the availability of money completely different, and the population size demanding the money is grossly different." This assessment addresses the heart of the problem.

I hope my testimony before the Subcommittee this afternoon has been helpful to the Subcommittee and as the author of H.R. 953, the House companion to S. 164 authored by Senator Melcher, which would prohibit the adoption of the regulations as proposed, I hope the Subcommittee will give this matter expedited consideration.

Senator GRASSLEY. I would like to call to order the hearing session we have called for today, a meeting of the Subcommittee on IRS Oversight, of the Committee on Finance.

At this time, I would like to thank my colleagues in the Senate and the House, the administration representatives, and our panels for contributing to the discussion of these important issues. They have a dramatic impact on agricultural America.

The regulations promulgated under sections 482, 483, and 2032(a) have been widely criticized as violating the true intent of Congress. In some cases, the interpretation of these statutes has caused serious hardship for individuals who are Congress intended beneficiaries.

It is my hope that this oversight hearing will focus on the difficulties that members of the agricultural community are encountering with these regulations.

I think I can safely say that all of my colleagues on this subcommittee are anxious to hear the position of the new administration on these controversial regulations.

We are fortunate to have on our subcommittee, Senator Dole, the chairman of the Committee on Finance.

I am sure Chairman Dole would appreciate hearing the concerns of Members of Congress, and others, and knowing whether or not the administration is having difficulties interpreting congressional intent.

If the administration needs clarification from Congress on certain passages within these code sections, I am sure that the subcommittee will keep these points in mind for the attention of the full committee.

After the administration panelists present their views, representatives of various sectors of the agricultural community will present their views on the regulations on imputed interest, on installment sales transactions and the special use valuation.

Among these commentators will be two individuals from Iowa and Kansas who have been directly affected by the operations of these regulations.

Bob Furleigh is a farmer from my home State of Iowa who may not qualify for special use valuations under the present regulations.

Philip Ridenour is an attorney from Kansas, who attempts to guide his agricultural clients through the highly technical requirements of these regulations.

We are also fortunate to have an excellent sampling of expert opinion from distinguished professors, State administrators, professionals specializing in these issues, and agriculturally related organizations.

Again, the other members of the subcommittee and I appreciate the interest of all of you who have shown an interest in resolving the difficulties surrounding these regulations.

Unfortunately, the ranking minority member of this subcommittee, Senator Baucus, was unable to attend this meeting, but stressed the importance of resolving the troublesome points within these regulations.

Without further delay, I would welcome our first panelists from the administration, Roscoe L. Egger, Commissioner of Internal Rev

enue, and Hon. John E. Chapoton, Assistant Secretary of the Treasury for Tax Policy.

I did not see Senator Melcher or Senator Andrews, who I know well enough to identify immediately, but I'm afraid I'll have to ask if Representative Daschle is here?

What we are going to do sir, for the Senators, when they show up, I—we will stop this presentation and the questions when our colleagues from both the House and Senate arrive.

So, at this point, I would like to welcome Roscoe and John to the witness table. I would like to say, as is the usual procedure, your statements will be made a part of the record. You are welcome to summarize. You may proceed as you would like.

In welcoming you here, I hope to stress one of the goals of this subcommittee-bringing greater understanding between the Congress and the Internal Revenue Service. If we could restate what congressional intent is and an appreciation on our part of how you interpret law, as is your constitutional and statutory prerogative.

I would also hope we can create a mutual understanding of what your interpretation of the law is and what we think congressional intent is. If we accomplish this, I think we can instill respect for Congress and respect for the IRS from the citizenry at large. More importantly, this effort will reestablish the credibility of Government with the public at large.

Our final goal must be to preserve the system of voluntary compliance. We have to reestablish that voluntary reporting and treatment of the whole process or otherwise, it is just simply going to cause our system of taxation to drop.

Regardless of how great the political power, pressure and police action of an individual Government, it still remains a poor substitute for voluntary cooperation.

Before you proceed, I would like to ask my dear colleague from Texas, Senator Bentsen, if he wants to make any opening statement. You are the first one from our body to appear here. We have a couple who are going to testify. I would like to ask you for any remarks or opening statement you have to make prior to our first witness.

Senator BENTSEN. Thank you, Mr. Chairman.

I just have a deep interest in the subject. I am pleased to participate with you.

Senator GRASSLEY. Thank you.

Senator BENTSEN. I just congratulate you on holding the hearings.

Senator GRASSLEY. Thank you, Senator.

Will both of you be speaking or will one of you be speaking, at least initially?

Mr. EGGER. Both of us, Mr. Chairman.

Senator GRASSLEY. I will say you may proceed however you want to proceed.

STATEMENT OF HON. ROSCOE L. EGGER, COMMISSIONER OF INTERNAL REVENUE

Mr. EGGER. I will proceed first on our statement with regard to sections 482 and 483.

82-821 0-81--3

Mr. Chairman, we are pleased to appear before you today, to discuss the proposed imputed interest regulations under sections 482 and 483.

We would like to take this opportunity to present the results of the review by the Treasury Department and the Internal Revenue Service of these regulations.

At the outset, however, we would like to correct a fundamental misunderstanding that has permeated all aspects of the debate over these regulations.

The Internal Revenue Service has received a large number of comments on these proposed regulations from farmers and other groups.

The majority of these comments are based on an erroneous understanding of how section 483 operates. The comments assume that by providing higher imputed interest rates for deferred payment sales for tax purposes, the proposed regulations would require higher amounts to be paid by purchasers of property.

In fact, section 483 does not affect the amounts paid by the purchaser for the property. It affects only the characterization of these amounts as principal or interest for Federal tax purposes.

Let me illustrate this point with a simple example. Assume I sell a farm to you for $1 million, and the contract of sale provides you will pay $100,000 each year, for ten years. The contract specifies that no interest will be charged.

Section 483 provides that in this situation, some portion of each $100,000 payment will be interest for Federal income tax purposes. The remaining portion will be considered to be a payment of principal.

Despite the application of section 483, you would continue to pay $100,000 each year for ten years, for a total of $1 million. Section 483 does not require that you pay more.

To the extent interest is imputed, I would have interest income for Federal income tax purposes. You would have an interest deduction in the same amount. My gain on the sale and your basis in the farm will be based on the portion of the $1 million representing principal, not the entire $1 million.

Thus, I would have less gain or more loss, and you would have a lower basis in the property than if no interest were imputed at all. Most of the specific criticisms of the proposed regulations arise from this misunderstanding. For example, it has been asserted that the proposed rates would make it more difficult for young people to purchase farms or homes by increasing monthly amortization payments due to higher interest costs; that the proposed rates are inflationary and would institutionalize higher interest rates; and that the proposed rates would further depress the already seriously depressed housing and real estate industries.

These assertions are all based on the underlying assumption that section 483 actually increases the amounts to be paid under deferred payment sales contracts. As I have indicated, section 483 affects only the characterization of these amounts as interest or principal for Federal income tax purposes.

Thus, these criticisms are misdirected.

I would like now to explain the background of the proposed changes in the regulations under sections 482 and 483, and to set forth the results of our review of these changes.

The principle that the imputed interest rates under sections 482 and 483 should reflect market interest rates has long been a part of the law.

The legislative history of section 483 indicates that its purpose is to prevent a seller of property from manipulating the tax consequences of the sale by increasing the amount of deferred payments for property in lieu of interest. Section 483 directs the Treasury Department to set an appropriate minimum interest rate for these deferred payment sales in order to prevent this abuse. The legislative history of section 483 anticipates that the rate will reflect the going rate of interest and will not be higher than the rate at which a person in reasonably sound financial circumstances, and with adequate security, could be expected to borrow from a bank,

The general purpose of section 482 is to prevent taxpayers from avoiding tax by conducting transactions between commonly controlled trades or businesses on non-arm's length terms.

Specifically, the section 482 regulations have for years provided that taxpayers cannot avoid tax by charging an interest rate very different from the normal market rate on loans between commonly controlled businesses.

In view of the disparity between the current market interest rates and the 7 percent rates imputed under the existing regulations where at least 6 percent interest is not charged, we believe it is necessary to adjust the existing imputed interest rates to bring them more in line with current market rates.

We have therefore concluded that the final regulations will provide, in general, that the minimum interest rate that must be charged under section 483, to prevent imputed interest, is 9 percent, and that the minimum rate that must be charged under section 482 is 11 percent.

These rates are unchanged from those in the proposed regulations. In the event the literal terms of both sections 482 and 483 are met in the same transaction, however, section 483 will be deemed to be controlling.

Senator GRASSLEY. May I interrupt you at this point?

Mr. EGGER. Yes, Mr. Chairman.

Senator GRASSLEY. Senator Andrews from North Dakota has appeared. We had an agreement with the administration witnesses that if either you, Senator Melcher, or Congressman Daschle showed up, that they would let us interrupt since they are on a busy schedule.

So, Senator Andrews, I would like to have you come forth. Just stay where you are, please.

Senator Andrews, I appreciate your testimony. I won't go through the usual complimentary statements that Senators are supposed to make to one another in the interest of efficiency and time.

Will you proceed?