1955 by that time. Public Law 74 could not help the publisher which commenced the publication of a new magazine, bought a new publication, or expanded its operation. Public Law 74 does not cure all the technical traps created by the repeal of section 452. Public Law 74 does not correct injustices to an employee or stockholder receiving bunched income in 1955, because of additional bonuses or dividends for 1954 received by December 15, 1955. The December 15, 1955, date in Public Law 74 is of no significance in the determination of whether to file consolidated returns. No new election to file separate returns was available for 1954 or for 1955 because of the repeal of section 452. Although the time for filing consolidate returns for calendar 1954 was extended to September 15, 1955, by Revenue Ruling 55-174 (1955-1 C. B. 141; March 14, 1955), the consolidated returns regulations were not promulgated until August 24, 1955, and the ruling explaining the effect of the repeal of section 452 upon consolidated returns was not announced until March 5, 1956, in Revenue Ruling 56–68 (1956 IRB No. 10, p. 11). In addition, if affiliated corporations had filed separate returns, and by September 15, 1955, did not elect to file a consolidated return, Public Law 74 did not afford the opportunity to do so by December 15, 1955. The Beacon case was decided on January 3, 1955. By its authority, prepaid subscriptions are income on the accrual basis only when earned. Publishers were therefore faced with the problem whether to follow that decision or whether to adjust their returns to reflect the repeal of section 452. The Treasury Department has refused to recognize the holding of the Beacon case. And it has refused to grant publishers requesting formal permission to change to the deferral method of reporting prepaid subscriptions the right to do so. Many 1954 income tax returns are now being examined. Publishers which have relied upon the Beacon case and upon the promise of corrective legislation are being threatened with deficiencies and interest. Legislation is badly needed, effective with the Internal Revenue Code of 1954. All publishers must be placed on the same basis currently. Those which have been prepaying taxes on prepaid subscriptions must be permitted to catch up with those historically permitted to defer such income. This can all be accomplished simply by reenacting section 452 as respects payments received in advance for subscriptions to periodicals and newspayers to be delivered in the future. There should be no transition year problems. H. R. 3104 recognized none. There is no income escaping tax by permitting currently received prepaid subscriptions to be deferred. Tax has already been paid in prior years on prepaid subscriptions received then. Certainly they should not be taxed a second time. Tax on the prepaid subscriptions currently deferred will be paid in the future as it is earned. And uniformity of taxation will be available to all publishers. Since taxes on subscriptions previously received but currently earned had previously been paid in advance, there is actually no transitional year revenue loss. There is simply a long-overdue readjustment. And since it has been estimated that about 95 percent of all prepaid subscription income is reported on the deferred basis, any readjustment should be comparatively small. No one seriously questions the equity of removing the present tax discrimination between publishers. We respectfully ask that it be done soon, and that it be made retroactive to years previously governed by section 452. STATEMENT OF JAMES A. DEERING, REPRESENTING THE ASSOCIATION OF ADVANCED LIFE UNDERWRITERS Mr. Chairman and members of the Ways and Means Committee, my name is James A. Deering, and I am a general insurance broker. I am a member of the legislative committee of the Association of Advanced Life Underwriters, a national insurance trade organization. The subject of my testimony is the Jenkins-Keogh bill, which bill was introduced in January 1957 under two identical bills known as H. R. 9 and H. R. 10 by two distinguished members of your committee. I am aware that each member of this committee is fully cognizant of the contents of this bill. However, a brief summary of the Jenkins-Keogh bill may be in order at this juncture. The Jenkins-Keogh bill is designed to enable a self-employed person to purchase qualified retirement life insurance, endowment, or annuity policies, or to join a bank-trusteed plan in such a way that his premium or other charges may be deductible from gross income tax up to a maximum of $5,000 per annum, or 10 percent of self-employment income, whichever is lesser. The lifetime deduction is not to exceed $100,000 (or 20 times the annual limitation) except that where a person is between the ages of 50 and 70 an additional credit of 10 percent toward the $5,000 exclusion will be allowed. This latter special rule is intended to equate in some measure the fact that persons in the age categories mentioned have fewer years in which to accumulate a retirement fund than persons of lesser years. The purpose of this bill is not only to encourage thrift, but at the same time voluntary savings toward a retirement program by self-employed individuals, and to bring their retirement advantages in line with those enjoyed by employed individuals covered by qualified pension plans under sections 401 through 404 of the Internal Revenue Code of 1954 and previous codes. These purposes would be in keeping with the advances made under the compulsory Social Security Act. This act originally applied only to employed persons, but gradually and later was extended to include almost every category of self-employed persons. The definition of a self-employed person is the same under the Jenkins-Keogh bill as under the self-employment provisions of the Social Security Act. The Jenkins-Keogh bill would, in effect, make certain technical amendments to and substitute as section 217 of the present Internal Revenue Code, and draws upon other sections of the code dealing with qualified retirement plans for its pertinent definitions, and to the Social Security Act definitions for taxation of self-employed persons. The Association of Advanced Life Underwriters, in harmony with the American Bar Association, the American Medical Association, and many other similar groups of self-employed individuals, desire to go on record in favor of the Jenkins-Keogh bill (H. R. 9 and H. R. 10) as to its general aspects and aims. It is our view that all priority should be given to the passage of this bill at least as written, but that possibly two technical changes might be considered prior to its passage, as follows: First: That, rather than spelling out the $5,000 annual maximum exclusion as expounded above, which exclusion would tend to favor the thrift of younger over old investors, there be substituted a limitation as to the maximum retirement at age 65 which such persons might purchase, such, for instance, as $1,000 per month. Further, that as a consequence of this, the $100,000 lifetime limitation (or 20 times the maximum annual exclusion) be dropped as a corollary to this monthly retirement limitation. Second: That the bill be expanded to encompass those employed individuals not covered by regular qualified pension plans, or, if covered by a meager plan, that such employed individuals be permitted to purchase the difference between the monthly retirement limitations of this bill as proposed above and their present employed retirement plan, if any. Since employment opportunities are today frequently denied to persons upwards of 40 years of age for the reason that their inclusion in an employee pension plan would be excessively expensive, an extension of the Jenkins-Keogh bill to employed as well as self-employed individuals would undoubtedly be of inestimable help in alleviating such situations. Whether or not this bill results in a loss of revenue, which its proposers as well as this speaker doubt because of the additional investment funds which would flow toward the capital formation of this country's economy through the payment of contemplated premiums, in all fairness, self-employed persons should be accorded the same tax advantages and treatment which are now available to employed persons, and have been for quite a number of years. It has never personnally seemed to me to make any sense to say to a large group of taxpayers, we cannot afford to be equitable and fair in your case because it will cost the Government too much money. The latest available figures from the Institute of Life Insurance indicate that annual premiums or deposits paid toward qualified private employee retirement plans approximate $4.4 billion. Undoubtedly the vast majority of such premiums paid by the employer are deducted at the 52 percent corporate rate. Many such plans are completely gratis to the employee, and these deductible contributions are not in any way taxable to him during his working years. Other plans are partially paid for by the employee, but in most cases not over 50 percent, so that the employee is still entitled to a substantial tax break. This is not today available to self-employed persons. Should your committee deem that the passage of H. R. 9 and 10 would result in a loss of revenue, I would like to point out that the passage of this bill might easily take the pressure off employers not now supporting a retirement program from starting one, so that the revenues not lost from such prospective employer deductions would offset any revenue loss sustained from deductions under H. R. 9 and 10. The self-employed person, the small-business man, the man of initiative should not be discriminated against at this critical period in our economic and political history. A quotation from Herbert Spencer, chapter XI, paragraph 70, "Egoism versus Altruism," might well be in order at this point: "Any arrangements which in any considerable degree prevent superiority from profiting by the rewards of superiority or shield inferiority from the veil it entails-any arrangements which tend to make it as well to be inferior as to be superior are arrangements diametrically opposed to the progress of organization and the reaching of a higher life." The Association of Advanced Life Underwriters would like to thank the chairman and members of this committee for this opportunity to appear before you. THE AMERICAN NATIONAL THEATRE AND ACADEMY, Hon. WILBUR D. MILLS, House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: On behalf of the legitimate theater industry and the thousands of independent producers, writers, actors and other self-employed individuals in the industry, the American National Theatre and Academy urges that your committee give favorable consideration to the proposals contained in H. R. 9 and 10. These bills would correct a grave inequity now operating against the self-employed individuals of the living stage who are virtually deprived of an opportunity to put aside savings in an adequate pension or retirement program. The American National Theatre and Academy is a congressionally chartered organization which, according to the intent of its charter, serves all facets of the American theater-professional, community and educational. In short, our principal role is the encouragement of greater, and the perfection of the existing, theatrical productions in all fields. ANTA is thus vitally interested in any legislation which might aid the living stage and its participants. The members of this industry characteristically receive fluctuating incomes. Under the progressive income-tax rates, most of their profits are taxed away during the good years, and no effective judgment is made for the lean years. H. R. 9 and 10 would tend to alleviate the inequities incurred by those selfemployed individuals whose income is subject to severe and radical change. The bills deal with the fundamental problem of the individual entrepreneur in our industry, that of providing for his old age. The present high rates make it difficult for the self-employed person to purchase out of his funds, after taxes, sufficient retirement protection for his declining years. Many of those who have preferred to stay in business for themselves are forced into corporate employment in order to attain some measure of old-age protection. The artistic professions, such as writing, designing, acting, and dancing, which are essential to the cultural life of our Nation, suffer many disadvantages under the present tax system. I know that you are aware of these inequities and believe that in justice and fair play, the individual who is taxed on earned income should at least be able to set aside funds for his old-age. The American National Theatre and Academy warmly endorses the statements of the American Thrift Assembly and others who testified in support of these measures. We strongly recommend that this discrimination against the self-employed be eliminated and that they be granted equitable tax treatment with respect to contributions to qualified retirement programs. Respectfully yours, WILLARD SWIRE, 20675-58-pt. 2- 38 AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION, Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, New York, N. Y., January 24, 1958. House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: I have already written you in connection with hearings before your committee on tax revision with respect to depreciation. I ask that this letter also be made a part of the record of hearings to present the views of the American Newspaper Publishers Association on accrual of prepaid subscription income. When the Congress in 1955 repealed sections 452 and 462 of the Internal Revenue Code of 1954, it left a situation where some daily newspaper publishers are permitted to report and pay taxes on subscription income on the accrual basis but other publishers who had not adopted this method before 1938 are required to report and pay taxes on subscription income on the basis of receipts. Depending on the policy of the individual newspaper before 1938, publishers are not permitted to change their method of reporting subscription income. Newspapers are normally paid in advance for many copies to be issued and delivered at future dates. Under the accrual method of accounting the income from such subscriptions is spread over the period of the subscription to cover expenses of delivering the copies over the same period. The ANPA believes that action of the Congress in the form of the Internal Revenue Code of 1954 to bring tax accounting nearer to conformity with accepted business accounting principles was fundamentally sound and in the public interest. The ANPA believes that reporting and paying taxes on prepaid subscription income on accrual basis is fair and accurate and that all publishers ought to have the same privilege of reporting and paying taxes under this method. The ANPA hopes your committee will take action to restore language similar to that carried in the original section 452 of the Internal Revenue Code of 1954 to recognize the fairness of accrual of prepaid subscription income. With high esteem. Sincerely yours, CRANSTON WILLIAMS, General Manager. WASHINGTON, D. C., January 6, 1958. Hon. WILBUR MILLS, Ways and Means Committee, House of Representatives, Washington, D. C. DEAR CONGRESSMAN: As Washington counsel for the Mobile Homes Manufacturers Association (MHMA), a trade association of house trailer manufacturers, I am submitting the following statement in support of H. R. 9481, to amend the Internal Revenue Code of 1954 so as to provide accounting procedures whereby dealers in personal property may exclude from gross income amounts withheld by banks and finance companies on notes purchased from such dealers employing the accrual method of accounting. It is a simple matter which H. R. 9481 seeks to correct. An accrual method vendor sells a mobile home under a time sales contract; the vendee's note which includes a finance charge is sold by the dealer to a bank or finance company; the bank or finance company pays or makes available to the dealer a sum below the face amount of the note; the difference between the bank's payment to the dealer for the note and the face amount of the note (which includes the finance charge) may, in whole or in part, be paid or credited to the dealer if certain eventualities occur. In Blaine Johnson v. Commissioner, the Tax Court of the United States (25 T. C. 123 (1955)) held that in the circumstances described above, the taxpayer had to include as gross income the full proceeds of the sale, although Johnson did not get the full proceeds. On appeal, the United States Court of Appeals (233 F. (2d) 952 (4th Circuit, 1956)) reversed the Tax Court, holding: "Until the right to an amount becomes accruable through fixation of the right to receive, the taxpayer is under no obligation to return it as income. Otherwise, he would be required to pay a tax on income which he might never have a right to receive." The Department of Justice decided not to petition the Supreme Court of the United States for a writ of certiorari in the Johnson case, as a result of which the decision is binding in the fourth circuit. But the Internal Revenue Service, although compelled to recognize the "right to receive" doctrine in that circuit, has not followed it elsewhere. In fact, by Revenue Ruling 57-2 the Service restated its position that notwithstanding the court of appeals decision in Johnson, it proposes to continue to hold that in the case of a dealer employing the accrual method of accounting, credits in the hand of a bank or finance company constitute income to the dealer at the time such credits are made. It is readily apparent to the committee that this leaves a large class of taxpayers-dealers in personal property who sell on credit and assign the note to a finance company-in an intolerable position. Unless they are in the fourth circuit, they are confronted with a confused picture. In some circuits other cases are pending in the Tax Court; in other circuits, cases are pending in the courts of appeals; and to add to the confusion, the Supreme Court of the United States has not spoken on this question, although an opportunity was presented to the Government to seek a review by that Court. As I have stated earlier, this is a matter which Congress can settle easily. It should not be left to the accident of geography, to the ability of dealers to finance litigation in every circuit, or to the whim of the Government as to whether to seek a review by the highest court. Here is an opportunity for Congress to eliminate expensive and confusing litigation by announcing clearly and simply what the law is on the subject. H. R. 9481 does just that. Under that bill, the amount withheld by the finance company from the dealer is excluded from the dealer's gross income for the taxable year in which the note is sold to the finance company; in any taxable year that any portion of such withheld amounts are paid or credited to the dealer, then the dealer must include in his gross income all amounts paid or credited to him in that taxable year. The MHMA strongly urges your favorable action on H. R. 9481. Yours very sincerely, SCOTT W. LUCAS. STATEMENT OF JOSEPH F. McGowan, CONTROLLER, Cerro de Pasco CORP., IN SUPPORT OF PROPOSED AMENDMENT OF THE INTERNAL REVENUE CODE OF 1954 RELATING TO PURCHASED GOODWILL AND OTHER INTANGIBLES My name is Joseph F. McGowan. I reside at 4 Peter Cooper Road, New York City. I am controller of Cerro de Pasco Corp., a New York corporation, which has its principal office at 300 Park Avenue, New York City. Prior to my appointment to the position of controller, I was supervisor, tax administration of that corporation, and at one time I was chief auditor for Sheffield Farms Co. Cerro de Pasco Corp. has approximately 4,200 stockholders. The corporation and its subsidiaries constitute a medium size nonferrous metals business. A wholly owned subsidiary produces lead, zinc, copper, silver, gold, bismuth, and other metals and concentrates in Peru and another subsidiary manufactures copper and brass tube, pipe, and rod at East St. Louis. The Cerro de Pasco enterprises include other operations and activities, but those I have mentioned are the principal ones. At the end of November 1957, Cerro de Pasco Corp. and its wholly owned subsidiaries had total assets of $203,448,529.80 and the gross sales for the 11 months then ended were $112,639,370. In addition to the foregoing, Circle Wire & Cable Corp.,' another wholly owned subsidiary, has plants at Maspeth and Hicksville on Long Island, N. Y., which produce hot rolled copper rod, galvanized strip steel, bare copper wire and cable, and more than 100 wire and cable products. It is about the experience of this subsidiary, which I shall hereafter refer to as "Circle," that my statement is concerned as we believe it affords an illustration of a type of problem that is of universal interest to taxpayers generally. I. AMENDMENT ADVOCATED We favor an amendment of the Internal Revenue Code of 1954, retroactively to the year 1954, to permit purchased goodwill, trademarks, trade names, secret processes and formulas, and other like intangibles, at the election of the 1 Organized in November 1955 under Delaware law. |