at the election of the taxpayer, be treated as deferred expenses which are allowed as deductions ratably over a period of not less than 60 months.

The congressional committee reports explain the purposes of these changes, which are summarized below:

1. Research expenditures which were capital in nature were not amortizable where a useful life could not be definitely determined. Deduction could be obtained only when the project was abandoned.

2. Elimination of uncertainty and encourage research and experimentation.

3. Corporate organization expenditures were amortizable only when useful life was determinable by a limited term of existence specified in the charter. Deduction was allowed only in the year of liquidation.

4. Allowance of corporate organization costs would conform tax and general business accounting thereof.

A further step in the direction of permitting amortization of intangibles whose useful lives are not definitely determinable was taken by the enactment of section 177 of the code of 1956 (Public Law 629, 84th Cong., 2d sess.). Under this provision expenses incurred in the acquisition, protection, expansion, etc., of trademarks and trade names are amortizable by the election of taxpayers over a period of not less than 60 months. The provision is not applicable, however, to purchased trademarks or trade names or those acquired in connection with the purchase of a business.

Recognition has thereby been accorded to numerous factors which are equally applicable to tax amortization of the intangibles discussed herein:

1. Where useful life is not readily determinable it is manifestly unfair to allow no current deduction against current revenues.

2. Uncertainty as to allocable amount between tangibles and intangibles in lump-sum purchases would be eliminated if both categories were tax deductible.

3. Expansion, economic growth, stability, and continuity of business enterprises would be encouraged.

4. Would contribute to conforming tax accounting with general business accounting.

To disallow a tax deduction for amortization of purchased intangibles in the light of these new sections is discriminatory and inequitable in view of the similarity of circumstances. It is likewise inequitable that two businesses be taxed differently depending whether goodwill, etc., is acquired by purchase or by annual outlays for advertising, research, etc.

Capital outlay for land is not recoverable through depreciation but its existence is permanent while under existing law, the highly perishable intangibles discussed herein may not be written off until 100 percent proof of their disappearance is obtainable. Even in the case of land, the taxpayer has an opportunity of matching its cost with revenues by sale and lease-back and deducting the annual lease expense.

CONCLUSION

The Internal Revenue Code of 1954 should be amended 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 taxpayer, to be treated as a deferred expense and deducted ratably over a period of not less than 60 months.

STATEMENT ON BEHALF OF THE CHICAGO & NORTH WESTERN RAILWAY CO. WITH RESPECT TO AMENDMENT OF SECTION 723 OF THE INTERNAL REVENUE CODE OF 1939

This statement is presented to the Committee on Ways and Means on behalf of the Chicago & North Western Railway Co.

The company urges the committee to include in its proposed revenue revision the provisions of H. R. 346, a copy of which is attached as exhibit A. This bill, introduced by Representative Noah Mason in the first session of this Congress, would amend section 723 of the Internal Revenue Code of 1939, dealing with World War II excess profits taxes. Its purpose is to confirm the congressional intent clearly expressed at the time of enactment of section 113 (a) (20) of the 1939 code, relating to basis in railroad reorganizations.

Section 113 (a) (20), which was added by section 142 (b) of the Revenue Act of 1942, provides as follows:

"If the property of a railroad corporation, as defined in section 77m of the National Bankrupty Act, as amended, was acquired after December 31, 1938, in pursuance of an order of the court having jurisdiction of such corporation— (A) in a receivership proceeding, or

(B) in a proceeding under section 77 of the National Bankruptcy Act, as amended, * organized or made use of to effectuate a plan or reorganization approved by the court in such proceeding, the basis shall be the same as it would be in the hands of the railroad corporation whose property was so acquired. * * *”

and the acquiring corporation is a railroad corporation

This provision was added to the 1942 bill by the Senate Finance Committee. The report of that committe stated that the basis determined under section 113 (a) (20) "shall be utilized for invested capital computations as well as for the computations affecting income." 1

The report further stated:

"As a result of this amendment, the basis of property will be the same whether the reorganization resulted in the continuation of the old corporate entity or the creation of a new corporate entity."

In spite of this clearly expressed congressional purpose, the Treasury-reversing its earlier stand-has taken the position that where a railroad reorganization was consummated by using the old corporate entity instead of by forming a new corporation, the "property paid in" for the new stock is not the railroad property retransferred to the corporation by the trustee in bankruptcy, but is the old bonds turned in for the new stock. Under this view, the basis of the corporate assets is not relevant to the determination of equity invested capital, and the congressional intent that such basis "shall be utilized for invested capital computations" is disregarded.

The only railroad affected by the Treasury's present interpretation is the Chicago & North Western. The purpose of H. R. 346 is to insure that this railroad will be treated exactly like all other reorganized railroads and given the relief which section 113 (a) (20) was clearly designed to confer.

The provisions of this bill have previously been approved by this committee.' They have twice been unanimously reported with approval by the Senate Finance Committee, which concluded that the amendment would carry out the original congressional purpase. They have twice been adopted on the floor of the Senate. The bill is not designed to provide retroactive relief but, as the Senate Finance Committee found, serves only to insure that the original purpose of section 113 (a) (20) will prevail.

The company believes that the Treasury's present view is clearly improper under the 1939 code, and that the proposed legislation would therefore result in no loss of revenue. It urges this committee to adopt a clarifying amendment, however, to remove the threat of a disadvantageous tax treatment to which no other recorganized railroad is subject and which Congress manifestly did not intend.

EXHIBIT A

[H. R. 346, 85th Cong., 1st sess.]

A BILL TO amend section 723 of the Internal Revenue Code

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 723 of the Internal Revenue Code of 1939 (relating to equity invested capital in special cases) is hereby amended by adding at the end thereof the following new subsection:

"(c) If a recapitalization of a railroad corporation, as defined in section 77m of the National Bankruptcy Act, as amended, was effected after December 31,

* See remarks of Representative Reed, 102 Cong. Rec. 10505.

H. R.

4 S. Rept. No. 2038, 83d Cong., 2d sess.; S. Rept. No. 1404, 84th Cong., 2d sess. 6440, reported by S. Rept. No. 2038, never reached a vote on the floor of the Senate. In the case of H. R. 7247, reported by S. Rept. No. 1404, the relevant provision was passed by the Senate but, at the suggestion of the sponsors, who did not wish to jeopardize the passage of other provisions of H. R. 7247, the Senate receded from this amendment at the committee of confrence on the bill. The conferees from both Houses expressed their understanding that the action was taken without prejudice as to the merits of the provision. H. Rept. No. 2252, 84th Cong., 2d sess., p. 3.

5101

Congressional Record 12303-12304 (amendment subsequently withdrawn in response to parliamentary objection); 102 Congressional Record 1890 (amendment receded from at committee of conference).

1938, in pursuance of an order of the court having jurisdiction of such corporation

"(1) in a receivership proceeding; or

"(2) in a proceeding under section 77 of the National Bankruptcy Act, as amended,

the equity invested capital of such corporation shall (at the election of the taxpayer) be the same as if the assets had been acquired in a transaction to which section 760 is applicable."

SEC. 2. This amendment shall be effective for taxable years beginning after December 31, 1941.

NEWMAN & BISCO, New York, January 3, 1958.

CLERK OF THE COMMITTEE ON WAYS AND MEANS, New House Building, Washington, D. C. DEAR SIR: In connection with the forthcoming hearing on proposed amendments to the Revenue Code of 1954, I am pleased to submit for the consideration of the committee a statement as to the purpose, effect, and background of H. R. 876, which was introduced by Representative Philbin on January 3, 1957, and referred to the Ways and Means Committee.

I believe this bill to be a worthy one and would appreciate an opportunity to be heard at the forthcoming hearing.

Very truly yours,

JOHN E. HIGGISTON, Jr.

STATEMENT AS TO THE PURPOSE, EFFECT and Background of H. R. 876

H. R. 876 seeks to make the remedial provision of section 2104 (a) of the 1954 code retroactive to January 1, 1954.

Section 2104 (a) of the 1954 code, dealing with estate taxes, reads as follows: "For the purposes of this subchapter shares of stock owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation."

H. R. 876 would amend this by adding the following:

"This subsection shall apply to estates of all decedents dying after December 31, 1953." (Note: December 31, 1953, was erroneously printed as December 21, 1953, in the bill as originally printed.)

BACKGROUND OF THE BILL

Section 2104 of the 1954 code changed the previously existing law to provide, in effect, that stocks of corporations organized outside the United States which were owned by nonresident alien decedents were to be regarded as property outside the United States for Federal estate-tax purposes even though the stock certificates representing these shares were actually physically situate in the United States at the time of the decedent's death. The stated reason for the change was to bring the existing statute into line with existing tax treaties that the United States had with most of the countries of the world. For the most part, the old law applied to and discriminated against nationals of friendly Pan American and South American countries with whom the United States had no tax treaties while nationals of the principal European and Asiatic countries were exempt from its application by reason of tax treaties with those countries. A further reason for the change was to encourage the nationals of foreign countries to use facilities of our United States banks and trust companies for the safekeeping of their securities and thus encourage foreign commerce.

UNDERLYING REASONS FOR H. R. 876

H. R. 876 seeks to avoid a particularly harsh, oppressive and unfair application of the old law arising out of the following facts:

On Friday, April 30, 1954, a national of a friendly Pan American country cabled his New York brokers from his home abroad and directed them to sell all of his stocks in foreign corporations and to deposit the proceeds of the sale in an account which he maintained with a New York bank. As Saturday, May 1, was not a trading day the cable was not acted upon until the following Monday, May 3, during the course of which the securities were sold by the broker and the sale confirmed to the owner by mail. On the evening of that day, after

the close of business and after the broker had written to the owner confirming the sale, the owner died. Because of the customary time interval between the sale, delivery of the securities and payment of the purchase price, the proceeds of the sale of the securities were not received and deposited in the decedent's account until a few days after the date of his death. As a result, in the course of the audit of the Federal estate-tax return for the decedent's estate the representatives of the Treasury Department took the position that the decedent still owned these securities and that the certificates were physically present in the United States with the broker, and their value was subjected to Federal estate tax in the decedent's estate.

The harsh, discriminatory, and unfair nature of this result becomes immediately apparent when the following factors are considered:

(1) Had the decedent here, instead of being a national of one of our friendly Pan American countries, been a national and resident of any number of European or Asiatic countries such as the United Kingdom, France, Finland, Greece, Ireland, Norway, the Union of South Africa, or Australia, no such technical contention would be available for the reason that our existing tax conventions with those countries all provide that shares of stock of corporations shall be deemed to be situated in the country in which the corporation was created or organized. Even the recent tax convention with our war enemy Japan contains a like provision as to Japanese nationals.

(2) Had the provision of section 2104 (a) been made effective as of the 1st day of January 1954, as were most of the other provisions of the 1954 code, no such technical contention would be available since section 2104 (a) also provides that stocks of foreign corporations shall not be deemed property within the United States for Federal estate-tax purposes.

(3) Had not the weekend intervened and had the actual delivery of the securities and payment of the proceeds into the decedent's bank account been made prior to his death instead of a day or two after his death, the technical contention that the shares were subject to tax in the decedent's estate could likewise not have been made since under another provision of the law moneys on deposit with banking institutions are also deemed not to be property within the United States for purposes of Federal estate tax.

The result, therefore, that because this decedent was a national of one of our American countries with whom the United States has not entered into any tax convention his heirs have been deprived of a very substantial portion of their inheritance purely on technical grounds. Administrative relief is not available and their sole recourse is legislative relief or resort to lengthy and expensive judicial proceedings, the result of which can be at best problematical.

BRIEF STATEMENT IN SUPPORT OF H. R. 876

It is respectfully submitted that the bill is entitled to favorable consideration for the following reasons:

(1) The very sound and compelling reasons which resulted in section 2104 (a) becoming a part of the 1954 code were in existence during the entire calendar year. If it were sound to change the existing law in the first place, as it clearly was, there were equally sound reasons for making the change effective for the entire calendar year 1954 as were other major provisions of the code dealing with income and estate taxes.

(2) The usual practical objections to making remedial tax legislation retroactive had and have no application here for the simple reason that the rule changed by section 2104 (a) was not a rule of general application in the first place. It might properly be termed a rule of judicial legislation which originated in 1933 with the decision of Burnet v. Brooks (288 U. S. 378). Subseqquently, and as a result of tax treaties with most of the major countries of the world, the rule was abrogated as to the nationals of such countries, with the result that at the time of the enactment of section 2104 (a) the old rule was a rule of limited application and, as indicated above, largely discriminatory in its nature since the nationals of friendly Pan American and South American nations were probably the principal taxpayers to whom it applied.

(3) The United States has expended decades of time and effort and millions of dollars in cultivating friendly relations with our pan-American neighbors. The good neighbor has been a part of our policy for years and recently our Vice President completed an extensive good-will tour of those countries. The enactment of H. R. 876 would be in furtherance of that policy, a substitute of action for words, by affording to the nationals of those countries the same relief as is

afforded to the nationals of nearly all of the major European and Asiatic countries.

(4) The fundamental conceptions of justice which are embodied in the dueprocess clauses of our Constitution are for the protection of the life, liberty, and property of all persons- citizens and aliens alike. They preclude legislation which is arbitrary and discriminatory in its application. The very fact that Congress has seen fit to abrogate the rule of Burnet v. Brooks, through tax treaties with most of the major countries of the world, thus leaving the old rule applicable to a few countries with whom we have no tax treaties, raises grave constitutional questions as to the validity and effectiveness of the old rule as applied to the nationals of such countries. Some substance is added to this view by the very fact that Congress has seen fit in the 1954 code to abrogate the rule of Burnet v. Brooks as to nationals of all countries, irrespective of tax treaties. The enactment of H. R. 876 would, therefore, serve the dual purpose of not only doing justice and equity in a particular case but also of avoiding needless and expensive litigation to resolve this issue.

(5) H. R. 876 is essentially noncontroversial and nonpartisan in nature. In seeking to make section 2104 (a) retroactive to January 1, 1954, it very probably effects no different result than would have obtained at the time the 1954 code was considered if the particular problem presented here had been brought to the attention of and received the consideration of Congress at that time.

STATEMENT OF INDEPENDENT NATURAL GAS ASSOCIATION OF AMERICA
WASHINGTON, D. C.

SECTION 6072 (B)—RETURNS OF CORPORATIONS

There are many elections in the Internal Revenue Code of 1954 to be exercised by taxpayers. There are also many provisions contained therein which are to be made effective under regulations prescribed by the Secretary of the Treasury. Because of the tremendous amount of work required in the preparation of regulations under the Internal Revenue Code of 1954, it has not been possible for the Internal Revenue Service to complete its studies and reviews and the issuance of many final regulations prior to the time that taxpayers must file their original income tax returns. In some cases, regulations issued provide that an amended return may be filed within 90 days after regulations have been filed and the taxpayer is then given the option of amending or changing his election based on this amended return.

Present administrative procedure of the Internal Revenue Service, however, provides that an amended tax return need not be considered in determining the liability of a taxpayer for the taxable year. This procedure sometimes results in undue hardship on the part of the taxpayer and makes for complications in administering the closing of income tax returns.

It appears that the most effective method of remedying this situation would be a statutory amendment providing that returns amended solely to the extent required in exercise of the election should be accepted in lieu of the return previously filed. We suggest that section 6072 (b) of the Internal Revenue Code of 1954 be amended as follows:

"SEC. 6072 (b). RETURNS OF CORPORATIONS. Returns of corporations under section 6012 made on the basis of the calendar year shall be filed on or before the 15th day of March following the close of the calendar year, and such returns made on the basis of a fiscal year shall be filed on or before the 15th day of the third month following the close of the fiscal year. An amended return, which is timely filed pursuant to provisions of the Internal Revenue Code of 1954, or regulations issued thereunder, amended solely to the extent required in the exercise of the election, will be considered and treated as the return of the taxpayer for the period for which filed, and any return or returns previously filed for the same period will be treated as tentative returns or estimates, and payments made by the taxpayer before the filing of the amended return in excess of the amount shown on the said amended return will be refunded in accordance with the provisions of section 6402 (a), I. R. C. of 1954. [Suggested changes in italic.]