posals which have been put forth from time to time and which are aimed solely at helping small business. We made our decision for several reasons.

The first is that small business is a very elusive concept, which is very difficult to identify properly. We feel that any of these proposals, by attempting to provide relief in a narrow area, based upon a rigid definition of small business, may well result in more inequities than it removes. Secondly, most of those we have studied are aimed principally at the corporate rates.

We feel that any small-business proposal aimed solely at the corporate rates will fall short of the mark, because of the fact that studies indicate that about 85 percent of small business is unincorporated, being carried on either through individual proprietorships or partnerships.

Of course, therefore, no proposal directed at the corporate rates only would help these people who are not subject to those rates.

In this connection, I would like to say just a few words, and then I will be finished, about the proposal which is often brought up, to graduate corporate-tax rates in order to help small business. Our chamber of commerce has consistently been and is unalterably opposed to the graduation of corporate rates.

First of all, for the reasons I have just mentioned, it will not help small business, because of the small percentage of small business that is incorporated. Secondly, we feel that the principle of graduation of corporate rates is a false one which is based upon a misconception of the nature of a corporation and its relationship to its stockholders. The corporate income ultimately is the income of the stockholders.

A small corporation may be owned by a few individuals with large incomes, whereas a large corporation may be owned by many individuals with small incomes. Therefore, by graduating the corporate rates, you run the danger of running into a situation where the profits of wealthy individuals are taxed at low rates and the profits which will ultimately become the income of individuals with modest means are taxed at high rates.

Lastly, we feel that the graduation of corporate rates provides an incentive to stay small rather than to grow, and might well result in the fragmentation of corporate enterprises into many small corporations in order to take advantage of the low rates.

In summary, Mr. Chairman, we feel that the best way to help small business is to help all business. We feel our program would accomplish it, and we offer it for your consideration.

The CHAIRMAN. Mr. Antoine, we thank you very much for your appearance and the information you have given to the committee. Are there any questions?

Mr. Reed.

Mr. REED. I just want to compliment you on your statement, sir. Mr. ANTOINE. Thank you very much.

The CHAIRMAN. Are there any other questions?

If not, sir, we thank you.

Mr. ANTOINE. Mr. Chairman, before I get away, may I have leave to file a statement of proposed technical changes to the code?

The CHAIRMAN. Yes; I am glad to receive that into the record, without objection.

(The statement referred to is as follows:)

RECOMMENDED CHANGES IN INTERNAL REVENUE CODE OF 1954, SUBMITTED BY THE COMMITTEE ON TAXATION AND GOVERNMENT EXPENDITURES OF THE PENNSYLVANIA STATE CHAMBER OF COMMERCE

1

The committee recommends that Federal expenditures be kept at a level which will permit a reduction of the national debt and the adoption of the following proposed amendments to the Internal Revenue Code of 1954:

1. CORPORATE INCOME TAX RATE

We are opposed to any further extension of the present 52 percent corporate income tax rate. The corporate income tax rate should be reduced to the preKorean level as soon as possible.

2. ACCELERATED CORPORATE INCOME-TAX PAYMENTS

The acceleration of corporation income-tax payments provided for by the Revenue Act of 1954 is a mistake and should be rescinded as soon as possible.

3. DEPRECIATION

We heartily commend Congress for its accomplishments in liberalizing the depreciation provisions of the Internal Revenue Code of 1954. Congress should further study the matter of depreciation with a view to adopting into law, as soon as revenues will permit, the principle that, within the limits of sound and consistent accounting, business management should be allowed to exercise its discretion in the choice of the method and the rates of depreciation and obsolescence.

4. DOUBLE TAXATION OF INTERCORPORATE DIVIDENDS

The double taxation of intercorporate dividends should be eliminated. Since 1936, 15 percent of intercorporate dividends have been subjected to the corporate income tax. As a result, corporate income is, to that extent, doubly taxed: first, as earnings in the hands of the distributing corporation; and second, as dividends in the hands of the recipient corporation. Such double taxation is inequitable and contrary to sound economic principles; consequently, dividends should be excluded from the gross income of corporations.

5. PENALTY ON FILING CONSOLIDATED RETURNS

The 2 percent penalty upon the filing of consolidated returns should be repealed. Consolidated returns have been provided for in the tax laws since 1921, as a means of determining the net income of a single enterprise, even though the business is carried on through two or more corporations. No special advantages are derived through the use of such returns. They are recognized and favored by the Treasury Department and taxpayers alike as the only practical method of determining net income in such cases, and as a method which is fair and easy to administer The additional rate of 2 percent imposed upon those filing consolidated returns, however, imposes a penalty upon their use which in many cases compels the filing of separate returns. Such a provision clearly discrim inates against the business which must be carried on through subsidiaries. Considered either from a viewpoint of equity or administrative convenience, consolidated returns should be fostered by eliminating the 2 percent penalty imposed on their use.

Under existing law, an election by an affiliated group of corporations to file a consolidated return is binding upon the group for all future years, with certain limited exceptions. This provision is unnecessarily harsh, and it is recommended that affiliated groups be given an annual election to file either consolidated or separate returns.

6. CAPITAL GAINS AND LOSSES-ALL TAXPAYERS

The deduction of capital losses should be allowed on the same basis that capital gains are taxed. Under present law, all capital gains are taxable, regardless of the nature of the transaction from which they arise. Numerous restrictions are contained in subchapter P, however, on the allowance of capital losses. No

1 Supplementary to statement o. Pennsylvania State Chamber of Commerce, presented by William C. Antoine.

sound reason presents itself for this difference in treatment, and it is earnestly recommended that the loss be allowed on the same basis that the gain is taxed. The tax on long-term capital gains should be reduced immediately and eventually eliminated.

7. DOUBLE TAXATION OF CORPORATE EARNINGS

We commend Congress for recognizing in principle the method supported by the Council of State Chambers of Commerce for the alleviation of the double taxation of dividends first as corporate earnings and later as individual income. After computing the taxes on their incomes, including taxable dividends received from domestic corporations subject to the income tax, shareholders should be allowed to deduct from their taxes a credit for the payment of corporate taxes on the income paid out in dividends. The percentage allowed as a credit presumably would be at least the initial rate for individual incomes.

8. ESTATE AND GIFT TAXES

The United States Government should withdraw from the estate and gift tax field entirely and leave such types of taxes to the respective States. If the estate and gift taxes are to be retained in the Federal system, the maximum rate on estates should not exceed 50 percent, and the rate on gifts should be not more than three-fourths of the rate on estates.

9. INDIVIDUAL INCOME TAXES

To furnish the maximum incentives to risk-taking and to provide equity capital to expand productive activity, the element of progression of the individual income tax rate structure should be substantially reduced to the point where the maximum tax rate will be 50 percent or less. In order to secure the greatest possible popular participation in the cost of Government, consistent with equity, a policy of low exemptions should be continued.

10. AVERAGING OF INDIVIDUAL INCOMES

We endorse the extension of the principle of optional averaging of incomes to all types of individual taxpayers.

11. ORGANIZATIONAL EXPENSES

Section 248 of the bill permits, for the first time, the amortization of certain organizational expenses.

We believe there are two serious defects in the section as presently drawn. First, it should not be limited to organizational expenses, but should cover reorganization expenses as well. Second, it should also cover stock-issuance expenses whenever incurred. These would include SEC and stock exchange filing fees, State filing fees, Federal, State and local taxes, engineering and accounting services, investment counsel fees, costs of prospectus preparation-and other items incident to the stock issue. It should be noted that the expenses of bond issues are deductible pro rata over the term of the issue. Failure to grant comparable treatment to the cost of issuing stock creates an undesirable discrimination against equity financing,

12. COST OF ELIMINATING AIR AND STREAM POLLUTION

In recent years, several States have entered into a program of eliminating the pollution of both air and streams by the imposition of certain regulatory measures. As a result, many industries have made substantial expenditures in order to comply with these programs. Taxpayers cooperating with these State programs should be permitted to amortize for tax purposes over a 5-year period the amount of expenditures incurred in eliminating stream and air pollu tion.

13. VALUATION OF LIFO INVENTORIES AT COST OR MARKET

LIFO inventories under present law must be valued at cost. In other words, the inventory at the end of the year may not be written down to market if market value is lower than cost as in the case of inventories computed under the first-in first-out method. We recommend that the cost or market method of valuation be extended to LIFO inventories. Many business and professional organizations, including the various accounting societies, have recommended this change.

14. SECTION 461 (C)-ACCRUAL OF REAL PROPERTY TAXES

The provisions of this section should be extended to apply also to personal property taxes.

15. DEPRECIATION-FULL TAX BENEFIT RULE

Section 1016 (a) (2) of the Internal Revenue Code of 1954 provides that the basis of property should be reduced by the depreciation allowed as deductions in computing taxable income and resulting thereby in a reduction for any taxable year of the taxpayer's taxes, but that in any event the basis shall be reduced at least by the amount of depreciation allowable under the 1954 code or prior income tax laws. This provision, like its counterpart in prior law, does not permit a full tax benefit from the depreciation allowance in any case in which it is determined that the amount of depreciation allowable for a prior closed taxable year was greater than the amount allowed; or in a case where the depreciation allowed and allowable were the same but the taxpayer had a deficit for the year which he is not entitled to carry back or forward against the income of another taxable year because of limitations in the net operating loss deduction provisions. It is recommended that section 1016 (a) (2) be amended to provide

1. That the adjustment to the basis of depreciable property at the beginning of the taxable year be limited to the amount of depreciation allowed in prior years in all cases where the taxpayer's returns for such prior years have been audited by a representative of the Internal Revenue Service.

2. That in any case where the amount of depreciation allowed or allowable for any prior year exceeds the amount of the income subject to tax for such year computed without benefit of the depreciation allowance, no adjustment to the depreciable base shall be made with respect to any part of such excess which does not reduce the taxable income of another year either as part of a net operating loss carryback or carryforward or under other provisions of law.

16. SELF-INSURERS AND PROPOSED AMENDMENTS OF SECTION 1221

It is the position of the Treasury Department, as set forth in the regulations that the treatment of casualty losses is governed by section 1231 of the 1954 code, whether or not "other property or money" is involved. Under this section, certain gains and losses from the sale, exchange, or conversion of property must be offset against each other and the net gain, if any, is taxable as a longterm capital gain. Consequently, under the position maintained by the Treasury, a self-insurer may receive, in effect, only a 25 percent tax benefit from his casualty losses. In contrast, a taxpayer who buys insurance from outside insurance companies is entitled to deduct the cost of such insurance in full in determining his taxable income. It is obvious that under the practice of the Treasury Department a self-insurer for casualty losses is placed at a discriminatory disadvantage as contrasted with the taxpayer who maintains his insurance with outside insurance companies.

It is the position of the Treasury Department that the provisions of the regulations are required under present statutory language. Therefore, in order to eliminate this inequitable and discriminatory treatment, it is recommended that section 1231 of the 1954 Internal Revenue Code be amended to provide that casualty losses shall be offset against section 1231 gains only when other property or money is involved. This would then eliminate the inconsistency now present in the treatment of gains and losses from conversions of property under section 1231 as set forth in Treasury regulations. House bill 9208 provides the relief herein recommended and we urge its adoption.

17. LOSS ON INVESTMENTS IN AFFILIATES

The national emergency which has existed over the last 15 years has taught industry that its members can work with one another in the promotion of developments. Unfortunately, however, these developments are not always successful. Since they are generally carried on in corporate form, the loss which the participants incur will be treated as a capital rather than an ordinary loss, unless one of the corporate participants owns the required percentage of the stock of the development corporation (95 percent under existing law).

In order to encourage the taking of risks in this situation, which may result in technological improvements which will benefit the entire Nation, we believe that the percentage requirements of section 165 (g) (3) should be drastically lowered, in order to permit the full deduction of losses. Specifically, we recommend that section 165 (g) (3) be amended so as to require ownership of no more than 25 percent of the stock of the issuing corporation. Investments by a corporation in 25 percent of the stock of another corporation are not as a rule stock speculations. In other words, the difference between 25 percent ownership and 95 percent ownership is not necessarily the difference between speculation and investment. The code should recognize this fact. The national emergency has proved that such investments can be of material benefit to the Nation and they should not be discouraged by the income-tax laws.

The reasoning of the above leads to the recommendation that the effect of the Hunter Manufacturing Corporation (21 T. C. 424) case be eliminated. This can be substantially accomplished by reducing the ownership requirement to 25 percent. It can also be done by providing in section 165 (g) that ownership of stock for business reasons auxiliary to that of the taxpayer shall be accorded the treatment provided by section 165 (g) (3) irrespective of time of purchase. This will clarify the meaning of the Hunter case.

Section 165 (g) (3) requires that "more than 90 percent of the aggregate" of the corporation's gross receipts for all taxable years must be from sources other than royalties, rents, etc.; doubt has been expressed in some quarters that a corporation which has never had any gross receipts of any kind can meet this test. Accordingly, it is suggested that paragraph (B) of section 165 (g) (3) be amended to insure qualification of a corporation which has never had gross receipts.

18. SUBCHAPTER C-CORPORATE DISTRIBUTIONS AND ADJUSTMENTS

We believe there are several areas in subchapter C which require clarification and revision. However, a special subcommittee was appointed to investigate and report to the House Ways and Means Committee with respect to subchapter C, and to make suggestions for its revision. Pending a study of the report of this subcommittee, we refrain from making any specific suggestions as to the revision of subchapter C. After we have had an opportunity to study the report of the subcommittee we may then wish to submit further suggestions in areas in which we believe either that the subcommittee's suggestions have failed to correct the evil complained of or where they have failed to touch upon a specific matter at all.

19. ACCOUNTING TREATMENT OF PREPAID INCOME-SECTION 452

This section pertained to amounts received which have been recognized under prior tax rules as currently taxable income even though such amounts are to be earned over future periods. Basically, that section contemplated that there would be no recognition of amounts received as income so long as there was a future liability to render services, furnish goods or other property, or allow the use of property. That type of provision was essential to conform with good accounting practice and avoid any possibility of a tax being imposed upon the receipt of money which did not rightly, at the time, represent income. On the basis of presently available information, it does not appear that this section would affect any substantial amount of revenue, and it is recommended that section 452 be restored to the Internal Revenue Code of 1954.

20. DEDUCTION FOR ALL EXPENSES ATTRIBUTABLE TO INCOME OF THE TAXABLE

YEAR-SECTION 462

Good accounting practice requires that there be charged against the income of any year all expenses incurred or to be incurred which are attributable to such income. This principle was recognized in section 462 of the Internal Revenue Code of 1954, now repealed. The report of the Committee on Finance with respect to the repeal bill (H. R. 4725) completely vindicated the purpose and effect of section 462. We strongly urge that the intention of the Committee on Finance to report out substitute legislation to be carried out promptly.

In this connection, a special problem exists with respect to the accrual of vacation pay. Under rulings which antedated the enactment of the 1954 code, taxpayers have been permitted to deduct vacation payments to be made in the following year despite the absence of a fixed liability existing at the close of the