After the career of an athlete has been terminated, it is often difficult for him to find employment. Generally, he has not prepared himself to enter another career or profession. Some are so physically broken that they are unable to engage in really profitable employment. And, while many of our athletes make millions of dollars during their glorious careers, they are frequently, at the end of their careers, broke and in debt to the United States Government for taxes. The great fighter, Joe Louis, is just one example.

H. R. 7609 is designed to relieve such conditions as I have outlined above. We must bear in mind that an athlete does not leave his profession because he no longer desires to participate in whatever sport he may have been pursuing. He leaves it, in most instances, because he has been so depleted that he no longer has the physical attributes required by his sport.

The income-producing potential of most persons, other than athletes, increases as they reach their forties, whereas the potential of athletes reaches its height at the age of 30 and decreases as they grow older. The token tax allowance of 15 percent of their gross earnings would enable them to set aside a nest egg and, perhaps, in some small way compensate them for the all too short period of time they may spend in their sports career. It would also make an appropriate leveling adjustment for the high-bracket taxes paid during a few high income years which are followed by years of greatly reduced earnings. Before introducing this bill, I gave long and concentrated thought to the position of sports in American culture. I thought of the many efforts that we have made and are presently making to find ways of living at home and abroad with some degree of amity. It has been said that "sports are one index to the national genius and character of the American people." I do not believe that any of us will deny the truth of this statement. By enacting my bill into law, the Congress will not only overcome an inequity in existing tax laws but it will also recognize that one of the common denominators we seek is to be found in the existence of sports and competitive games which are an integral part of every culture known to history.

The next witness is Mr. Robert E. Garrett.

Mr. Garrett, please come forward and identify yourself for the record by giving your name, address, and the capacity in which you

appear.

STATEMENT OF ROBERT E. GARRETT, ALABAMA MINING
INSTITUTE, BIRMINGHAM, ALA.

Mr. GARRETT. Thank you, Mr. Chairman and gentlemen of the Committee on Ways and Means.

My name is Robert E. Garrett, Birmingham, Ala. I am making this presentation on behalf of Alabama Mining Institute, whose offices are also in Birmingham. The Alabama Mining Institute is a trade association whose members produce more than 80 percent of the coal mined in Alabama. Currently, Alabama ranks eighth as a bituminouscoal-producing State.

We have prepared a written statement which we would appreciate your having filed.

The CHAIRMAN. Without objection, the entire statement will appear in the record.

Mr. GARRETT. Time will not permit the reading of the full statement, although I commend it to your sincere attention. I would like to read some portions of the statement, with some elaboration on the text.

The CHAIRMAN. Pardon me just a minute, Mr. Garrett. Which statement did you have in mind in that request? Is it the larger statement?

Mr. GARRETT. Yes, sir.

It is our purpose to direct this committee's attention to a deficiency in the Internal Revenue Code of 1954. This deficiency has permitted an inequity to exist in the administration of the percentage depletion provisions of the code. The deficiency in the code, with the resultant inequity, has served to create an acute hardship in the coal-mining industry in Alabama. It is also our purpose to suggest an amendment which will at least partially eliminate the inequity, and which will serve to reduce the extreme hardship now generally prevailing in the coal industry.

Inequity in administration of the code: The inequity results from the fact that the Internal Revenue Service has and is applying unrealistic market or field prices to coal processed beyond the ordinary treatment processes to establish gross revenues from coal-mining properties. Gross revenues so determined serve to establish taxable income for percentage depletion purposes.

The limitation that the percentage depletion allowance shall not exceed 50 percent of the taxable income from the property has resulted in Alabama coal producers being allowed little or no percentage depletion from their properties. There is presently no indication that the Internal Revenue Service intends to change this practice. To the contrary, the proposed regulations are even more restrictive than those currently in effect.

Proposed amendment to 1954 Internal Revenue Code: The Congress apparently intended that those who discover, develop, and deplete mineral resources should have a reasonable allowance for depletion. Therefore, in order to provide a minimum percentage depletion allowance, we respectfully suggest your serious consideration and adoption of an amendment to the present code section 613 (a). The effect of this suggested change would be to provide a minimum depletion allowance of 5 percent of taxpayer's total allowable cost of recovery. It would not otherwise change the existing provisions of the code, the only changes from existing law being the addition of the underscored portion of code section 613 (a), which would then read as follows: SECTION 613. Percentage depletion:

(a) General rule.—In the case of the mines, wells, and other natural deposits listed in subsection (b) the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion) but, notwithstanding this limitation, such allowance shall not be less than 5 percent of the costs allowable in computing taxable income from the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed without reference to this section. Condition of the coal industry nationally: The report of the Subcommittee on Coal Research of the House Committee on Interior and Insular Affairs (findings and recommendations of the Special Subcommittee on Coal Research, H. Rept. 1263) contains significant data

with reference to the coal industry. On page 14 of this report, it is stated "The history of the coal industry since the end of World War I has been one of erratic production, declining and uncertain markets, and at least 35 years of either net losses or exceedingly low net income." On page 5, the report states "To encourage concurrent scientific research and development in the production, transportation, and utilization of coal within the industry, the subcommittee recommends further that Congress act to bring about a more equitable depletion allowance rate for the bituminous coal and anthracite industries."

Our group endorses the subcommittee's report as being entirely factual and setting forth conditions in our industry. We also endorse the recommendation of the National Coal Association, including the proposed change in the statutory rate as applied to coal. We believe the requested rate is entirely reasonable. However, as illustrated on page 9 of our written statement, about which I will comment later, a change in rate will not within itself provide any additional allowance to the Alabama coal producers.

Condition of the coal industry in Alabama: The coal industry in Alabama is subject to all of the ills that beset the industry nationally, and in addition has serious ailments brought about by peculiar local conditions.

General types of Alabama coals:

Alabama coals may be roughly divided into three classes:

1. Those suitable only for use as fuel.

2. Those suitable for blending with other coals to produce coke.

3. Those suitable for the production of coke without blending with other coals.

Physical and economic conditions in the Alabama coalfields: For many years prior to 1946, the coal mines in Alabama competed in the open market for the commercial fuel business which was largely fuel coal, and to a lesser degree for the blending coal business. However, beginning in 1946 the market for Alabama commercial coals began to weaken. Competition with other fuel and power sources, plus steadily rising costs of production, gradually caused commercial markets in our area to practically disappear.

Alabama coal, although of good quality for industrial and domestic uses, is beset by more difficult and costly mining conditions than those in other fields competing with our area. Alabama mines cannot, because of their physical conditions, fully mechanize their mining operations. Rock partings and gaseous conditions prevalent in this area increase maintenance costs, and in some mines seriously retard the use of the most modern mechanical equipment.

Generally, Alabama coal requires tremendous investment in processing equipment as much as 50 percent of gross tonnage extracted from mines in this area constitutes waste material which must be removed in surface cleaning plants. These local conditions are responsible for the relatively high cost of production of coal mined in Alabama.

The effect of these difficult conditions can only be minimized by additional research and experimentation and the development of more efficient mining equipment and processes for cleaning and preparation. Expenditures for research and development can be justified only if a reasonable profit can be expected. A healthy and vigorous coal industry is essential to the safety and welfare of our Nation.

The disappearance of the commercial coal market is reflected by the following statistics of coal tonnages produced in Alabama from railroad-connected mines as taken from reports compiled and published by the State of Alabama, Department of Industrial Relations. These statistics also shows the relatively stable condition (productionwise) of the so-called captive mines (those who process beyond ordinary treatment processes, i. e., coal into coke).

The schedule of tonnage shown for railroad-connected mines on page 6 of the written statement shows the disappearance of the commercial market and the relatively stable condition of the so-called captive operations. It will be noticed from this schedule that in 1947 the commercial coal tonnage accounted for more than 48 percent of the total production, whereas in 1956 commercial coal accounted for less than 17 percent of the total production.

It will also be noted that in 1956 commercial coal tonnage is but 23 percent of the commercial coal produced in 1947.

What has been happening to the industries in this district is further indicated by the fact that at September 30, 1946, there were 73 railroad-connected mines in Alabama, and 10 years later there were only 32 such mines, a reduction of 56 mines.

It will be noted from the above schedule that in 1947 the commercial coal tonnage accounted for more than 48 percent of the total production, whereas in 1956 commercial coal accounted for less than 17 percent of the total production. It will also be noted that the 1956 commercial coal tonnage is but 23 percent of the commercial coal produced in 1947.

What has been happening to the industry in this district is further indicated by the fact that at September 30, 1946, there were 73 railroad-connected mines in Alabama and 10 years later there were only 32 such mines-a reduction of 56 percent. From the standpoint of the number of operators on railroad-connected mines, the number decreased from 44 in September 1946 to 21, 10 years hence-a reduction of 52 percent. During this same period the number of nonrailroad-connected mines decreased from 270 to 168, and the number of operators of non-railroad-connected mines decreased from 269 to 159. The above-mentioned statistics relative to mines and mine operators are also taken from reports compiled and published by the State of Alabama, Department of Industrial Relations.

Basically, the story presented is the drying up of the commercial coal usage and the marked reduction in the number of mines and mine operators in this district.

Effect of economic conditions on percentage depletion: During the years there was a fairly good market for coal, the commercial coal

20675-58-pt. 29

operators were able to earn a profit. During this period it was possible for them to secure a small amount of percentage depletion. This served to encourage rather than discourage the operators to stay in business, explore for deposits, and develop processes for recovery and treatment of the coal.

It naturally followed that the sharp decline in the demand for commercial coal was accompanied by a most uneconomic price structure, until many producers were selling the product below cost. This is evidenced by the number of mines and companies that have gone out of business. Those who continue to operate do so under extremely abnormal conditions. These conditions permit little or no profithence, little or no percentage depletion.

For many years during the period when there was a reasonably free market for commercial coal, prices at which such coal was sold were used to establish representative market or field prices for socalled captive coal (coal processed beyond the normal treatment processes). These prices were then used to calculate gross revenues from the properties for percentage depletion purposes.

The Internal Revenue Service insists on the continued use of this method which is clearly unrepresentative and inequitable.

It is an established fact that the relatively high cost of production per ton of high-quality coking coal by the captive operators is incurred because the coal is not otherwise available. This cost per ton is in most instances in excess of what the Internal Revenue Service claims to be the representative market or field price. Further, it would be a physical impossibility for the captive operators to purchase their requirements of high-quality coking coal in the open market in Alabama. Simply put, there is no such market.

I would now like to elaborate on my earlier statement that a change in a rate would not within itself be of benefit to the Alabama coal producers. This is strikingly illustrated by the experience of one of our group which I believe is generally representative of the experience in our area. It is set forth in the table on page 9 of the written state

ment.

It is apparently the adopted policy of the Service to establish market prices based on isolated and completely unrepresentative transactions. As a result, the Service has taken the unreasonable position that profits of captive companies accrue entirely from manufacturing and no part of such profits are attributable to mining.

Thise policy has resulted in practically no percentage depletion allowances in the Alabama district, since the prices used by the Service provide little if any profit and the 50-percent limitation generally eliminates any percentage depletion.

Example of results under current administration of the code: The gravity of this situation is strikingly illustrated by the experience of one of our group, generally representative of experience in the area as set forth below.

The actual percentage depletion on coal allowed by the Internal Revenue Service in its reports of examination covering the years 1947 through 1953 (and calculations perpetuated on this basis for subsequent years) reflected on an average-per-ton basis is shown below together with the percentage relationship to gross income (value) and to costs of mining and related expenses.