(The paper referred to is as follows:)

DISSENTING OPINION OF MR. JUSTICE HARLAN IN AUTOMOBILE CLUB OF MICHIGAN v. COMMISSIONER (353 U. S. -; 1 L. Ed. 2d 746), ON ISSUE OF TAXATION OF PREPAID DUES

I also disagree with the Court's holding that the Commissioner may properly tax in the year of receipt the full amount of petitioner's prepaid membership dues. The Commissioner seeks to justify that course under the "claim of right" doctrine announced in North American Oil Consol. v. Burnet (286 U. S. 417, 76 L. ed. 1197, 52 S. Ct. 613). However, that doctrine, it seems to me, comes into play only in determining whether the treatment of an item of income should be influenced by the fact that the right to receive or keep it is in dispute; it does not relate to the entirely different question whether items that admittedly belong to the taxpayer may be attributed to a taxable year other than that of receipt in accordance with principles of accrual accounting. See Brown v. Helvering (291 U. S. 193, 78 L. ed. 725, 54 S. Ct. 356), where these two problems were involved and were treated as distinct. The collection of taxes clearly should not be made to depend on the vicissitudes of litigation with third parties in which the taxpayer may be engaged. That is quite a different thing, however, from holding that the Commissioner may force taxpayers to abandon reasonable and accurate methods of accounting simply because they do not reflect advance receipts as income in the year received. Under section 41 of the Internal Revenue Code of 1939, the income of the taxpayer is to be determined "in accordance with the method of accounting regularly employed in keeping the (taxpayer's) books," unless "the method employed does not clearly reflect" the taxpayer's income. Under section 42, items of gross income need not be reported in the taxpayer year in which received by the taxpayer if "under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period." And it is clear that accrual methods of accounting may be employed. United States v. Anderson (269 U. S. 422, 70 L. ed. 347, 46 S. Ct. 131). The Commissioner's own regulations authorize the deferral of income in some instances.

The Court, however, now bypasses the Commissioner's "claim of right” argument, and rests its decision instead on the ground that the "pro rata allocation of the membership dues in monthly amounts is purely artificial and bears no relation to the services which petitioner may in fact be called upon to render for the member," so that it cannot say that in doing what he did the Commissioner exceeded the limits of his discretion. I do not understand this, because the Commissioner does not deny-as, indeed he could not-that the method of accounting used by the taxpayer reflects its net earnings with considerably greater accuracy than the method he proposes. Nor does he urge that the taxpayer's accounting system defers income in a manner or to an extent that would make the Govern ment unreasonably dependent on the continued solvency of the taxpayer's business. And no other circumstances have been shown which would justify application of the statutory exception.

Mr. BOMAR. In this dissent, he stated:

*** I do not understand this, because the Commissioner does not deny-as, indeed, he could not-that the method of accounting used by the taxpayer reflects its net earnings with considerably greater accuracy than the method he proposes

*

Mr. Justice Burton and Mr. Justice Clark agreed with Mr. Justice Harlan. Mr. Justice Whittaker took no part in the case.

As a result of the Supreme Court decision in the Michigan club case, the American Automobile Association and a number of its affilated clubs are required to pay Federal income taxes on a basis which is not only discriminatory but in some cases borders on confiscation.

Furthermore, an automobile club which employs the accrual method of accounting must incur the unnecessary expense and spend the time required to keep two sets of records: one to ascertain whether any profit, in fact, has been earned; the other to determine how much income tax is owed to the Federal Government.

Since the accounting issue which I have discussed has been decided adversely by the highest Court in the land, there is absolutely no prospect for nondiscriminatory treatment of automobile clubs unless Congress enacts remedial legislation.

Several years have elapsed since Congress repealed section 452 of the Internal Revenue Code of 1954, at which time both the Ways and Means Committee and the Senate Finance Committee requested the Treasury Department to recommend to the Congress equitable legislation which would reinstate in the law provisions conforming tax accounting with sound business accounting. To my knowledge, no such recommendation has been made by the Treasury Department to date.

Since the announced objective of these hearings is to formulate legislation which will correct hardships existing under present law and to eliminate inequities in the tax base, there is no better place to start than with legislation which would approve the use of sound accounting methods in computing net income.

This committee now has before it two bills to which I wish to refer briefly. One is H. R. 3104, introduced by Mr. Simpson of Pennsylvania, and which might be described as a comprehensive bill designed to reinstate in the law, on a very restricted basis, the principles of accounting contained in old sections 452 and 462. This bill would limit the application of section 452, for example, to three designated items: (1) prepaid rents, (2) prepaid newspaper and magazine subscriptions, and (3) prepaid dues or fees received from members by nonprofit corporations. Its enactment would solve our problem.

If it is impractical for this committee to approve H. R. 3104 or similar legislation because of the impact on revenues, I call your attention to the second of these bills, H. R. 223, introduced by Mr. Herlong, of Florida. It is an extremely limited bill, which would authorize a nonprofit corporation whose principal activity consists in providing services to its members and which receives dues from its members in payment for such services to elect to include such dues in gross income ratably over the period of time during which the nonprofit corporation has agreed to render services to the member, whether or not such period extends over more than 1 taxable year. The principal activity of the American Automobile Association and its affiliated clubs is to render services to their members and to carry on many activities from which all motorists and the public in general directly benefit. The relief granted by H. R. 223 is intended to be prospective only, and it should be emphasized that relief would be limited to corporations which employ the accrual method of accounting. Its sole purpose is to prevent the Commissioner of Internal Revenue from collecting income taxes on a basis which does not represent true net income.

In behalf of the American Automobile Association and its affiliated clubs, unique taxpayers in the sense that they are organized and operated as nonprofit corporations, yet are required to pay Federal income taxes, and in the further sense that the principal source of their income, prepaid dues, is taxed in a discriminatory manner, I urge your committee to give earnest consideration to legislation which will correct existing inequities.

Thank you.

The CHAIRMAN. The Chair thinks it might be advisable to let Mr. Thompson testify before the committee interrogates either of these two gentlemen, since they are appearing together.

Our next witness is Mr. Norman P. Thompson, executive vice president of the Automobile Club of Southern California.

Mr. Thompson, you were allotted a minute and a half, but, if you cannot complete your statement in that time, the Chair might stretch it to 2 minutes.

Mr. THOMPSON. I think we can do it within the minute and a half, Mr. Chairman. Thank you.

The CHAIRMAN. You are recognized.

STATEMENT OF NORMAN P. THOMPSON, EXECUTIVE VICE PRESIDENT, AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA, LOS ANGELES, CALIF.

Mr. THOMPSON. I am here solely in support of the statements made by Mr. Bomar. Many of the examples cited in his report applied to us, most forcibly. For instance, during the year 1957, we are estimating an operating loss in excess of $400,000. Our Federal income tax, we estimate, will be about $42,000. Therefore, you can see that it is a matter of gravest concern to us, and we are, therefore, here to solicit your support for any legislation that will help us to correct this inequitable situation. Thank you for the opportunity to appear here.

The CHAIRMAN. We want to thank Mr. Bomar, Mr. Thompson, and Mr. Singer for their appearance and the information given the committee.

Are there any questions of these gentlemen?

If not, thank you again.

Our next witness is Mr. Pat McCormick.

Mr. McCORMICK. Yes, Mr. Chairman.

The CHAIRMAN. Mr. McCormick, will you please come forward and give your name, address, and the capacity in which you appear?

STATEMENT OF PAT A. McCORMICK, TRAILER COACH ASSOCIATION, LOS ANGELES, CALIF.

Mr. McCORMICK. Mr. Chairman, my name is Pat McCormick. I am from Los Angeles, Calif. I am here on behalf of the trailer coach association of that area.

The CHAIRMAN. You may proceed. You are recognized for 10 minutes.

Mr. MCCORMICK. The trailer coach association, Mr. Chairman and gentlemen, is a trade association representing over 400 manufacturers and dealers in the mobile-home industry in the 11 Western States. We respectfully urge this committee to recommend the passage of H. R. 9481, introduced by Congressman Richard M. Simpson. This resolution, by its terms, amends subpart B of part II of subchapter E of chapter I of the Internal Revenue Code of 1954. The enacement of this measure into law will effectively relieve thousands of smallbusiness men from the burden of being compelled to pay Federal income taxes on moneys that they have not yet and may never receive.

The need for this legislation-the need for this remedial legislation arises from the following circumstances: Dealers in mobile homes universally finance their sales with banks and other lending institutions. The retail purchaser signs a conditional sales contract which generally provides for a downpayment and the balance to be paid in monthly installments extending for periods up to 7 years. To this unpaid balance is added insurance, other costs, and interest. The dealer then takes this contract to a lending institution and sells or assigns the contract for immediate cash.

The necessary capital for his engaging in business is largely obtained in this manner. The lending institution which advances money against this paper, however, does not pay to the dealer the full amount of the contract, and retains what is generally known as a dealer's reserve as security against various contingencies.

The amount retained on individual accounts varies, but averages in excess of 6 percent of the unpaid purchase price. However, this reserve is held not only against the individual account from which it is withheld, but together with other like reserves against all such contracts financed by a given dealer with the lending institution. The purchaser makes his payments directly to the lending institution, and additional amounts are withheld from these payments, so that in some instances the reserve held by a lending institution against a given dealer's obligations will amount to as much as 15 percent of his contingent liabilities.

The lending institution insists by contract that this percentage be held constant and only releases these funds from the reserve account when the amount exceeds the agreed-upon percentage. It can be readily seen that, in a growing business, this fund increases proportionately to the increase in sales and, in some instances, the dealer will only receive the moneys so held upon a cessation of business. Attitude of the Internal Revenue Department: The Internal Revenue Department has taken the position that the amount represented by these dealer reserves constitutes taxable income to him even though he has not received and may never receive it. Despite the fact that numerous Federal circuit courts have disapproved of the Commissioner's attitude on this matter, he has seen fit to ignore such decisions and has obtained the approval of the tax courts (as distinguished from the civil courts) in making these assessments.

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The inequity of the Commissioner's attitude and the tax courts' treatment of this problem are apparent. The taxpayer is compelled pay taxes on moneys that he has not received and may never receive. Taxpayer has no adequate remedy: The only recourse left to the taxpayer is to sue for a refund of the taxes paid, and, as we have noted, the tax courts have universally decided such cases against the taxpayer. He may, of course, appeal to the United States court and under the present decisions may expect relief there, but this is a procedure that is very expensive and is only warranted where substantial amounts of money are involved. Thus, thousands of smallbusiness people are caught in the clutches of the taxing authorities, which compel them to pay out moneys that they do not receive, and the only relief available to them is an expensive court proceeding which, in most cases, they cannot afford.

The proposed legislation simple permits a taxpayer to exclude from his gross taxable income that portion of his sales which is not paid or

made immediately available to him by the lending institution to which he sells or assigns his contracts.

No loss of revenue to Government: It should be emphasized that the Government will suffer no ultimate loss if this legislation is passed. Its effect will be only to delay the payment of such taxes until the time that the moneys are received by the taxpayer. It will in no way relieve the taxpayer of the obligation of paying his taxes when the money is received by him.

If this legislation is not adopted, the inevitable result will be the failure of many small businesses. The following example of what can happen to a given dealer will point up this fact:

Apex Trailer Sales, a corporation, is engaged in the business of selling mobile homes at retail in Los Angeles, Calif. Their gross sales average $500,000 per year. Because they are well managed, they average an annual net profit, after the payment of taxes, of 4 percent on their sales, or $20,000 per year. Eighty percent of their sales are financed by the bank on down payments averaging 25 percent of the purchase price. During the year the company will finance a total of $300,000 of its contracts, against which the bank insists on holding back a 6 percent reserve, or $18,000. The company's profit in hand has now shrunk to $2,000. This may be further reduced by defaults in payments and collection and repossession charges, all of which are charged back against the dealer. This condition is not improved with time because as old contracts are paid off, new ones are substituted for them, and the withheld reserve remains constant. If, through effort and hard work, the company's sales increase, because of higher tax brackets, its percentage of profit decreases and the situation only be

comes more acute.

This is an actual example of what is happening in our industry, and we respectfully suggest that it calls for relief by this Congress.

Thank you, Mr. Chairman. I would like this statement to be made a part of the record.

The CHAIRMAN. Without objection, it will be included in the record. (The statement referred to follows:)

STATEMENT OF PAT A. MCCORMICK, REPRESENTING THE TRAILER COACH ASSOCIA TION IN SUPPORT OF HOUSE RESOLUTION 9481

Gentlemen, the Trailer Coach Association is a trade association representing over 400 manufacturers and dealers in the mobile-home industry in the 11 Western States. We respectfully urge this committee to recommend the pas sage of House Resolution 9481, introduced by Congressman Richard M. Simpson. This resolution by its terms amends subpart B of part II of subchapter E of chapter I of the Internal Revenue Code of 1954. The enactment of this measure into law will effectively relieve thousands of small-business men from the burden of being compelled to pay Federal income taxes on moneys that they have not yet and may never receive.

I. NEED FOR THIS LEGISLATION

The need for this remedial legislation arises from the following circumstances: Dealers in mobile homes universally finance their sales with banks and other lending institutions. The retail purchaser signs a conditional sales contract which generally provides for a down payment and the balance to be paid in monthly installments, extending for periods up to 7 years. To this unpaid balance is added insurance, other costs and interest. The dealer then takes this contract to a lending institution and sells or assigns the contract for immediate cash. The necessary capital for his engaging in business is largely obtained in this manner. The lending institution which advances money against this paper,