Because such facilities are intended to benefit the community and the public rather than to produce income, they partake of the nature of contributions to the community. Like contributions, expenditures for such facilities should be deductible on a current basis, rather than recovered through depreciation.

Such treatment would encourage the installation of facilities to abate water pollution and thereby aid in the early completion of this important national program.

A similar principle should be extended to the cost of installing facilities for the prevention or abatement of air pollution.

Depletion on mine tailings: Section 613 (c) (3) of the code provides that mining includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining, but further provides that this shall not apply to a "purchaser" of such waste or residue or of the rights to extract ores or minerals therefrom.

The proposed regulations contain the following statement, taken almost verbatim from the Senate Finance Committee report on the 1954 code:

The term "purchaser" does not apply to any person who acquires mineral property, including such waste or residue, in a tax-free exchange, such as a corporate reorganization, from a person who was entitled to a depletion allowance upon ores or minerals produced from such waste or residue.

Prior to the enactment of the 1954 code there was conflict of authority as to whether or not a person acquiring a mineral property including tailings in a tax-free exchange was entitled to depletion on the ores or minerals extracted from the tailings.

Therefore, under the proposed regulations there will be uncertainty as to whether or not depletion is available in the future to a person who acquires such property and tailings in a tax-free exchange from a person who, prior to the effective date of the 1954 code, acquired the property and tailings in a similar tax-free exchange.

We believe this uncertainty should be cleared up by specific provision to the effect that depletion is available where the owner acquires the property in a series of tax-free exchanges even though one or more of such exchanges may have taken place prior to the effective date of the 1954 Code.

We also believe that depletion should be available to the mine owner who acquires mine tailings as an integral part of the mineral properties from which they were derived, provided the tailings do not constitute a major part of the total value of the properties.

To accomplish these objectives, we recommend the following amendment-new language italic-to section 613 (c) (3) of the Code, or an amendment equivalent in purpose and effect:

(3) Extraction of the ores or minerals from the ground. The term "extraction of the ores or minerals from the ground" includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. The preceding sentence shall not apply to any such extraction of the mineral or ore by a purchaser either of such waste or residue or of the rights to extract ores or minerals therefrom unless:

(A) Such waste or residue shall have been acquired as an integral part of the mineral properties from which derived and such waste or residue shall not have constituted a major part of the total value of the properties thus acquired;

or

(B) Such mineral properties (including such waste or residue derived therefrom) were acquired by the taxpayer in a tax-free transaction or exchange (or

series of such transactions or exchanges) from a transferor who, upon the application of this paragraph, would have been entitled to depletion under this section if he had extracted the ores or minerals from such waste or residue, and such properties have, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in the taxpayer's hands as they would have in the hands of such transferor. The term “purchaser” shall not apply to a lessee, upon the renewal of a mineral lease, if such lessee was entitled to depletion in respect of the waste or residue prior to the renewal of such lease.

Rate of depletion for coal: The coal industry is a most important part of all mining activity, and coal is essential to virtually all industry. The President's Advisory Committee on Energy Supplies and Resources Policy, in its report dated February 26, 1955, accorded full recognition to the need for adequate solid fuel productive capacity. We believe the rate of percentage depletion for coal should be increased.

More equitable tax treatment would assist the coal industry in the formation of investment capital which will be required in order to meet the expanding energy needs of the future.

Definition of taxable income from the property: When percentage depletion was first extended to mines in 1932, the allowance was limited to 50 percent of the taxpayer's "net income from the property" and this language has continued without change until in the 1954 code the word "net" was changed to "taxable."

The phrase "net income"-now taxable income "from the property" has never been defined in the statute.

We believe the original intent of Congress was to limit the percentage depletion allowance to 50 percent of the net income from the property from which the ore was produced, regardless of the form of its ownership-whether by a corporation, partnership, or individual— and regardless of the manner in which the operation might have been financed.

To meet this standard, it is appropriate that deduction should be made for those expenses directly connected with the production of income from that property and for such indirect or overhead expenses as definitely contributed to production of income from such property. The deductions in computing net income from the property should not be increased by expenses applicable to other property-any more than the income from that property should be increased by other income; by interest paid on indebtedness-any more than interest received should be included in income from the property; by taxes based on or measured by income, capital stock taxes, and other charges which are not costs of producing net income from a particular property-but depend upon the form of property ownership, the amount of net income of the taxpayer from all sources, methods of financing, and so forth.

Nevertheless, under present practice the Internal Revenue Service holds such items-deductible in computing "taxable income from the property" for percentage depletion purposes, and the courts have sustained such practice.

Present practice results in inequitable and unreasonable results as between taxpayers. For example, two different taxpayers in identical situations except for the method of financing may have identical properties producing at the same cost and the same profit. Neverthe

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less, the taxpayer who must borrow funds for his operation will, under present practice, receive the benefit of a smaller percentage depletion deduction than that available to the other taxpayer who has sufficient capital to operate without borrowing.

Again, two different taxpayers with substantially identical operations, producing at the same rate of profit, may be located in different States, one in a State which imposes an income tax and the other in a State which has no income tax.

Under present practice, the taxpayer in the State which has an income tax will have a smaller Federal percentage depletion allowance than the taxpayer in the State with no income tax.

In order to limit deductions in the computation of the depletion allowance to those items which have a direct bearing upon the production of income from the property on which the percentage depletion is allowable, we recommend the addition of the following new subsection to section 613 of the code, or its equivalent in purpose and effect:

(d) Definition of taxable income from the property: As used in this section the term "taxable income from the property" means the gross income from the property (computed without excluding any amount on account of rents or royalties), less the allowable deductions directly attributable to the mineral property upon which the depletion is claimed and the allowable deductions directly attributable to the processes described in paragraph (4) of subsection (c) of this section insofar as they relate to the products of such property, including operating expenses, rents and royalties, development costs properly chargeable to expense, depreciation, property taxes, losses sustained during the taxable year, etc., but excluding any allowance for depletion. Such expenses or deduction shall not include expenses or deductions attributable to, or arising out of expenditures on, other property or assets, irrespective of whether such property or assets are income producing or active. Deductions not attributable to or arising out of particular properties, processes, or assets, such as general overhead, shall be fairly allocated to all properties, processes, and assets whether active or inactive. The term "general overhead" as used herein shall be deemed to mean the overhead relating to the property, but shall exclude deductions and expenses of financial overhead of the taxpayer, such as interest, taxes based on or measured by income, capital stock taxes, and the like.

Western Hemisphere trade corporations: (a) Use of subsidiary for carrying on a portion of the business:

Section 921 of the 1954 code provides as did section 109 of the 1939 code that a domestic corporation cannot qualify as a Western Hemisphere trade corporation unless it meets the test, among other tests, that 90 percent or more of its gross income is derived from the active conduct of a trade or business.

It is recognized that the mere receipt of dividends is not in itself sufficient to constitute the active conduct of a trade or business.

However, regulations under section 921 of the code, adopted on August 21, 1957, provided for the first time, without any qualification,

that

Dividends received by a corporation do not represent income derived from the active conduct of a trade or business.

A corporation which is engaged in the active conduct of trade or business should not be disqualified as a Western Hemisphere trade corporation merely because some division of that business which it is actively conducting is-to meet local law or administrative or practical requirements-conducted through a subsidiary from which dividends and interest are received.

In such a situation the subsidiary's activities are an integral part of the operation as a whole. The parent in such a case is not in the position of an ordinary stockholder.

The compulsion to operate a division of the business-such as local transportation facilities-may arise out of requirements of local law, or it may arise out of administrative or practical requirements.

In any such case, the parent corporation should not be excluded from the Western Hemisphere trade corporation treatment. We accordingly urge that section 921 of the code be amended by adding thereto the following provision, or its equivalent in purpose and

effect:

Where a domestic corporation otherwise qualifies as a Western Hemisphere trade corporation and part of the business activity conducted by it is carried on by and through its subsidiary or subsidiaries (domestic or foreign), the dividends and interest received by it from any such subsidiary are to be considered as income derived from the active conduct of a trade or business if such subsidiary meets the requirements (other than the requirement of being a domestic corporation) set forth in this section.

For the purpose of the preceding sentence, a corporation shall be deemed to be a subsidiary of another corporation if stock possession at least 50 percent of the voting power of all classes of its stock is owned directly by such other corporation.

(b) Incidental purchases: Section 921 of the code defines a Western Hemisphere trade corporation as being one which, among other things, does all of its business (other than incidental purchases), in the Western Hemisphere.

The Western Hemisphere trade corporation concept was enacted to encourage United States capital to invest in that area and to provide competitive equality with foreign capital' so invested.

In keeping with that policy, a Western Hemisphere trade corporation should be allowed to purchase, whenever economically feasible, the materials, supplies, and equipment for the Western Hemisphere business without losing its eligibility for Western Hemisphere trade corporation treatment.

It is recommended that section 921 be amended so that the phrase "(Other than incidental purchases)," will read "(other than purchases)."

Fourteen-point rate reduction for foreign income: The Ways and Means Committee, in its report on H. R. 8300, 83d Congress-House Report No. 1337, on the Internal Revenue Code of 1954, page 74stated the following with respect to taxation of income derived from foreign business:

It

Your committee recognizes that firms doing business abroad may be competing with other enterprises which have lesser taxes to bear, and that such firms may be assuming certain risks that do not prevail in domestic business ventures. is also impressed by the fact that the present United States tax approach tends to induce heavy foreign taxation of American enterprises. Accordingly, your committee has incorporated changes in the bill designed to correct this tendency, to eliminate certain inequities in the present tax treatment of foreign income, and to offset some of the factors adversely affecting foreign investment by giving special tax treatment to business income from foreign sources.

As passed by the House, the Internal Revenue Code of 1954 would have provided a 14-point differential for income earned abroad, with certain stated specifications and qualifications. There were various questions as to the appropriate scope and wording of these provisions

so that the Senate did not accept them, but the Senate did not reject the basic soundness of a 14-point tax differential.

The American Mining Congress urges that a 14-point tax differential now be made available with respect to all business income earned abroad.

Involuntary liquidation of LIFO inventories: Section 472 of the 1954 code continues permission to use the last-in, first-out method for inventories.

In World War II, war conditions made it impossible for many taxpayers currently to acquire, by purchase of production, goods sufficient to replace those sold, and the law made special provision to permit later replacement of goods due to the involuntary liquidation of LIFO inventories through no fault of the taxpayer.

Similar provision was also made to cover the recognized disruptions of normal markets due to the Korean action. Both of these were provisions to meet special situations and were of limited duration.

Under section 1321 of the 1954 code, the special treatment of deferred replacements is no longer available.

Although these special provisions were written to meet the special situations which had arisen, they were entirely in accord with the general principle of the last-in, first-out method, and merely waived a detail in application of the method by permitting an extension of the normal 1-year period for replacements in cases where conditions beyond the control of the taxpayer prevented current replacements in the normal manner.

There are many circumstances and conditions beyond the control of the taxpayer which may prevent the taxpayer from making normal replacements within the year, and which merit an extended time for replacement of the involuntarily liquidated inventories. There is real need of a permanent provision to recognize such involuntary liquidations.

We believe that the normal 1-year period for replacements should be extended on a permanent basis to involuntary liquidation of inventories where the failure on the part of the taxpayer to replace the inventories is due to any circumstance, occurrence, or condition beyond the reasonable control of the taxpayer, including inability to obtain goods in the open market or through normal channels of distribution by reason of the scarcity thereof.

If it is considered desirable to state the tests of involuntary liquidation in more detail, they might be stated as follows:

If such failure on the part of the taxpayer is due, either directly or indirectly

I. To disruption of normal or substantial sources of supply;

II. To transportation shortages;

III. To material shortages due to priorities, allocations, or stockpiling;
IV. To labor shortages;

V. To disruption of normal trade relations between countries; or

VI. To other conditions beyond the reasonable control of the taxpayer. Under our proposal the involuntary liquidation provisions would not apply if replacement could be made from stocks available through normal channels, but the taxpayer fails to make the replacements because he believes they might later be obtainable at lower prices, or for other reasons which are within his control.