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.

II. ATTITUDE OF INTERNAL REVENUE DEPARTMENT

The Internal Revenue Department has taken the position that the amounts 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.

The inequity of the Commissioner's attitude and the Tax Court's treatment of this problem are apparent-the taxpayer is compelled to pay taxes on moneys that he has not received and may never receive.

III. 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 small-business people are caught in the clutches of the taxing authorities which compells 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 simply 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.

IV. 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-business men. 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 annular 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 downpayments 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, 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 becomes more acute.

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

Mr. McCormick, do you desire to introduce the gentleman accompanying you?

Mr. McCORMICK. He is with me only for the purpose of answering any questions, Mr. Chairman, thank you.

Are there any questions of Mr. McCormick?

If not, Mr. McCormick, we thank you, sir, for your appearance and the information you have given to the committee.

The next witnesses are Mr. Wiley and Mr. Sorrell, appearing together.

Mr. SORRELL. Yes, sir.

The CHAIRMAN. Come forward and please give your names, addresses, and the capacity in which you appear, for the benefit of the record.

STATEMENTS OF FRANK WILEY AND W. BYRON SORRELL, MOBILEHOME DEALERS NATIONAL ASSOCIATION, WASHINGTON, D. C.

Mr. SORRELL. Mr. Chairman, my name is Byron Sorrell. I am counsel for the Mobilehome Dealers National Association. Mr. Wiley, one of our members, will present the testimony. Mr. Hutchinson is from Nashville with Mr. Wiley, in case there are any questions on accounting procedure.

The CHAIRMAN. Mr. Wiley, will you identify yourself for the

record.

Mr. WILEY. Mr. Chairman and members of the committee, my name is Frank Wiley, and I am a Mobilehome dealer with sales lots located in Nashville, Tenn., and nine other communities in the South. I am here representing the Mobilehome Dealers National Association, an association of more than 600 mobile home dealers located in every State of the Union. With me is our association's counsel, W. Byron Sorrell, of Washington, D. C.

H. R. 9481 is 1 of 3 bills pending before the House Ways and Means Committee which would resolve a rather serious difference of opinion which has developed between the Federal courts, including the Fourth and Sixth Circuit Courts of Appeals, on the one hand, and the United States Tax Court and Internal Revenue Service on the other hand. H. R. 9481 differs but slightly from H. R. 8623, introduced by the distinguished chairman of this committee.

Briefly, the bill would permit a dealer in personal property, mobile homes in our case, who must finance the sale by discounting the purchasers' note to a bank or finance company, to exclude from his taxable income that part of the face value of the note which is withheld by the finance company as a so-called holdback or dealer's reserve.

Also, the bill would permit exclusion of the finance charge credited to the dealer on the books of the finance company.

Under existing Internal Revenue Service and United States Tax Court interpretation of the law, a dealer must include in his taxable income all money which accrues on the books of the finance company to the taxpayer's credit, even though in fact the taxpayer's right to

receive such money has not vested. In other words, the dealer's holdback reserve or finance charge reserve is only payable to the dealer when the purchaser of the mobile home pays off the note, and until all of the outstanding obligations on which the dealer is an endorser fall below a certain level.

The United States circuit court of appeals in Blaine Johnson et al v. Commissioner of Internal Revenue (233 F. 2d 952 (1956)), reversing the United States Tax Court, said:

But the important question here is not the Commissioner's power in that regard but whether, in the exercise of his conceded powers, he includes as accruable assets for the years in question items which did not so qualify.

The general principles which must control our decision have been authoritatively stated by the Supreme Court. It is the right to receive and not the actual receipt of an amount which determines its accruability. When the right to. receive an amount becomes fixed, the right accrues.

The United States Fifth Circuit Court of Appeals in Texas Trailer Coach, Inc. v. Commissioner of Internal Revenue (case No. 16619, Jan. 7, 1958), again reversed the United States Tax Court, and said:

In our American economy, based so largely on consumer-installment financing, dealers' reserve accounts perform a useful and often necessary function when the financing is furnished by a third party to a sale. A trailer dealer has little hope of obtaining financing unless he agrees to the establishment of a reserve account; its existence means life or death to the trailer business.

The practice raises a touchy tax question: Are amounts in a dealer's reserve account, held back by a finance company, taxable income to an accural basis dealer in the year in which they are withheld and credited to the dealer's reserve account? Yes, says the Commissioner of Internal Revenue relying on Revenue Ruling 57-2, 1957-1 Internal Revenue Bulletin 12. The Tax Court agreed with the Commissioner. We disagree. We respect the considered opinions of the Tax Court and of the Commissioner, but we think that the Court of Appeals for the Fourth Circuit stated the law correctly in Blaine Johnson v. Commissioner (233 F. 2d 952 (4 Cir. 1956)), holding that dealers' reserves are not taxable income until there is a fixed right to receive them.

As a result of the Internal Revenue Service's interpretation, which we emphasize runs contrary to the two circuit courts of appeal and several Federal district court opinions, many mobile home dealers have found themselves in serious financial straits because they have had to pay the income taxes on $25,000 to $50,000 held in these reserve accounts over a period of years, and yet they are unable to use this money. We therefore have a combination of capital being tied up pending the happening of some future event and the dealer being required to pay the income taxes on such holdbacks and finance reserves while it accrues on the books of the finance company.

In our exhibit which we are filing for the record, we cite inter alia the case of a taxpayer who would have to borrow $85,000 in order to pay a tax bill of $261,000 because of a dealer finance reserve of $168,000.

H. R. 9481 would write the circuit courts' interpretations into law by permitting the dealer to include as his income only the money he actually receives or that he actually has a right to receive. The bill is not only directed at the dealer reserves, which represents part of the face value of the note, but the part of the financing charge which is credited to the dealer's account as an inducement for the dealer to send his business to the particular finance company.

Under present interpretation this financing charge, which is contingent upon satisfactory payment of the note to maturity, is neverthe

less required to be included as taxable income even though the note might be in default of paid prior to maturity, in which cases the financing charge credited to the dealer's account would be something less or eliminated altogether.

The difference of opinion which has developed between the Federal courts and the United States Tax Court will have serious consequences, in that litigation on this point in the district courts will increase. If the Internal Revenue Service insists on its position as expressed by the United States Tax Court, dealers will be required to go through the costly procedure of paying the tax in controversy and initiating legislation for its recovery in the district court.

We therefore strongly urge that the committee report favorably the bill H. R. 9481, which would correct this inequity in our Tax Code and resolve the serious difference in interpretation of the law as between the Federal courts and the United States Tax Court.

We also desire to file for the record a statement by the president of the Mobilehome Dealers National Association in support of H. R. 9 and H. R. 10, the Jenkins-Keogh bills, which would correct a grave tax inequity against self-employed persons. Our association is a participating member of the American Thrift Assembly, and we request that our statement be filed in the record along with those of the American Thrift Assembly.

The CHAIRMAN. Without objection, the statement will be included, and the exhibit referred to by you also will be included.

Mr. WILEY. Thank you, Mr. Chairman.

To conserve time, we have attached an exhibit that we have prepared, the Mobilehome Dealers National Association. That exhibit stands as evidence of the fact that we are faced as an industry with a situation that is of a very undesirable character and is, in effect, a compelling and forceful thing toward involuntary bankruptcy in many cases over the Nation.

Percentagewise it also affects those smaller businessmen in the industry who, of course, are affected percentagewise by the tax.

I will not read the article that is attached, but I do want to call your attention to three exhibits that we have prepared for you in this report.

Since we are more concerned and more familiar with our own particular phase of the business than we are with others, naturally, I would like to submit to the committee the reports that we have prepared, which come from an actual audit of our own in particular cases. These would be in our instance, if we were a single corporation. multiple corporations and a sole proprietorship.

The CHAIRMAN. Do you want that included in the record?
Mr. WILEY. I would like, if I may, to review it briefly.

The CHAIRMAN. Without objection, the entire matter will be included in the record.

(The material referred to above is as follows:)

STATEMENT OF HERBERT L. SMITH, JR., PRESIDENT, MOBILEHOME DEALERS NATIONAL ASSOCIATION, IN SUPPORT OF H. R. 9 AND H. R. 10, BILLS TO PROVIDE CERTAIN VOLUNTARY RETIREMENT DEDUCTIONS FOR SELF-EMPLOYED PERSONS

Mr. Chairman and members of the committee, the Mobilehome Dealers National Association, consisting of more than 600 members representing almost every State in the Union, joins the American Thrift Assembly, of which it is a participating member, in urging your early consideration and approval of the Jenkins

Keogh bills, H. R. 9 and H. R. 10, which would remove a grave inequity in our tax code.

This inequity discriminates against self-employed persons who are unable to provide for their own retirement and receive the same tax treatment as corporations which are now able to deduct from their taxable incomes contributions made to retirement funds for their employees.

The President and the Treasury Department have conceded that such a tax inequity against self-employed persons does in fact exist. Consequently, we believe that the Congress should proceed to correct this inequity unless there is some compelling reason why it should not.

We have studied the measure and analyzed the views of eminent economists who conclude that enactment of the Jenkins-Keogh bills would not involve more than approximately $100 million in revenue. This we believe is a small price to pay for correcting an inequity which the Government concedes does in fact exist. Also, the loss in revenue would be balanced by an increase in savings by selfemployed persons with its beneficial effect on the national economy.

Approval of the Jenkins-Keogh bills would have a salutary effect on the Nation by promoting the self-reliant and entrepreneurial characteristics which are so essential to a progressive and balanced society.

We should avoid at all costs a tax structure which discourages self-employment and individual self-reliance.

Although some mobile-home dealers operate their business under a corporate structure, many operate as sole proprietors. All are small-business men. Unlike the corporation, the sole proprietor cannot depreciate himself; he cannot pass along the cost of funding his retirement. To retire, he must set aside something from that portion of a dollar left over after he pays taxes and pays the evermounting costs of living and of doing business, if any be left to him. He necessarily ponders whether, in the long run, inflation will diminish the value of the meager income from his individual thrift.

We strongly urge that the committee initiate this change in our tax system, an action which we feel is dictated by simple fairness, by reporting favorably the Jenkins-Keogh bills.

EXHIBIT TO STATEMENT OF MOBILEHOME DEALERS NATIONAL ASSOCIATION RE TAXATION OF DEALERS' FINANCE RESERVES AND DEALERS HOLDBACK RESERVES

To understand fully the serious threat confronting the mobile-home industry, a careful analysis should be made of the conditions which have brought about this problem.

A. DEALERS' FINANCE CHARGE RESERVE

A small-business man, in order to keep his business going and expanding, must of necessity sell on the installment plan. In order to do this, he must have an outlet with a financial institution to purchase from him the installment obligations he has acquired. In this financing operation, the dealer is required to carry special reserves to protect the finance company from possible loss. These reserves are created when the finance company agrees to give the dealer a portion of the finance cost charged to the customer. For example, the customer purchases merchandise from the dealer, paying the required downpayment and executing a conditional sales contract for the balance of the purchase price plus the various finance costs, including interest and insurance at a specified rate. The finance company then purchases this contract from the dealer by paying him the full remaining balance of the installment sale and requiring the dealer to sign with full recourse. As an inducement for doing business with them, the finance company agrees to set up in a reserve account in the dealer's name, a portion of the finance charge so charged to the customer. These reserves set up by the finance company, in the dealer's name, are subject to many contingencies, these, namely, being:

1. No withdrawals from the reserve accounts are permissible until the reserve has accumulated until it reaches a stipulated percentage of the outstanding unpaid aggregate balances on notes acquired from the dealer.

2. The reserve credits are set up by the finance company out of charges which are unearned, and, in the event of a repossession or an account being paid in advance, these credits are refunded to the customer on a pro rata basis.

3. Due to the fact that these reserves are set up out of unearned charges, the finance company exercises unqualified control over these reserves, and re