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The CHAIRMAN. Mr. Grassman, do you have copies of your statement?

Mr. GRASSMAN. I wish to file a copy of my statement here, if I

may.

The CHAIRMAN. Do you have copies with you for members of the committee?

Mr. GRASSMAN. I have them here, plenty of them. I would like to say a few words and not read the statement, to save time. It will only take a moment.

The CHAIRMAN. We will include your entire statement in the record. Mr. GRASSMAN. The statement is here, but I would like to say a few words in addition.

The CHAIRMAN. You are recognized for 10 minutes to proceed in your own way.

Mr. GRASSMAN. Thank you, sir.

I was supposed to speak on depletion of ball, sagger, and china clay, but I would like to say a few words instead on capital gains as far as real estate is concerned.

I have filed a statement and will only say a few personal words.

As a land surveyor, I have had a good opportunity to note the trends and fluctuating of values of vacant land.

Before I was 21, I had invested in land held in my mother's name. Much of the land I and my companies own has been held 20, 30, and 40 years.

I never had a real-estate license or took a commission or a fee as an appraiser.

The Lord has been very good to me and I have, in addition to real estate, acquired interests in many corporations.

On occasion I have made 40 to 50 sales of securities in 1 year and always capital gain.

On the other hand, when real estate is concerned, 2 or 3 annual sales result in controversy with examiners claiming ordinary gain because of what is termed volume and regularity of transactions.

At times in past years where gain was small, I have accepted examiners' contentions to avoid controversy, but now I am afraid to make sales, especially in transactions where the gain amounts to several hundred thousand dollars, for, if perchance, after several years of controversy it is held ordinary gain because I have been buying and selling occasional parcels over the last 40 years, then practically all my sales price will go for taxes, and I will have nothing for my 20to 40-year investment.

As a solution, I am transferring the property to charity during my lifetime and thereafter. This uncertainty is depriving the Government of several hundred thousand dollars in taxes, and depriving me of a lot of fun.

In general, my real estate investments have been profitable and constructive. I know the subject much better than Wall Street investment and with a safe and secure set of laws respecting capital gain or ordinary gain, I would have been guided in making many more real estate sales, paid a lot of money to the Treasury and been very happy so to do.

Instead the Treasury is the loser by my giving the properties with the greatest gain to charity and refusing to sell except occasionally 1 or 2 parcels every year or so. I have and am passing up many

splendid opportunities for gain because I am afraid to make real estate investments under existing indefiniteness.

Gentlemen, give to real estate investment the same constructive encouragement you have given Wall Street, and you will see a substantial increase of revenue to the Treasury.

Fundamentally, none of you gentlemen would want to make many investments in real estate if after 20 or 30 years you would suddenly wake up and find out that when you made a sale 80 percent or more would go to the Treasury.

Thank you, gentlemen.

The CHAIRMAN. Mr. Grassman, as I understand your point existing law holds that you are engaged in the business of buying and selling real estate, presumably because of the frequency and continuity of sales in your operation; is that correct?

Mr. GRASSMAN. The point is that having numerous holdings of real estate, the fact that over the years I sell 2 or 3 parcels, perhaps every year or every other year or so, they say there is a trend, a continuity. I have had controversy on it. It will be years before it is finally decided, but there is a tendency on the part of the examiners to allege always that the sale is ordinary gain.

I go into that more fully in my statement. I appeared on this same subject several years ago and as a result a section 1237 was passed and my brief deals principally with the ramifications of 1237 and the confusion which now confronts us with respect to that law. I do not want to take your time, but I could talk for an hour on that subject.

The CHAIRMAN. Mr. Grassman, you contend that if you did the same thing with respect to stocks you would not be held to be in the business of buying and selling stocks.

Mr. GRASSMAN. I could make 50 or 60 sales a year and it is all right. Now, I am talking about property that is held 10, 20, 30 years. The CHAIRMAN. I understand. Your point is that you do not believe you are any more in the business of selling real estate than you believe you are in the business of selling stocks.

Mr. GRASSMAN. That is right. The suggestion on my last appearance was that the law says that if you held it for 10 years it was an investment regardless. You might split it up.

The CHAIRMAN. You intended it as an investment in the beginning?
Mr. GRASSMAN. Yes.

The CHAIRMAN. Mr. Kean, do you desire to ask questions?
Does anyone desire to ask Mr. Grassman any questions?

Mr. Grassman, we appreciate your coming to the committee and the information you have given us.

Mr. GRASSMAN. Thank you, sir.

(The statement referred to is as follows:)

STATEMENT OF EDWARD J. GRASSMAN, ELIZABETH, N. J., RELATING TO SECTION 1237 OF INTERNAL REVENUE CODE

Why not do justice to our fundamental and best field of investment, namely, real estate? A man can own 100,000 shares of United States Steel as well as numerous other securities and make a sale of 10 shares or more every week and if the securities were held more than 6 months it will be a capital gain. (Under certain conditions even though he be a security dealer.) A man owns several 1,000-acre parcels for 5 to 30 years, and if he needs money and sells off several 10-acre plots in 1 year, he has a fight on his hands with the Internal Revenue

Service and will not know for many years whether or not he is in business, and if he must pay ordinary income tax instead of capital gain tax.

I appeared before the Ways and Means Committee some years ago explaining how difficult it is for a taxpayer to know whether he is in the business of selling real estate because our decisions vary in accordance with the facts and there is no standard by which a taxpayer can be guided. Cases are decided on the question of continuity and number of sales, yet there is no yardstick of measurement. Many times a taxpayer does not know until the court decides whether he has ordinary or long-term capital loss or gain. Such an uncertain condition naturally affects the activities of many taxpayers and there should be some standard upon which a taxpayer may rely.

My suggestion at that time did not have in mind a taxpayer dividing a large tract into lots and constructing numerous roads and other improvements, but rather clarification for a taxpayer having real estate investments acquired over many years; possibly several purchases of adjoining tracts of land which become one under section 1237 now may constitute a subdivision when taxpayer finds it necessary to sell in a few parcels instead of one large tract in order to obtain the best price. This is similar to the situation which might confront the aforementioned holder of 100,000 shares of United States Steel, who might obtain a better price selling his 100,000 shares in several blocks instead of one sale.

As section 1237 is legislation resulting from your committee's study, but as modified by the Senate, I take the liberty of explaining how this section as finally enacted does not serve the purpose.

Section 1237 is intended to provide relief in a limited area by providing special rules for the taxation of gain from the sale of real property coming within the scope of the section. The intention is that the taxpayer is not to be considered as holding property primarily for sale to customers in the ordinary course of trade or business "solely" because he subdivided the tract for purposes of sale or because of any activity incident to the subdivision or sale if the property comes within the scope of the section. If the taxpayer could be considered a dealer in real property because of his transactions involving other property, the property would still be considered as held for sale to customers in the ordinary course of trade or business.

Although section 1237 was intended, in some measure, to remedy the situation, both the section and the regulation fail to supply a proper standard as too much is left for determination of fact. Some of the unjustifiable results and uncertainties which arise are listed below.

1. A taxpayer owns vacant land for 9 years. It has been purchased as an investment. The governing body of the municipality either determines of its own volition or is ordered by a health authority to install sanitary sewers in the entire municipality. The property is assessed for a substantial improvement. Under section 1237 (a) (2), even though the taxpayer holds no other real prop erty primarily for sale to customers in the ordinary course of trade or business and the taxpayer is powerless to prevent such improvement, he would be barred from the benefits of section 1237 if he subdivides the tract.

2. If he owns the property more than 10 years and elects not to add the cost of the improvement to his basis if it is needed to make the lot marketable at the prevailing price and complies with other special rules, he is entitled to the benefits of the section. If the property is the first in the municipality to be subdivided since the sewer was installed there could be no comparison with other property in order to determine the prevailing price and therefore he would be unable to meet the test required by the regulation. If the improvement increases the value of the lot by more than 10 percent, then all relevant factors must be considered to determine whether the increase is substantial. Here a conflict of opinion deprives a taxpayer of the right to certainty.

3. A taxpayer is put to the risk of electing whether he comes within the provisions of the section as to substantial improvements and if he fails to make such election he waives the benefits of the section. Yet, if he so elects in order to protect himself, such election is irrevocable even though it is later determined the improvements were not substantial and the taxpayer ordinarily would be entitled to add the cost to his basis. There seems to be no basis for this in the regulation because it cannot be inferred from the statute itself. It certainly is unreasonable because the determination of whether an improvement is substantial is based upon opinion and if the taxpayer wishes to preserve something he mistakenly believes is necessary he should not be penalized by such a requirement.

4. A decedent owned the land 20 years. If the trustee under his will does not have title for at least 10 years the estate is deprived of even some meager benefits resulting from an improvement thrust upon it.

5. The provision that if any of the tract had been held primarily for sale to customers, which deprives the taxpayer of the benefits of the section, is unfair. A taxpayer may have sold off minor parcels from a large tract and because of the uncertainty of the law on the subject and because trivial amounts were involved, the transactions often would be reported as occurring in the ordinary course of business. At other times an examiner would make a change too trivial to dispute. To deprive such a taxpayer of the benefits of the section obviously is discriminatory.

6. The section and regulations should clarify what is meant by a subdivision. In its ordinary use it is meant to describe a development which comprehends some of the desirable comforts of living, such as streets, pavements, sidewalks, sewers, etc., laid out on a map with some degree of uniformity. On the other hand, a tract of 1,000 acres could be sold off in parcels of 100 acres or more without any substantial improvements or uniformity of size. Would the latter be the type of subdivision contemplated by the section?

7. If more than five lots are sold, gain from any sale in the year in which the sixth lot is sold is taxable as ordinary gain to the extent of 5 percent of the selling price. The entire gain may be no more than 5 percent of the selling price and, consequently, there is no capital-gain benefit. On the other hand, the regulation states the section has no application to losses.

8. The section primarily deals with subdivisions and does not in any way guide a taxpayer who intends to hold specific vacant land as an investment, as in the case of stockbrokers who may designate the manner of holding stock. So much is left to opinion that the inevitable result is costly litigation. This is manifest from the large number of cases on the subject which are litigated. It is respectfully suggested that both the section and the regulation are difficult of interpretation, lack certainty, and create confusion. It is also suggested that the code include a provision that, even though other vacant land is held by a taxpayer for sale in the ordinary course of trade or business, vacant land held by a taxpayer for more than 10 years shall be deemed to be held as an investment and subject only to long-term capital gain or loss upon sale of the same. Rarely is stock in trade in any other business held for that period of time, and the fixing of a definite period of holding would lend a certainty badly needed. The provision should also provide that a holding for more than 6 months, but less than 10 years, does not necessarily mean that such holding is not for investment. The time of holding by a decedent should be tacked on to the time held by the estate or beneficiary. This suggestion should apply even though the property be substantially improved by municipal or other governmental authority resulting in an assessment for benefits against the land. It would have no application to the provisions of section 1237, but any inconsistent provisions of section 1237 should be repealed; in fact, if section 1237, which serves no constructive purpose, is repealed, few tears will be shed.

If a law of fundamental justice which will encourage real-estate investment and ultimately increase the Government's revenue cannot at this time be passed, the minor changes suggested will give some relief.

The CHAIRMAN. Our next witness is Mr. Benjamin Graham.
Mr. Graham, will you identify yourself for the record please?

STATEMENT OF BENJAMIN GRAHAM, VISITING PROFESSOR OF
FINANCE, UNIVERSITY OF CALIFORNIA

Mr. GRAHAM. My name is Benjamin Graham. I am visiting professor of finance at the University of California, Los Angeles, living in Beverly Hills.

I appear as an economist and in the public interest in relation to the subject matter on which I wish to comment.

I apologize to the committee for not having had the opportunity to provide a sufficient number of copies of my statement for the members, but I will supply additional copies later on.

The CHAIRMAN. Mr. Graham, can you complete your statement in 15 minutes?

Mr. GRAHAM. Yes, indeed; less than that.

I desire to comment on section 6 of the report of the "Subchapter C. Advisory Group," relating to the amendment of section 305 of the code.

In this group's report it is recommended that stock dividends be taxed as cash distributions if they are paid under a two-class arrangement, whereby one class receives dividends in cash and the other in stock. It is my view that such purposed change in the present law would be undesirable in theory and largely ineffective in practice.

In other words, I think that Congress neither should nor could prevent the future evolution of dividend policy along the lines represented by two-class or similar plans.

May I say here that although I am more or less the author of the two-class dividend idea, I have no financial interest of any kind therein, nor am I paid for testifying here. I appear solely as an economist, and in the public interest.

The two-class plan is at bottom a device to permit expanding corporations to pay dividends in stock, rather than cash, to most holders without thereby depressing the market price of their shares. Its need arises from the fact that the public in general is not yet ready to accept stock dividends as freely as cash dividends; hence a policy of paying stock dividends only to every stockholder would in most cases be viewed with disfavor in the stock market.

There is nothing improper about the payment of nontaxable stock dividends.

In fact, Congress, in the 1954 revision, liberalized their nontaxable status beyond the limits set in the controlling Supreme Court decision (that of Eisner v. Macomber).

Nor is there anything improper about efforts to make stock dividends as attractive to shareholders as equivalent payments in cash.

Why then should Congress now consider adding a special tax provision to discourage such arrangements?

The reason is solely one of expediency. The large-scale substitution. of stock dividends for present cash dividends would mean a loss of tax revenue which the Treasury would be loath to accept.

But my basic point is that this particular loss of revenue is bound up inevitably with the aim of an expanding economy Heavy reinvestment of corporate profits for expansion is essential to our economic stability and growth. It should be encouraged by Congress even at the loss of some part of the present double tax on corporate earnings— which everyone recognizes is largely indefensible in theory, even if apparently necessary in practice.

If we wish to make permanent the dynamic expanding economy of recent years, we must realize that corporate dividend policies are bound to change in the future. The proportion of earnings paid out in cash dividends will have to be sensibly reduced. We cannot maintain a 52-percent corporate profits tax, plus a $36-billion annual expenditure on new plant equipment and added inventory-and at the same time have corporations pay liberal cash dividends to stockholders. In 1956 this $36-billion expansion program absorbed all of the corporate earnings after tax plus the allowance for depreciation, and so forth. Thus the entire $12 billion paid out in cash dividends had

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