Senator MELCHER. Mr. Ely's examples show that there may actually be a loss of revenue to the Treasury from a higher imputed interest rate. So, serious questions can be raised as to whether the proposed regulations provide greater equity for taxpayers and also whether they bring in any significant amount of revenue to the Treasury. But the issue goes even beyond these considerations. President Reagan has pledged himself to a new direction of American economic life, one that will lead to economic recovery, one that will put reliance on private business rather than the Government, and one that will end needless Government interference in private dealings of our citizens. These proposed regulations do not fit that new direction. The background report for the hearing states section 483 does not increase the total amount of sales, prices and interest payments made under a contract. Instead, part of the sales price is recharacterized as interest under the imputed rate. Any of us who have been in business know that is simply not the way the real world works. When sellers find out that they are going to have to pay taxes on a minimum of 10 percent interest, they will increase the interest charged to that level, thus increasing the overall cost to the property and adding to inflation. Further, this will make it difficult for young people to purchase homes, farms and businesses. National figures show that every time the interest rates go up a percent, millions of young people are pushed out of the homebuying market. Increasing interest rates is only one more way of putting the purchase of a first home, farm or business out of range for many people. Mr. Chairman, I suspect that bell is for me to quit, is that right? Senator GRASSLEY. Yes. We would like to keep on time if possi ble. Senator MELCHER. That is all right. I reached virtually the conclusion of my remarks. I only want to reemphasize that I don't believe we need IRS involved in this particular area. I hope not only the regulations are rejected, I hope that underlying authority is either modified or repealed. Senator GRASSLEY. Thank you very much. Of course, if you desire, your entire testimony will be included in the record. Before you leave Senator, I would like to ask in the order in which they have come into the room, if either Senators Byrd or Durenberger have any questions, or opening statements to make. First, Senator Bentsen, do you have any questions of Senator Melcher? Senator BENTSEN. None other than to congratulate him on his statement. Senator GRASSLEY. Senator Byrd? Senator BYRD. Thank you, Mr. Chairman. I have no questions. Senator GRASSLEY. Senator Durenberger. Senator DURENBERGER. Thank you, Mr. Chairman. Yes, Mr. Chairman. I do have an opening statement I would like to be made a part of the record. Senator GRASSLEY. Do you want to say something in regard to your opening statement or just have it included? Senator DURENBERGER. The purpose of my statement is to lay out my view of the problem and congratulate you on bringing your House background and your farming background and your commitment to the problem. Senator GRASSLEY. Thank you very much. Senator DURENBERGER. I would add my compliment to a Member of the Senate last year, to the Senator from Montana for rising on the floor at what most people considered a relatively inopportune moment and bringing this matter to our attention and getting some delays and helping with this problem. Senator GRASSLEY. Thank you, Senator Durenberger. Thank you, Senator Melcher, for your attendance. Senator MELCHER. Thank you, Senator Grassley. [The prepared statements of Senators Dole, Durenberger and Melcher follows:] YOU HAVE CHOSEN TWO VERY SIGNIFICANT ISSUES FOR THE FIRST HEARING THIS YEAR BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE INTERNAL REVENUE SERVICE. IT WOULD BE DIFFICULT TO FIND RECENT ACTIONS OF THE IRS WHICH HAVE STIRRED AS MUCH CONCERN AMONG FARMERS AND SMALL BUSINESSMEN AS THE REGULATIONS ON IMPUTED INTEREST AND SPECIAL USE VALUATION. LAST YEAR, WHEN THE TREASURY DEPARTMENT ISSUED PROPOSED REGULATIONS RAISING IMPUTED INTEREST RATES AND PUBLISHED FINAL REGULATIONS TO IMPLEMENT THE SPECIAL USE VALUATION RULES, WE ALL BEGAN TO RECEIVE A SUBSTANTIAL VOLUME OF MAIL FROM OUR CONSTITUENTS. THESE REGULATIONS OBVIOUSLY HAVE TOUCHED A NERVE WITH MANY OF OUR CITIZENS, AND UNDERSTANDBLY SO. IMPUTED INTEREST RATES ALL AMERICANS HAVE WATCHED WITH DISBELIEF AS INTEREST RATES HAVE SHARPLY RISEN OVER THE LAST FEW YEARS. WHEN THE TREASURY DEPARTMENT ISSUED PROPOSED REGULATIONS RAISING INTEREST RATES ASSUMED FOR TAX PURPOSES, MANY AMERICANS WERE OUTRAGED THAT THE GOVERNMENT WAS DENYING PARTIES THE ABILITY TO CONTRACT PRIVATELY AT LESS THAN COMMERCIAL INTEREST RATES. FURTHERMORE, MANY CITIZENS WERE AMAZED THAT THE GOVERNMENT COULD ASSUME A HIGHER INTEREST RATE FOR TRANSACTIONS BETWEEN RELATED PARTIES THAN IT WOULD FOR TRANSACTIONS BETWEEN STRANGERS. 82-821 0-81-4 THE TWO STATUTORY PROVISIONS INVOLVED ARE SECTIONS 482 AND 483 OF THE INTERNAL REVENUE CODE. SECTION 482 ALLOWS THE IRS TO ALLOCATE ITEMS OF INCOME, DEDUCTIONS, CREDITS OR ALLOWANCES BETWEEN ORGANIZATIONS, TRADES, OR BUSINESSES CONTROLLED BY THE SAME INTERESTS. UNDER REGULATIONS NOW IN EFFECT, THE IRS COULD ASSUME AN INTEREST RATE OF 7 PERCENT IF RELATED PARTIES DID NOT SET FORTH A RATE OF BETWEEN 6 AND 8 PERCENT. UNDER THE PROPOSED REGULATIONS, THE IRS WOULD BE ABLE TO ASSUME A RATE OF 12 PERCENT IF THE PARTIES DID NOT ESTABLISH A RATE BETWEEN 11 AND 13 PERCENT. SIMILARLY, UNDER SECTION 483, IF PROPERTY IS SOLD ON AN INSTALLMENT BASIS AND LESS THAN 6 PERCENT INTEREST IS STATED IN THE CONTRACT, THE IRS MAY SET A RATE OF 7 PERCENT FOR TAX PURPOSES. THE PROPOSED REGULATIONS WOULD ALLOW THE IRS TO ASSUME A RATE OF 10 PERCENT IF THE CONTRACT RATE IS LESS THAN 9 PERCENT, THIS SENATOR RECOGNIZES THAT THE CONGRESS DELEGATED THE AUTHORITY TO SET THESE INTEREST RATES TO THE IRS SO THAT THE RATES MIGHT BE ALTERED AS ECONOMIC CONDITIONS CHANGED. THIS SENATOR IS ALSO AWARE THAT THE CONGRESS INTENDED AT THE TIME SECTION 483 WAS ENACTED THAT THE INTEREST RATE ASSUMED APPROXIMATE COMMERCIAL RATES, HOWEVER, IT CERTAINLY SEEMS THAT THERE IS REASON TO QUESTION WHETHER THE CURRENT SYSTEM IS ADEQUATE IN A WORLD WITH CONSTANTLY FLUCTUATING INTEREST RATES. IT ALSO SEEMS, AT LEAST TO THIS SENATOR, THAT IT WAS QUESTIONABLE JUDGMENT TO IMPOSE A HIGHER INTEREST RATE FOR SECTION 482 PURPOSES THAN FOR SECTION 483. WHILE IT MAY BE THAT NOT ALL RELATED PARTY TRANSACTIONS COULD BE CONSIDERED TO BE BETWEEN COMMONLY CONTROLLED ENTITIES, THE PROPOSED |