draw the line? After all, a corporation is treated as a separate entity and is taxed heavily. We should not draw a rule that will be applied only where there is a 100percent change of ownership. We said that where there is a real business, and the ownership of that business changes hands 50 percent or more primarily because there were values, real values, apart from the net loss carryover, we will adopt a rule that says, "Go ahead, boys, keep the loss carryover, because this is not a trick, this is not a tax device, this is not trading in losses, such as we saw in those ads."

But we must have a rule that will eliminate effectively the trading in losses. We said further that you have to have a rule that will apply whether you buy stock for cash or whether you acquire it in reorganization, and no matter how you bring about that change of ownership, taxable or tax free.

Mr. MASON. What you are really trying to do is to do away with. this trading in losses.

Mr. DARRELL. Precisely.

Mr. MASON. And to make the illegitimate mergers more difficult to make.

Mr. DARRELL. That is correct.

Mr. MASON. That is what you were trying to get at, was it not, Mr. Chairman?

The CHAIRMAN. Actually, I know I have heard existing provisions of law criticized because there is no theory or policy that can be pointed to as underlying the statute.

Mr. DARRELL. That is quite true. There is no rule where you acquire stock for stock tax free in what we call a type B acquisition. There is one rule where you purchase stock and there is another rule where you have a reorganization to acquire the stock. So all are slightly different. It is very difficult to see how they fit together. We were trying to eliminate that.

The CHAIRMAN. I have been trying to think, as you were discussing this, just what theory you proceeded on in the establishment of the rule. I am not trying to be technical or anything else. I am seeking some explanation that you might offer as a theory in back of these recommendations. I come only to the conclusion that the theory back of this must be that we not only will regard a corporation as a person, as described in law, but that we will regard it as an individual with the same sensitivity to motivation.

I wonder if we are ascribing to corporations motivation felt only by individuals.

Individuals are motivated, but I question very seriously that corporations are motivated in the sense that individuals are.

Mr. DARRELL. This is all keyed to changes of ownership by individuals. They are the ones that benefit.

The CHAIRMAN. The motivation to purchase is by individuals, but how is the seller, the individual who owed the seller, benefited when he is not compensated for his losses and does not continue in the business?

Mr. PETERSON. There are many other tax attributes that are not changed by the purchase of stock. For example, I think reference was made earlier today to the case where someone bought stock in a corporation and the next day a dividend was declared out of earnings and profits which had accumulated before the shareholder bought the stock. Furthermore, shareholders may have bought stock, paying a good deal more than the book value of the corporation, yet for excessprofits taxes the corporation had to use the lower amount in arriving at invested capital.

They there said that the corporation is a separate entity and its taxes will be computed on a separate basis.

Our problem was to try to distinguish the cases where they were buying losses and where they were buying businesses.

The CHAIRMAN. Concerning the purchaser of the stock, who is the individual or individuals who own the buyer corporation, and who may well be motivated by tax benefits, you do reach the basic conclusion as a group that in these purchases and transfers of ownership, as well as the assets themselves, there should be recognition of some of the operating loss carryover for the business under the new ownership even though they pay only for the real assets?

Mr. DARRELL. Yes, Mr. Chairman. I want to add further that we do not look into motivation of the individual. We did not want to get into motivation or intention. We wanted to go to the facts and find out what, probably, it was, by looking to see what was actually done, and then making a rule that would put the case on one side or the other and not get into a squabble about "What was your purpose?" The CHAIRMAN. Since I already stated that I would introduce this bill, I wonder if our staff people could get your opinion as to the effective dates that should be in the bill.

You say that some of these dates should be prospective. But let us do it in accordance with your thinking, rather than the thinking of the staff. I would want this to be your bill, and I would want it to be, so far as dates are concerned, your ideas and not the ideas of the committee, myself, or of the staff. If we may have the benefit of that information from you for our committee people, we would appreciate it. It is not necessary to do that now.

Mr. DARRELL. We will study that.

The CHAIRMAN. Thank you.

Mr. COHEN. Could I call attention to one other matter, Mr. Chairman? I believe I mentioned earlier that, generally speaking in the print of the proposed amendments, we have included only amendments to subchapter C. There are some collateral amendments, such as the one involved in 1221 (3) and several others outside of subchapter C. I think it would be desirable if they were included in the print as it Would be introduced, in order that they would be available for study at the same time.

Mr. MASON. They are all pretty closely related.

Mr. COHEN. Yes.

The CHAIRMAN. Are there any questions? Mr. Curtis will inquire. Mr. CURTIS. Mr. Chairman, this is a little off the track, but I think it has bearing on this. It has to do with taxation of foreign income. What is now section 367 of the Internal Revenue Code, part of subchapter C was originally placed in the internal-revenue laws to prevent avoidance of the Personal Holding Companies Act. I realize

today it has the added purpose of avoiding capital gains being realized from business liquidations. In your opinions, would it not be possible to achieve these two purposes and yet permit the flexibility necessary to permit many more organizations who are doing the business abroad in branch form, and are sort of frozen into that form of doing business, to obtain the benefits now enjoyed by foreign corporations, such as the average made possible by the Internal Revenue Service position, with respect to the per-country limitation as it concerns foreign subsidiaries? Do you follow the point I am raising?

Mr. DARRELL. Do I understand you are raising the question of whether we need 367?

Mr. CURTIS. No. It is whether or not the purpose that you are seeking in 367 cannot be amended to provide some flexibility in regard to the treatment to these subsidiaries or branches abroad which, presently, because the company has chosen to do business abroad in the branch form, finds itself encased in that kind of procedure and at a disadvantage to the corporation doing business abroad under the guise of a foreign corporation.

Mr. DARRELL. It is perfectly true that if, instead of a branch, you set up a foreign subsidiary, you are enmeshed in this provision as it is. We felt that this provision was probably necessary for the protection of the revenue. Maybe it could be amended and maybe it could be clarified. Take the subsidiary corporation. The parent incorporates a subsidiary abroad, and it piles up its income. Then it liquidates, and it would like to liquidate tax free. The Internal Revenue Service will not give you a ruling that it is tax free if you have not paid a reasonable amount of dividends out of that company.

You cannot have used it to accumulate income and not pay taxes, to get out of it without tax. They say if you have not paid adequate dividends you will pay a capital gains-tax when you liquidate that subsidiary. The question for your committee is whether you want to open the door there, or if you don't want to open the door there; whether you want to say to the taxpayer: "Have this thing cleared first before you move as the law now provides", or whether you want to say, "You move and we will decide later."

Today they have to get a favorable ruling before they make the move or they cannot have a tax-free liquidation.

I don't personally believe section 367 is very closely related to the per-country limitation. I think it has nothing to do with the latter. But, in my own judgment, this provision is a necessary administration provision to police the dividend situation. Does anybody want to add to that?

Mr. CURTIS. Thank you very much.

The CHAIRMAN. Are there any further questions of the advisory group? If not, gentlemen, I want to thank you again for the many, many hours of work that you have devoted to this report, and commend you for having rendered what I consider to be outstanding public service, and to the country as a whole, in bringing to us your many suggestions for corrections in the area of subchapter C. Thank you very much.

Dr. DARRELL. Thank you, Mr. Chairman.

The CHAIRMAN. Our next witness is Mr. Edward B. Burr.

Mr. Burr, for purposes of the record, you will you please identify yourself by giving your name, address, and the capacity in which you appear?

STATEMENT OF EDWARD B. BURR, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF INVESTMENT COMPANIES, NEW YORK CITY, ACCOMPANIED BY VINCENT L. BRODERICK, GENERAL COUNSEL; AND EDWIN S. COHEN, OF ROOT, BARRETT, COHEN, KNAPP & SMITH

Mr. BURR. I am Edward B. Burr, the executive director of the National Association of Investment Companies, New York City.

The CHAIRMAN. You have present with you Mr. Cohen. Will you identify the other gentleman, please?

Mr. BURR. That is Vincent L. Broderick, national counsel for the National Association of Investment Companies.

The CHAIRMAN. Mr. Burr, will it be possible for you to complete your statement in 15 minutes that we have allotted to you?

Mr. BURR. Sir, I have a statement that I think I can do in much less time than 15 minutes.

The CHAIRMAN. Would you want the entire statement included in the record?

Mr. BURR. Yes, sir.

(The document referred tó follows:)

STATEMENT OF EDWARD B. BURR, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF INVESTMENT COMPANIES, NEW YORK, N. Y.

My name is Edward B. Burr. I am executive director of the National Association of Investment Companies, 61 Broadway, New York, N. Y.

The National Association of Investment Companies has a membership of 140 open-end investment companies and 24 closed-end investment companies. All of its members are registered with the Securities and Exchange Commission under the Investment Company Act of 1940, and the securities which they issue are registered under the Securities Act of 1933. In assets, they constitute over 95 percent of the assets of all publicity held, diversified management investment companies in the United States. Most of the members of the National Association of Investment Companies have elected to qualify, for tax purposes, as regulated investment companies under subchapter M of the Federal Internal Revenue Code

of 1954.

This memorandum is submitted in support of three bills presently pending before the Ways and Means Committee: H. R. 8810, H. R. 8811, and H. R. 8812. These bills, which are identical, are intended to widen the market for municipal securities, thus assisting State and local governmental units, including school districts, to raise the funds necessary to finance the construction of needed school and other public facilities. The bills would enable persons of moderate means who presently do not invest in municipal securities to invest in them indirectly through the medium of regulated investment companies which have the bulk of their assets invested in State and local securities. This legislation would put the shareholders of such regulated investment companies in the same position as if they had invested directly in the municipal securities held by the investment companies.

The principle underlying these bills was first advocated by the President in his economic message to Congress in 1955 and reiterated in his 1956 and 1957 messages. It has been endorsed by various State and municipal officials. This association has cooperated with the staffs of the Treasury Department and of the Joint Committee on Internal Revenue Taxation in the drafting of appropriate language to implement the President's proposal. We urge passage of the pending bills, in the belief that regulated investment companies of the municipal bond fund type might make a significant contribution toward enlarging the market for municipal securities, thereby aiding local and State governments in their programs for financing the construction of new schools and other needed facilities; and with the conviction that the extension to all members of the public.