CAPITAL GAINS AND LOSSES (1954 CODE, SEC. 1211) Similarly, in the interest of equity and to encourage venture capital, we recommend that the deduction of capital losses be allowed in full against ordinary income as well as capital gains and that the tax rates on long-term capital gains be adjusted so that the maximum effective rate, now 25 percent, be kept in line with the starting rate on individual incomes. NET OPERATING LOSS DEDUCTION (1954 CODE, SEC. 172) Greater recognition to the problems of business should be given through extension of the 5-year net loss carryforward to 7 years, retaining the 2-year net loss carryback. DEDUCTION OF AMOUNTS SET ASIDE FOR RETIREMENT (SEE 1954 CODE, SECS. 401-404) Another item which we feel represents an inequity is the difference in the tax treatment of the officers and employees of corporations from that accorded the proprietor of a small business or the professional man. In the case of a corporation, it is possible for the corporation to set aside in a qualified trust certain amounts to be paid to the officer or employee after his retirement. The corporation receives a tax deduction for these amounts and they are not taxable to the employee until received in the form of a pension after he retires. The proprietor of a small business is not eligible for this treatment. We recommend that Congress pass legislation permitting the individual to deduct, within specified limits, amounts set aside for retirement purposes. PENALTY TAX ON CONSOLIDATED RETURNS (1954 CODE, SEC. 1503) Tax laws should not restrict or penalize sound business practices. For this reason, we recommend that the 2 percent penalty tax on consolidated returns be repealed. DEPRECIATION (1954 CODE SEC. 167) There is probably no single item which produces as much disagreement between the taxpayer and the revenue agents as the question of the amount of depreciation allowable as a deduction for tax-return purposes. This question involves method of depreciation, salvage value, and estimated life. We believe that these matters are properly those of management and that, within the limits of sound and consistent accounting, business management should be allowed to exercise its own discretion in these matters. We believe that the administration of tax law as it relates to depreciation does not reflect the intent of such law as enacted by Congress and evidenced by committee reports preceding such legislation. In summary, we recommend: 1. A balanced budget-no deficit financing in peacetime. 2. A planned program of progressive reduction in income-tax rates. 3. Elimination of double taxation of corporate earnings. 4. More equitable treatment of capital gains and losses. 5. Extension of net loss carry forward to 7 years. 6. Legislation permitting individuals to deduct, within specified limits, amounts set aside for retirement purposes. 7. Elimination of 2 percent penalty on consolidated returns. 8. Administration of depreciation provisions in accordance with congressional intent. LEO H. IRWIN, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, Clerk, Committee on Ways and Means, House of Representatives, Washington, D. C. DEAR MR. IRWIN: This is in response to your letters of October 29 and December 11, soliciting comments on possible revision of the internal revenue laws. The brevity of my remarks would not justify taking advantage of your invitation to appear as a witness, but I would like to offer them for the record and such attention as they may deserve. One of the advantages of large corporate size is stability of earnings. A company which is diversified as to location, product lines, channels of distribution, sources of material, etc., will suffer fewer ups and downs of profits. It will neither soar as high nor fall as fast as smaller firms. Of course, this particular advantage is only one of many advantages and disadvantages of size, which differs greatly from one branch of industry to another. Akin to the advantage held by a larger over a smaller one-in this one respect is that held by an older one over a newer one. A firm which is trying to grow up to the right size for its line of business must not only earn a profit, it must also secure capital for expansion. But at this stage of its growth, its profit picture may be too unsettled for it to secure credit; and it must, therefore, depend to a disproportionate extent on retained earnings. These advantages of size are an inherent part of our economic system. But the tax system has, in my opinion, had an important effect in moving the balance of advantage toward the larger and the older firm. An established firm, with taxable income, shares half the gains and half the losses on any given part of its operations. A small or new firm, with no income or only one source, shares in gains but not losses. Lacking a system of perfect averaging, such a firm bears a disadvantage which is not an inherent aspect of capitalist enterprise, but rather an unintended result of high levels of corporate and individual income taxation. This reasoning assumes, of course, what some would deny that the incidence of the corporate and individual income tax is predominantly upon the owners of the enterprise. My reasons for this opinion are briefly indicated in the April 1957 issue of the Journal of Political Economy, and need not be repeated here. I think most economists would agree; many, and perhaps most noneconomists would disagree. We are repeatedly told that income taxes are really passed on to the consumer; that they are therefore inflationary, etc., etc. If these views are correct, then income taxes have no important effect on the structure of methods of American business. In my opinion, this is not true; hence taxes may, at least, have substantial effects. This has, so far, not been proved. Over the long run, we would expect to see industry become increasingly concentrated because of this tax effect. So farwith 1954 statistics—there is no sign of it. This may be because the process works slowly, and our rather crude statistics are not sensitive enough to catch the development in its early stages. But a process which gathers headway so slowly may also be equally slow in being reversed by any congressional action. Hence I would urge-and here depart from the facts to offer a hunch-that the Congress proceed on the assumption that the tax structure is indeed promoting economic concentration, and pose the question of what, if anything, can be done about it. It is clearly out of the question to make any substantial reductions in individual or corporate income taxes. Hence the best we can hope for is some kind of system to ease the burden of taxation on smaller business. This obviously calls for the most careful kind of investigation and drafting, since the possibility of abuse is so glaring. Not being expert, I cannot even offer any assurance that an acceptable scheme can be worked out. But it is definitely worth a try. A remission of taxes is a form of subsidy to small and new business, and we should be clear on what we hope to gain from it in return for the heavier tax burden we are asked to assume. The notion that lower taxes will produce higher revenues in the short run, because they will stimulate business, must be dismissed offhand. The argument that small business deserves support simply because it is small, because it makes for a more healthy political climate, etc., is not convincing. The example of France, where national income is sacrificed to small-business interests, suffices to disprove it. But a policy which would try to offset the disadvantages of small business which result from the tax structure would aim to preserve those small or growing enterprises which were efficient enough to survive and grow, absent the side effects of taxes. If even a very small percent of the new or small firms grew to the point where they could originate significantly new products or methods, imitated in time by others, the gamble would be well worth taking, in my opinion. But the difficulties are so great that this objective needs to be kept to the forefront at all times. With thanks for your consideration, I remain, Yours very truly, M. A. ADELMAN. AIR TRANSPORT ASSOCIATION OF AMERICA, Subject: Sections 167, 452, and 462 of the Internal Revenue Code of 1954. Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: The Air Transport Association of America is composed of substantially all of the scheduled airlines of the United States. Its tax policy committee has carefully reviewed the recommendations for revisions in the Internal Revenue Code of 1954, transmitted on May 29, 1957, to Mr. Colin F. Stam, chief of staff, Joint Committee on Internal Revenue Taxation, by the Controllers Institute of America. Of the recommendations of that institute, three are of particular interest to the airline industry: IX-Depreciation, X-Accounting treatment of unearned income; and XI-Deduction for all ex penses attributable to income of the taxable year. The text of these recommendations is attached to this letter. In view of the general tax revision hearings now being conducted by the Ways and Means Committee, we believe it appropriate at this time to inform the committee of our strong endorsement of these recommendations of the Controller's institute. It is respectfully requested that this letter be included in the record of the current hearings. Very truly yours, J. D. DURAND, Secretary and Assistant General Counsel. RECOMMENDATIONS OF CONTROLLERS INSTITUTE OF AMERICA FOR REVISIONS IN INTERNAL REVENUE CODE OF 1954 1 IX. DEPRECIATION We have consistently urged that flexibility of method and rate should be permissible so as to meet the varying conditions of each taxpayer's business. The introduction of new methods in the 1954 code has unfortunately tended to introduce more, rather than less, rigidity. We urge that a taxpayer be permitted to shift methods or rates as his conditions require. Specifically, he should be allowed the automatic right to shift from any of the methods under section 167 (b) (2), (3), or (4) to the straight-line method or to any method under section 167 (a). X. ACCOUNTING TREATMENT OF UNEARNED INCOME Section 452 (repealed by Sec. I (a), Public Law 74, June 15, 1955) pertained to amounts received which have been recognized under prior tax rules as currently taxable income even though such amounts are to be earned over future periods. Basically, that section contemplated that there would be no recognition of amounts received as income so long as there was a future liability to render services, furnish goods or other property, or allow the use of property. That type of provision was essential to conform with good accounting practice and avoid the possibility of a tax being imposed upon the receipt of money which did not rightly, at the time, represent income. On the basis of presently available information, it does not appear that this provision would affect any substantial amount of revenue, and it is recommended that section 452 be restored to the Internal Revenue Code of 1954. XI. DEDUCTION FOR ALL EXPENSES ATTRIBUTABLE TO INCOME OF THE TAXABLE YEAR Good accounting practice requires that there be charged against the income of any year all expenses incurred or to be incurred which are attributable to such income. This principle was recognized in section 462 of the Internal Revenue Code of 1954, now repealed. The report of the Committee on Finance with respect to the repeal bill (H. R. 4725) completely vindicated the purpose and effect of section 462. We strongly urge that the intention of the Committee on Finance to report out substitute legislation be carried out promptly. In this connection, a special problem exists with respect to the accrual of vacation pay. Under rulings which antedated the enactment of the 1954 code, taxpayers have been permitted to deduct vacation payments to be made in the following year despite the absence of a fixed liability existing at the close of the taxable year. When this method of deducting vacation pay was adopted, there may or may not have been a compressing of 2 years' deductions into 1 year, depending upon the circumstances. If the early rulings are withdrawn in 1957, some taxpayers under present law will not be permitted to deduct any amount for vacation pay in 1957. This situation should be corrected by appropriate legislation, preferably by the reinstatement of section 462 or the enactment of a similar provision. We would oppose, however, any proposal which would allow the taxpayer a deduction for estimated expenses to be incurred after the close of the taxable year only at the price of foregoing a deduction for estimated expenses attributable to prior taxable years incurred during the taxable year or subsequently. Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, AMERICAN MEAT INSTITUTE, House of Representatives, Washington, D. C. DEAR CONGRESSMAN MILLS: The following suggestions with respect to revisions in the Internal Revenue Code of 1954 as presented as the recommendations of the American Meat Institute, the trade, research, and educational association of the meatpacking industry, representing a membership of about 435 meatpackers, sausage manufacturers, and meat processors and wholesalers throughout the country. These recommendations are the result of a study made by the American Meat Institute's committee on accounting of the income-tax laws with special reference to their application to the meatpacking industry. Following are our comments and recommendations: (1) DEDUCTION FOR ALL EXPENSES ATTRIBUTABLE TO INCOME OF THE TAXABLE YEAR The meatpacking industry tends to be seasonal. Hence various items of expense may be incurred at irregular intervals. However, good accounting practice requires that there be charged against the income of any year all expenses incurred or to be incurred which are attributable to such income. This principle was recognized in section 462 of the Internal Revenue Code of 1954, now repealed. The report of the Committee on Finance with respect to the repeal bill completely vindicated the purpose and effect of section 462. We strongly urge that the intention of the Committee on Finance to report out substitute legislation to be carried out promptly. In this connection, a special problem exists with respect to the accrual of vacation pay. Under rulings which antedated the enactment of the 1954 code, taxpayers have been permitted to deduct vacation payments to be made in the following year despite the absence of a fixed liability existing at the close of the taxable year. When this method of deducting vacation pay was adopted, there may or may not have been a compressing of 2 years' deductions into 1 year, depending upon the circumstances.. If the early rulings are withdrawn, some taxpayers under present law will not be permitted to deduct any amount for vacation pay in the year of withdrawal. This situation should be corrected by appropriate legislation, preferably by the reinstatement of section 462 or the enactment of a similar provision. We would oppose, however, any proposal which would allow the taxpayer a deduction for estimated expenses to be incurred after the close of the taxable year only at the price of foregoing a deduction for estimated expenses attributable to prior taxable years incurred during the taxable year or subsequently. (2) INVOLUNTARY LIQUIDATION OF LIFO INVENTORIES A number of companies in the meatpacking industry have adopted the LIFO method of accounting for inventories in whole or in part. To them the problem of involuntary liquidation is one of great significance inasmuch as the industry deals with perishable products which cannot be stored for any appreciable length of time, but which must be sold and consumed fairly promptly. Whether or not it is in accordance with his wishes, a meatpacker must regularly dispose of his inventory and attempt to replace it. However, the proper functioning of the LIFO inventory method breaks down when replacement within the taxable year through normal channels of distribution is rendered difficult or impossible by abnormal circumstances over which the packer taxpayer has no control. In recognition of this fact, both during World War II and the Korean crises so-called involuntary liquidation relief was granted whereby taxpayers were permitted to use replacement cost in the final determination of their tax liability, even though replacement did not take place for several years owing to war-induced shortage of supplies. These provisions have now expired, but the need for them has not. It is becoming increasingly apparent that a permanent provision is required to take care of comparable situations that are bound to arise from time to time. Involuntary liquidation relief should be available to any taxpayer whose failure to replace is attributable to any circumstance, occurrence, or condition beyond the reasonable control of such taxpayer, including inability to obtain the goods required to replace his inventories on the open market through the normal channels of distribution by reason of the scarcity thereof. If a definition of involuntary liquidation in terms of abnormal circumstances is regarded as difficult to administer, a provision which would be relatively automatic in its operation could be adopted. The basic principle of LIFO is that replacement cost is the proper measure of cost in the case of a continuing business. This principle could be applied over a longer span than a single year. Thus, it could be provided that the taxpayer might elect that in any case in which inventories declined in 1 year and there was an equivalent inventory increase within the next 5 years, for example, the subsequent increase should be deemed a replacement of the goods previously liquidated. In order to restrict the operation of such a provision to relatively unusual cases, it could further be provided that it would operate only if the liquidation related to goods whose values were determined by sections 471 or 1321, or their predecessors in the 1939 code, at least 5 years prior to the year of liquidation or whenever the taxpayer initially went on LIFO, whichever date was later. Under former provisions a year in which involuntary liquidation takes place remains open, for tax purposes, until the year of replacement. We recommend that the income of the year of involuntary liquidation should be adjusted by the difference between the inventory cost and the current replacement cost of the liquidated items. The difference between such current cost and the replacement cost as determined in the year of actual replacement could be adjusted in such year. If replacement is not made the interim adjustment should be reversed in the last year in which replacement would have been recognized. A precedent for making such revision in the law was established by the passage of Public Law 629, enacted June 29, 1956. This amendment enables farmers who are forced to dispose of livestock because of drought conditions to treat sales as involuntary conversions with the proceeds not subject to income tax if reinvested in the same kind of livestock within a year. (3) DEPRECIATION The meatpacking industry has experienced much difficulty in replacing wornout plants and equipment. Funds made available through depreciation allowances have been inadequate in the face of replacement costs of 3 to 4 times the original investment. Also, profits earned in the industry have been too meager to provide a source for the funds required in addition to depreciation allowances if wornout and obsolete plants and equipment are to be replaced. We, therefore, urge that provisions be made for depreciation on a replacement cost basis. We also urge that flexibility of method and rate should be made permissible so as to meet the varying conditions of each taxpayer's business. The introduction of new methods in the 1954 code has unfortunately tended to introduce more rather than less rigidity. We urge that a taxpayer be permitted to shift methods or rates as his conditions require. Specifically, he should be allowed the automatic right to shift from any of the methods under section 167 (b) (2), (3), or (4) to the straight-line method or to any method under section 167 (a). (4) ANNUAL REPORTING FEDERAL INSURANCE CONTRIBUTIONS ACT Section 6011 provides for the quarterly filing of form 941 under the Federal Insurance Contributions Act. We believe that annual filing of this return would be just as satisfactory a procedure and would reduce the tremendous |