I can think of all kinds of things I would like to advocate this morning in order to increase the equities of the tax law. The Keogh bill, in my opinion, is something that certainly should be injected. into the tax law, even if it has to start on a very moderate scale.

The CHAIRMAN. All of the equity adjustments that you mention provide for additional loss in revenue. Would there be any inequities that might exist in the law today that you would have us adjust that would bring in additional revenues to offset the adjustments that we would make in reducing rates?

Mr. CHAPMAN. It is very difficult for me actually to discover points in the tax law where you can substantially increase the revenue without creating additional inequities or else increasing the rates which we want to reduce.

I am talking strictly about the income-tax law.

In my opinion, therefore, if additional revenues are going to be realized, it seems to me that they should be sought in sources other than the personal income and corporate income taxes.

The CHAIRMAN. Am I justified, then, in having the thought, from what you say, that the only inequities and the only unfairness that exists in the Internal Revenue Code are within the rate and the fact that we are taking too much from the taxpayer? Is that the situation? Mr. CHAPMAN. No.

The CHAIRMAN. Or is there at the present time fairness and equity in the distribution of the burdens in the Internal Revenue Code? Mr. CHAPMAN. Are you talking within the confines of the income tax?

The CHAIRMAN. Yes.

Mr. CHAPMAN. I thought I said just a few minutes ago, but might not have made myself clear, that I think there are any number of inequities in the present structure.

The CHAIRMAN. Some of them are in favor of the taxpayer, who enjoys the exception, is that right, or are they all in favor of the Government?

Mr. CHAPMAN. I am talking from the taxpayer's point of view, so that any inequities that run in the taxpayer's favor I would call by a different name, such as, conceivably, loophole.

The CHAIRMAN. I see.

Thank you, sir, very much for coming to the committee and giving us the benefit of your views.

Mr. CHAPMAN. Thank you.

Mr. CURTIS. Mr. Chairman.

The CHAIRMAN. Mr. Curtis of Missouri is recognized.

Mr. CURTIS. Mr. Chairman, I have recently received from an esteemed citizen of St. Louis, Mr. Walter C. Hecker, a statement in support of a bill, H. R. 130, which I introduced. The meritorious purpose of this legislation is to amend the Internal Revenue Code of 1954 so as to allow a longer period of claiming refund or credit of income tax under circumstances of the claim being based upon a judicial decision affecting tax liability in a similar case. Mr. Hecker's able statement deserves the sympathetic attention of the membership of this committee and I will ask that Mr. Hecker's statement be included at this point in the record and that copies of that statement be furnished to the membership of the committee at this time.

The CHAIRMAN. Without objection it is so ordered.

(The statement referred to is as follows:)

STATEMENT OF WALTER C. HECKER, ST. LOUIS, MO.

In the reorganization of the Frisco Railroad during 1947, the holders of Frisco defaulted bonds, which had been purchased flat, received new issues of bonds, preferred stock, common stock and some cash-all of which new issues and the cash, the Commissioner of Internal Revenue ruled were ordinary income.

The holders of the Frisco defaulted bonds in filing their returns in March 1948 for the taxable year 1947, obviously, were governed by the Commissioner's ruling. The statute of limitation for these tax returns was March 15, 1951-yet witness 3 court decisions, 2 of which were made a very short time after the statute of limitation of the taxpayer had expired; namely, only 2 months in 1 case and 7 months in the second.

In the case of William W. Carman v. Commissioner of Internal Revenue, United States Court of Appeals, Second Circuit, No. 173, on May 23, 1951, ruled against the Commissioner and also against the Tax Court, the latter of which had upheld the Commissioner. This case covered Western Pacific Railroad securities, similar in facts to the Frisco Railroad. The Carman case was ap pealed and the United States Court of Appeals held it was a capital gain and not ordinary income.

Since the Carman case, the Second Circuit of New York, in the Willis Wood case, on October 26, 1951, also held the new issues of bonds, preferred stock. common stock, and cash received in lieu of defaulted Frisco bonds, was capital gains instead of ordinary income.

Now witness in the third case namely, A. J. Dunbar v. Commissioner of Internal Revenue, United States District Court, Eastern Division of the Eastern Judiciary District of Missouri, Case 8896, Division No. 3, on August 4, 1953, also overruled both the Commissioner of Internal Revenue and the Tax Court, holding that the new issues of bonds, preferred stock, common stock and cash, received in lieu of the defaulted Frisco bonds, were capital gain and not ordinary income. Now here is what we have: One decision was as of May 23, 1951, only 2 months after statute of limitation had expired; another decision was as of October 26, 1951, or only 7 months after statute of limitation had expired; third decision was of August 3, 1953, or 2 years 5 months after statute of limitataioin had expired. Note that these three decisions were after the statute of limitation had expired, hence, the taxpayer could not have filed for a refund on or before March 15, 1951, as the Commissioner would have rejected such claims due to the statute of limitation then in effect.

H. R. 130 was introduced by Congressman Thomas B. Curtis to amend the Internal Revenue Code to allow a longer period of time for claiming refund or credit of paid income tax where the claim is based upon a judicial decision affecting tax liability in a similar case.

I am, no doubt, only one of many who has been compelled to pay an unjust income tax because both the Commissioner of Internal Revenue, as well as the Tax Court, having erroneously ruled that the purchasers of Frisco defaulted bonds, when they received the new issues of bonds, preferred stock, common stock and some cash in lieu of their defaulted Frisco bonds, had to consider same as ordinary income instead of capital gain.

Had the holder of the Frisco defaulted bonds filed claims prior to the expiration of the statute of limitation same would have forthwith been rejected because the then Commissioner's finding had already been upheld by the Tax Court, yet both the Commissioner and the Tax Court were later overruled in three different circuit courts. The Commissioner never appealed these decisions and by his silence acquiesced in the decisions of the three circuit courts.

If a taxpayer makes a fraudulent return, the Government can open his tax return regardless of the statute of limitation.

I am not implying that the Commissioner of Internal Revenue or the Tax Court have perpetrated a fraud upon me, but I submit to you why should I pay approximately $18,000 because of an unjust decision made by both Commissioner of Internal Revenue and by the Tax Court?

The problem is to overcome an inequity arising out of the fact that the statute of limitation of 3 years in which to file claim for refund does not take into consideration that our legal machinery grinds slowly and it is sometimes many years from the happening of an event to have a decision from the lower courts, and sometimes as long as 10 years from the Supreme Court, in the event of an appeal.

Also this subject matter concerns inequities to persons in various districts because of the fact that a decision in one circuit is not binding upon a person in another circuit, and again there are in many instances conflicting decisions between circuits on the same set of facts.

Then we have the problem of the Commissioner not being bound by the decision of any one district in any other district, or even in the same district in which the case has been ruled upon, thereby resulting in necessity of each taxpayer with a similar case to go into his court with his case.

By requiring the Commissioner to appeal, the taxpayer who may not desire to expend additional funds would overcome the possibility of the Commissioner winning by default and thereby take from the taxpayer a sum to which the Government is not justly or legally entitled. If the Commissioner does not accept the ruling of one court, yet the Commissioner does not appeal that case within the time limited by law, it should be consider prima facie evidence that the Commissioner acknowledges his error and the taxpayer has won the right to file a claim for refund and have the claim allowed by the Internal Revenue Department.

As to the jurisdiction of districts, it would seem that the Commissioner should be bound throughout the country, regardless of the district in which the decision is rendered if the Commissioner does not take positive action in appeal.

Bill H. R. 130 introduced by Congressman Curtis would make it mandatory for the Commissioner to appeal, whereas now the taxpayer cannot require the Commissioner to do so, and it therefore works a hardship on the taxpayer even though the taxpayer won his case in a lower court. By requiring the Commissioner to appeal, the Commissioner could no longer win by default, that is, by his failure or unwillingness to appeal. It does not seem practical from either the standpoint of the taxpayer or the Commissioner to require either one to appeal, but it does seem proper to permit the taxpayer to be awarded a claim for refund on the same set of facts in cases where not only the Commissioner but also the Tax Court have been overruled, and do not see fit to appeal.

I think it highly proper, just and equitable that when the Commissioner of Internal Revenue and the Tax Court have made an improper ruling, resulting in an unjust tax upon a taxpayer, that the statute of limitation should not be 3 years after taxpayer has filed his tax return but the law should read 3 years after a court of competent jurisdiction has returned a decision in favor of the taxpayer and where they find the Commissioner and the Tax Court have erred in their ruling. By this procedure I could have filed a claim for refund against the unjust decision of both the Commissioner of Internal Revenue and the United States Tax Court.

What I propose is a setting up of corrective methods, for I could not have filed a claim before the statute of limitation expired since United States Court of Appeals, Second Circuit, did not make its decision in the Willis Wood case until May 23, 1951, when the statute of limitation for my filing for refund had already expired by only 2 months.

As of this moment, taxpayers in three circuits, under a similar set of facts, would have their income considered capital gains, whereas, taxpayers in all other circuits, under the same set of facts, would have to consider the income from the Frisco transaction as ordinary income. I ask you, is that impartial treatment of the taxpayer? I think not. This is making fish of one and fowl of the others. Think of the several thousand taxpayers in the same identical situation who have also paid taxes on the basis of ordinary income instead of capital gain in this Frisco Railroad bond transaction. The total issue of defaulted Frisco bonds aggregate $279 million.

In a case of fraud by the taxpayer, there is no statute of limitation as to time and the Revenue Department can open such tax return at any time, yet here is a case of the Treasury Department letting the three court decisions go by default with the result that I and many others have paid to the Revenue Department an amount to which they were not and still are not entitled. I should not be penalized due to no fault of mine, either as to element of time or because of the incorrect decision of the Treasury Department. Under the conditions I have set forth, I think I am entitled to relief, even though the statute of limitation has expired.

If bill H. R. 130 is approved in sufficient time prior to March 15, 1958, I can get the relief for which I pray. I am not asking for legislation to cover my individual case, but rather for legislation to apply to all cases present and past where a tax has been unjustly collected by the Treasury Department from a taxpayer on these Frisco defaulted bonds because of an unjust ruling by not only the Commissioner of Internal Revenue but also by the Tax Court.

All I ask is a square deal-this in your power to grant. Permit me to repeat, H. R. 130 must become effective in sufficient time prior to March 15, 1958, if I and all other Frisco Railroad defaulted bondholders can hope to obtain refunds to which they are justly entitled.

If II. R. 130 cannot be passed in ample time prior to March 15, 1958, then remedial legislation should be passed to correct this unjust collection of taxes so proper refund can be made, or by making H. R. 130 retroactive for calendar year 1947 and subsequent years.

As the A. J. Dunbar case was tried in St. Louis, I delved further into same and here is what I found:

This was a 1947 case settled August 4, 1953 (some 5 years later), and I wondered why the 3-year period of limitation did not prevail as was and is the factor in my case.

Mr. Dunbar had never heard of the Commissioner's ruling on the Frisco reorganization and did not include in his 1947 return any moneys coming from the Frisco reorganization. Dunbar's return was audited within the 3-year statutory period, at which time the agent made adjustments for the Frisco moneys and he (Dunbar) was assessed a deficiency tax in 1950. Because of this, Dunbar still had another 3 years in which to sue for a refund, which in fact gave him almost a 6-year period.

In my case, I followed the Commissioner's ruling and paid exactly what the Commissioner then said was due, whereas, in the Dunbar case, as no doubt in the case of many other taxpayers, they were not cognizant of any such rulings until their returns were audited. This has given them an advantage of 3 years over me, who meticulously followed the Commissioner's ruling. Because of the fact that I did so, I have been penalized by reason of the 3-year period of limitation which ran from the time I filed my 1947 return and not from a date 3 years bence as in the case of Dunbar who was assessed a deficiency. In the one instance you have me as a taxpayer who felt it a duty to keep himself thoroughly advised on how to proceed with his tax return and, on the other hand, a taxpayer who was not trained or informed on such matters.

I think the Ways and Means Committee should recognize this type of a situation and enact legislation that will assure equitable treatment.

If Congress is not going to recognize such situations, it would seem that all taxpayers will have to always assume that the Commissioner is wrong and let the Commissioner set up a deficiency in order that the taxpayer may enjoy a longer period of time in which to file claim for refund when subsequent litigation holds to the taxpayer's views.

Congressman Curtis' bill, H. R. 130, removes all such cases of inequity and allows sufficient time for these matters to be settled. Since the office of Commissioner of Internal Revenue moves slowly, as do also our courts, matters of this nature remain pending for many years.

The CHAIRMAN. Our next witness is Mr. Sidney B. Gambill.

Mr. Gambill, you have come also, as I understand, at the invitation of the committee. We appreciate very much having you with us this morning.

Mr. Eberharter.

Mr. EBERHARTER. Mr. Chairman, I think it would be proper for me to say that I am glad the committee invited Mr. Gambill. I am particularly glad, and want the record to show, that there are experts in the tax field outside of the cities of Washington and New York, and also I wish to say that I hope Mr. Keogh will not become angry at that statement.

Mr. Gambill is connected with one of the most highly respected firms in the city of Pittsburgh, Mr. Chairman, and is highly regarded in that field himself. I am certain, although I do not know what his testimony will be, that the members of the committee will give it due regard.

The CHAIRMAN. Mr. Gambill, will you please give your name, address, and the capacity in which you appear, for the benefit of the record.

Mr. KEOGH. Mr. Chairman?

The CHAIRMAN. Yes.

Mr. KEOGH. I want to assure may distinguished friend from Pennsylvania that I find it impossible to become angry at anything he says, and I join with him in conceding that there is no monopoly on brains in the District of Columbia or in the city of New York. As a matter of fact, many of our experts in the city of New York have been nice enough to go there from other parts of the country.

Mr. GAMBILL. Thank you very much.

STATEMENT OF SIDNEY B. GAMBILL, ESQ., REED, SMITH, SHAW & MCCLAY, PITTSBURGH, PA.

The CHAIRMAN. Mr. Gambill, for the purposes of the record, will you first identify yourself.

Mr. GAMBILL. Yes. I am Sidney B. Gambill, a partner in the law firm of Reed, Smith, Shaw & McClay in Pittsburgh.

Referring to Congressman Eberharter's kind remarks, I would like to say that I did have a good start in the tax field by commencing as a private secretary to your former distinguished chairman, Congressman Doughton. That started me off on the right foot.

The CHAIRMAN. As a member of this committee, I would agree with you completely, that that was a wonderful start for anyone to have. Mr. GAMBILL. He was following me for many years.

The CHAIRMAN. He was a very great man.

Mr. GAMBILL. We who, like Mr. Chapman and myself, deal day by day with tax problems and taxpayers, do not have time to get into much economic theory, and probably that part of our problem is sorely neglected. But we do have experts in that field, many of whom have appeared, and many of whom have been helpful, I am sure, as to the question of the economic effect of taxation of our tax system.

While I am not an economist, I do know that we came out of World War II with a tremendous backlog of need for everything. I do know that since that time, we have filled that need, and our capacity for production has doubled; our economy has been affected by the expenditures made in increasing that capacity for production.

We had a shot in the arm in the Korean days. Since then, and during that time, we have filled the needs of the people of this country for automobiles, for the most part, and for most of the homes and appliances and furniture, and all of those things.

Then, we had the campaign of selling ahead on installments of homes and automobiles and everything that the average-particularly the young-families in this country needed.

That has caught up with us today, and I fear that we have trouble ahead. However, I am not qualified to do more than merely point out that observation as a layman. I do know that taxes are awfully high. I do know that the taxpayers of this country are deeply concerned, because when you deal every day with taxpayers, with their particular problems and not only their tax problems, of knowing what the law is, and what should be done about problems of raising money, you have an opportunity to feel the pulse of the taxpayers outside of economic theory.

Many people have general ideas as to what is wrong with our tax system, but they are lost when they are called upon to be specific.

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