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Mr. HOLMES. Mr. Chairman, I appreciate the comments made by Senator Johnson and the others on the subject. I want to ask a question for information only and particularly for my own information.

Mr. Lentz brought up the matter of depletion allowance emphasized by all the members of your group and he referred to the depletion allowance carrying over into the synthetic and gas field.

For my own information would you clarify the word "synthetic" in relation to your oil and gas ? What does it mean in relation to the regular natural gas, by comparison of natural oil and shale oil? What is the difference in composition?

Mr. LENTZ. Perhaps Mr. Hartley should answer this question from a technical standpoint.

As I understand it, synthetic oil and gas would be any oil and gas produced from other than wells. It can be produced from coal; it can be produced from oil shale. It can be produced from bituminous sand, and there may be other natural deposits from which it can be obtained. (The following letter was subsequently received by the committee:)


Denver, Colo., January 27, 1958. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means,

House Office Building, Washington, D. C. DEAR SIR: In further answer to the question of the Honorable Hal Holmes at the hearing held by your committee regarding depletion allowance for synthetic oil and gas held at 10 a. m., January 21, 1958, we wish to make the following clarifying statement for the record :

The question was substantially as follows: "What do you mean by synthetic oil and gas in relation to the raw materials source ?"

We mean all oil or gas produced from any natural deposit other than oil or gas wells as a result of the application of some "ordinary treatment process” such as retorting in the case of oil shale, extraction in the case of tar sands, and catalytic synthesis in the case of goal. The depletion is on the oil or gas produced regardless of the raw materials source. For example, oil or gas extracted from oil shale or coal would be entitled to the 2712 percent depletion allowance, but coal or shale mined and used for other purposes would have only their present depletion allowances. In other words, the depletion allowance applicable to the material would depend upon the use to which it is put. There would be no overlapping or pyramiding of depletion allowances.

We are hoping that this letter may go into the record of the hearing along with our oral testimony. Respectfully submitted.

RICHARD S. KITCHEN, Chairman. Mr. HOLMES. Now, that brings up the natural sources from which synthetic can be produced. Do you have a stamped series of sources for synthetic?

You see, when you get into depletion on synthetics you are going to have it fairly widespread.

Mr. LENTZ. You mean other than oil shale and coal which are the principal ones?

Mr. HOLMES. Yes.

Mr. LENTZ. Perhaps Mr. Hartley can add to that. I believe there are sources of bituminous sand in Canada. I think the two principal ones are oil shale and coal.

Mr. HOLMES. The reason I bring it up is to ask whether you are going to limit your depletions to oil shale or total whole bracket of sources producing synthetic. Mr. LENTZ. That is correct.

20675-58-pt. 2-6

Mr. HOLMES. You want the whole bracket?
Mr. LENTZ. Yes, sir; that is our intention.
Mr. HOLMES. I just wanted to bring up that point.
The CHAIRMAN. Are there any further questions?

If not, we thank you for your appearance and information given the committee, and particularly appreciate your bringing with you our friends, Senator Johnson and Senator Carroll, who used to be on the committee.

Thank you very much. Mr. KITCHEN. Thank you, Mr. Chairman. The CHAIRMAN. The next witness is Mr. William C. Crichley. Will you identify yourself for the record, by giving your name, address, and the capacity in which you appear. STATEMENT OF WILLIAM A. CRICHLEY, TAX POLICY COMMITTEE,


Mr. CRICHLEY, My name is William A. Crichley, from Cleveland, Ohio. I am appearing as chairman of the tax policy committee of the Manufacturing Chemists' Association.

The CHAIRMAN. You are recognized for 15 minutes, Mr. Crichley.
Mr. CRICHLEY. Thank you.
We appreciate this opportunity of giving you our recommendations.

The Manufacturing Chemists' Association is an incorporated national trade organization composed of 169 companies which manufacture and sell chemicals. These companies account for more than 90 percent of the chemical production capacity of the United States.

My testimony will be concise and will not include detail which is repetitious of the testimony of others appearing at these hearings.

High income tax rates are major problems: Our association believes that, at such time as national security considerations permit, a realistic reduction of the present high corporate income tax rate and the high surtax rates on individual income would result in a healthier business atmosphere and a sounder economy.

However, we recognized the necessity for a Federal Budget adequate to finance national defense and other essential Government activity and the importance of national fiscal soundness.

Even though budgetary considerations may preclude rate reductions now, we urge that your committee promptly begin to study reform of our basic tax policies, with a view toward equitable downward revision of corporate and individual income-tax rates which could be instituted as soon as prudent fiscal policy will permit.

However, there are a number of tax changes, for the most part to correct substantive inequities, which we consider important and which should be effectuated without delay. We are submitting supplemental explanatory material for inclusion in the record, but I should like to summarize the changes we propose.

The CHAIRMAN. Without objection, the material will appear in the record.

Mr. CRICHLEY. Thank you.

First, tax policy to stimulate private investment in foreign countries: Our association believes that the expansion of American business operations in foreign countries should be encouraged by providing

that business income derived from operations abroad will be taxed at a lower rate than the rate for corporate domestic income.

Many chemical manufacturers have shown definite interest in investing in business activity abroad, and we are confident that, if tax revisions are enacted to offset the greater risks involved in business operations in foreign countries, there will be increased American business investment abroad.

Such a program will materially assist in stimulating private investment which should help to reduce the need for publicly financed foreign-aid programs, and would counteract the development of socialistic tendencies in foreign countries.

We endorse in principle the proposal recommended by President Eisenhower in his January 10, 1955, message to Congress that legislation be enacted to provide for taxation of business income from foreign affiliates or branches of American firms at a rate of 14 percentage points lower than the corporate rate on domestic income, and providing for a deferral tax on income of foreign branches until it is brought back to the United States.

An additional improvement would be to grant domestic taxpayers an election, in determining their foreign tax credit, to apply a limitation based either on income from each foreign country, or on aggregate foreign income.

Facilitating corporate reorganizations : Section 269 of the Internal Revenue Code was intended to prevent the avoidance of tax through acquisitions which would secure for the acquirer a deduction, credit, or other allowance which such person would not otherwise enjoy.

The section was not intended to apply to corporate rearrangements within an affiliated group where there is no change in ultimate ownership.

We recommend that the attribution of stock ownership rules of code section 318 be made applicable to section 269.

Taxation of cooperatives: We desire to emphasize the inequity of the tax favoritism now accorded to cooperative organizations which engage in manufacturing and sell a substantial portion of their output to others than their stockholders.

Cooperatives are entering new business and industrial fields each year. Because of special tax privileges, they have an unfair advantage in the accumulation of capital to finance rapid expansion.

More and more cooperatives are manufacturing and selling products in direct competition with regular business corporations whose earnings are taxed at a 52 percent rate. Such favoritism should be eliminated in the interest of fairness to all taxpayers and to the public.

In addition to concepts of fairness and equity, the taxation of cooperatives on the same basis as regular business corporations would add substantial sums to the Federal revenue.

For example, several years ago the staff of the Joint Committee on Internal Revenue Taxation estimated that Federal revenues would be increased $700 million if the earnings of cooperatives were taxed under a bill proposed by a member of this committee in 1953.

Unless legislation is enacted to eliminate the inequitable and discriminatory distribution of tax burdens between cooperative organizations and business corporations, more corporations are likely to adopt the cooperative form, thus further diminishing tax revenues and

increasing the inequity.

In our view, this would not be in the national interest, and we hope this tax favoritism will soon be eliminated by legislation.

Taxation of compensation : Several inequities dealing with the taxation of compensation which your committee proposed to correct in 1954 still present a serious problem which we hope you will again endeavor to correct.

Under existing law and the judicial doctrine of "economic benefit," an employee can be taxed on compensation prior to the time he has any actual or constructive right to realize any income with which to pay the tax. We believe this cannot be justified under any reasonable theory of taxation.

An amendment which the Ways and Means Committee proposed in H. R. 8300 would have dealt with another inequity by making it clear that an employer is entitled at some time to a deduction for compensation which is paid into a nonqualified trust, to the extent that it is later paid to an employee.

No reason was given by the Senate for the deletion of the amending provisions approved by the House.

Still another inequity relates to an inconsistency between the gift tax and the estate tax sections of the law.

This is already dealt with and we hope that section 57 of H. R. 8381 will be enacted into law.

Liability for interest under Government-requested extensions of time: Under existing law, deficiencies of income taxes can be assessed during a 3-year period from the date an income tax return is filed by a taxpayer. The commissioner may secure an extension of this 3-year period by requesting a waiver from the taxpayer. Interest on such deficiencies accrues from the due date of the tax to the date of payment of the deficiency.

În many instances, the taxpayer is not responsible for the delay and, in such cases, it seems inequitable to require him to pay interest Therefore, we recommend that the law should be amended to provide that no interest shall accrue subsequent to the end of the 3-year statutory period in cases where waivers are given by taxpayer for the convenience of the commissioner.

Depreciation of obsolete assets: The depreciation provisions of the Internal Revenue Code of 1954 were constructive additions to the tax law, but restrictions imposed on the application of these provisions are a deterrent to the chemical industry.

The “reasonable allowance for obsolescence” authorized in code section 167 is interpreted as not covering obsolescence arising from technological improvements. Our industry needs flexibility to shorten the depreciable life of a fixed asset rendered obsolete by discovery of a new process or development of a new product.

The chemical industry can continue its dynamic existence only by the development and utilization of new techniques and processes, and the entire national economy will benefit by a depreciation policy which encourages a high rate of investment in modern plant and equipment.

We believe that the Internal Revenue Code should be amended to permit a taxpayer to give realistic weight to obsolescence attributable to technological changes.

Depreciation of goodwill: For many years the tax law has permitted a taxpayer to depreciate intangible assets provided the useful life of the asset can be reasonably estimated.

However, the Treasury Department regulations do not permit any depreciation of goodwill.

We recommend the enactment of legislation to permit writing off the cost of purchased goodwill, trademarks, trade names, and similar intangible assets over a reasonable length of time, for example, 60 months.

The CHAIRMAN. You have already obtained permission to include the remainder of the statement in the record.

Mr. CRICHLEY. Yes, sir.

(The supplemental material referred to is as follows:) SUPPLEMENTAL STATEMENT OF MANUFACTURING CHEMISTS' ASSOCIATION, INC.,


To provide detail in support of several of the tax changes recommended by the Manufacturing Chemists' Association, Inc., as summarized in the oral testimony of William A. Crichley before the Committee on Ways and Means on January 21, 1958, this statement is respectfully submitted for inclusion in the committee's hearing record.

PROPOSALS WITH RESPECT TO UNITED STATES TAXATION OF FOREIGN INCOME In recognition of the vital role of the United States in world economy, Congress and Government-appointed commissions have conducted hearings and undertaken studies repeatedly since World War II to examine and recommend measures for strengthening our foreign economic policy. Reports on these proceedings reflect consistent emphasis on positive Government action to encourage expansion of American private trade and investment abroad. Taxation by the United States of income from abroad is recognized as an important factor affecting foreign investments; one which is within the jurisdiction of Congress.

Among the recommendations resulting from these studies were specific proposals for amending our tax laws. The Commission on Foreign Economic Policy, in its "Report to the President and Congress” in January 1954, suggested a 14 percentage point reduction in the rate of tax on foreign income, and an election to defer payment of tax on such income until its return to the United States. President Eisenhower subsequently recommended enactment of similar proposals to facilitate the investment of capital abroad.

The above-mentioned studies also acknowledge that double taxation and inequities do exist under present United States methods of taxing foreign income. They arise from the variable effects on United States taxpayers of the alternative corporate forms for operating abroad and the inadequacies of the foreign tax credit system which does not provide for differences in types of taxes and methods of determining income under foreign laws. As a consequence, in addition to the indeterminate political and financial risks, American investors abroad are confronted with substantial tax deterrents, accentuated by our high level of income tax rates. Thus, United States traders and investors are placed at a serious disadvantage vis-a-vis nationals of the capital-importing country and of other capital-exporting countries. Furthermore, capital importing countries are encouraged to increase their income tax rates in the knowledge that, to the extent their taxes are less than ours, American business abroad must pay the difference in additional taxes to the United States.

Our association believes that the expansion of American business operations in foreign countries should be encouraged. Therefore, we urge enactment of the following proposals to offset the greater risks and tax disadvantages affecting foreign operations.

Provide a lower rate of tax on foreign income It is recommended that income from foreign sources be taxed at a rate of 14 percentage points lower than the corporate rate on domestic income. Such a rate reduction would be consistent with that presently applicable to Western Hemisphere trade corporations.

We believe that this measure would provide a stimulant for expanded foreign trade and investment by offsetting some of the deterrents to American business.

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