This amendment would permit deductions for casualty losses to stand alone under section 165 as intended.

SECTION 172-NET OPERATING LOSS DEDUCTION

Under this section taxpayers are permitted a net operating loss carryover to 5 successive taxable years. Section 7701 (a) (23) defines taxable year to include, inter alia, a fractional part of a year. Thus, a taxpayer which has been filing separate returns is required to file a separate return for a fractional part of a year prior to its inclusion in a consolidated return where the taxpayer became a member of the affiliated group in the middle of its taxable year (determined without affiliation). (See Consolidated Regulations, section 1.1502-13 (g).) The taxpayer in this situation would be permitted a carryover to only 4 calendar years. This is inequitable when compared with a taxpayer each of whose taxable years contains 12 months. The later taxpayer would have 5 calendar years to carry over a net operating loss.

Section 172 should make it clear that the term "taxable year" refers to either 5 calendar or 5 fiscal years of 12 months each to which the taxpayer is entitled to carry over its net operating loss.

The committee reports on this section 172 refer to 5-year carryovers and not to carryovers to 5 taxable years.

SECTION 243-DIVIDENDS RECEIVED BY CORPORATIONS

Section 243 of the Internal Revenue Code continues to tax 15 percent of the dividends received by one corporation from another domestic corporation. Historically, payments of intercorporate dividends have been treated for Federal income tax purposes as nontaxable transfers of funds from one corporation to another. Prior to the Revenue Act of 1936, a corporation receiving dividends incurred no tax thereon. Full recognition was given to the principle that a corporate tax had already been paid upon the earnings distributed as dividends. The Revenue Act of 1936 subjected 15 percent of intercorporate dividends to tax. In 1936, with a corporate income tax rate of only 15 percent, the effective tax rate on intercompany dividends was only 2.25 percent. Under the present 52 percent tax rate, the effective rate on intercompany dividends is 7.8 percent. Thus, the burden of this economically unsound tax has become much heavier than when first imposed.

The only asserted reasons and possible justification for taxing intercorporate dividends have long since disappeared. In a message to Congress by the President of the United States dated June 19, 1935, the President recommended the substitution of a corporate income tax graduated according to the size of corporation income in place of the then uniform rate of 134 percent. The President supplemented this recommendation with the following:

"Provision should, of course, be made to prevent evasion of such graduated tax on corporate incomes through the device of numerous subsidiaries or affiliates, each of which might technically qualify as a small concern even though all were in fact operated as a single organization. The most effective method of preventing such evasions would be a tax on dividends received by corporations."

Corporate tax on an extensive graduated scale has long since been discarded. Today, tax avoidance under the present division of the corporate tax rate into normal tax and surtax is largely prevented by other provisions of law. Thus the penal motivation of this tax has been removed and, therefore, the tax itself should also be removed.

The burden of the tax is particularly onerous upon a public utility system. Legal and operating considerations, State laws, requirements of corporate charters and franchises, operation of the regulatory process and the like contribute to the necessity of separate corporations as a fully integrated and closely affiliated utility system operating in several States. The considerations named may prevent the creating by merger of a single corporation. The same considerations, plus the stock ownership requirements of section 1504, may prevent the filing of a consolidated return.

The chain of taxation may be shown thus:

Corporation S with a net income before tax of $1,000,000 pays a tax of $520,000 S disburses its remaining net income in dividends to corporation P, the latter paying thereon a tax of 7.8 percent-

37, 440

557, 440

The income has been taxed at 55.7 percent and, of course, the effective rate increases progressively if the corporate chain is longer. Moreover, when the income passes to the parent corporation's stockholders there is a further imposition of normal tax and surtax at high rates. The inclusion of a penalty tax in this chain of taxation is wholly without justification.

The inequity should be corrected by allowing a deduction for dividends received of 90 percent for 1957, 95 percent for 1958, and 100 percent for 1959 and subsequent years.

SECTION 248—ORGANIZATIONAL EXPENDITURES, CAPTITAL STOCK ISSUANCE EXPENSE, REORGANIZATION EXPENSE

Section 248 of the Internal Revenue Code provides that certain organizational expenditures of a corporation may, at its election, be treated as deferred expenses and amortized over not less than the first 5 years of the corporation's existence. However, this provision does not permit the deduction of expenses incident to the issuance of capital stock such as Securities and Exchange Commission filing fees; State corporate filing fees; State regulatory filing fees; Federal taxes; legal, engineering, and accounting services; investment counsel fees; transfer agent and registrar fees; printing; engraving; advertising; and other expenses in connection with issuance of capital stock.

Large amounts of new money are required continually in the development and expansion of the utility industry. The recurring issuance of stock is thus a regular part of the utility business, and expenses associated therewith are just as much an ordinary and necessary expense as any other operating expense. It is equitable, therefore, that these expenses should be permitted as a deduction in the determination of net income when they are such an integral part of the year-by-year operations of most utility companies.

Section 248 also denies a deduction for expenses incident to the reorganization of a corporation. It would appear that reorganization expenses fall into the same general category as organization expenses, and little reason is perceived for treating them differently. It appears equitable, therefore, that reorganization expenses should be permitted as a deduction in the same manner as organization expenses.

The code should be changed to permit an election to deduct currently or to amortize all of the expenses of issuing capital stock, all expenses incurred in organizing a corporation, and all expenses incident to a reorganization.

SECTION 368 (A) (1) (B)—ACQUISITION OF STOCK FOR STOCK

Section 368 (a) (1) (B) defines a form of reorganization where one corporation acquires control of another corporation in exchange for stock, and section 368 (a) (1) (C) defines a form of reorganization where one corporation acquires substantially all the properties of another corporation in exchange for stock. In the case of Hubert E. Howard, et al. v. Commissioner ((CA-7, 238 Fed. (2d) 943), where the acquiring corporation exchanged voting stock for more than 80 percent of the stock of the other corporation and paid cash for the remaining stock, it was held that there was no reorganization.

In Helvering v. Southwest Consolidated Corporation (315 U. S. 194), where a corporation exchanged voting stock for substantially all the properties of another corporation and paid cash for the remaining property, it was held that there was no reorganization. To correct this inequity, subsection 368 (a) (2) (B) was added to the 1954 code so that under the present law if a corporation acquires 80 percent of the fair market value of the assets of another corporation in exchange for stock and pays cash for the remaining assets, the exchange constitutes a reorganization.

A similar subsection should be added to the 1954 code to cover the inequity involved in the exchange of stock for stock situation reflected in the Hubert E. Howard case. This amendment could be made by inserting a new paragraph as section 368 (a) (2) (B) after section 368 (a) (2) (A) and changing paragraphs (2) (B) and (2) (C) to (2) (C) and (2) (D), the new paragraph to read as follows:

"(B) Additional consideration in central paragraph (1) (B) cases. "If

"(i) one corporation acquires stock of another corporation in exchange for stock,

"(ii) the acquisition would qualify under paragraph (1) (B) but for the fact that the acquiring corporation exchanges money or other property in addition to voting stock, and

"(iii) the acquiring corporation acquires at least 80 percent of the voting stock and at least 80 percent of the total number of shares of all other classes of stock of another corporation in exchange for voting stock described in paragraph (1) (B) and acquires for money additional stock of the other corporation.

"then such acquisition of stock for stock shall be treated as qualifying under paragraph (1) (B).”

SECTION 1552-EARNINGS AND PROFITS

Section 1552 of the 1954 Internal Revenue Code sets forth three specific methods of allocating consolidated tax liabilities for the purpose of computing earnings and profits of each member of the affiliated group. In addition thereto, subsection (a) (4) provides for the allocation of such tax liability by any other method selected by the group with the approval of the Secretary or his delegate. The Securities and Exchange Commission in rule U-45 (b) (6) permits an allocation of consolidated tax under either subsection (a) (1) or (a) (2) but imposes the limitation that the tax allocated to any subsidiary company shall not exceed the amount of tax that would have been payable by such subsidiary if it had filed a separate tax return. The rule provides that any excess taxes that might otherwise be allocated to a particular subsidiary shall be apportioned among the other members of the affiliated group, including the parent company, in proportion to each member's tax savings by reason of the consolidation.

Several public utility systems filing consolidated tax returns for 1954 requested the approval of the Commissioner of Internal Revenue under subsection (a) (4) for an allocation of consolidated tax liabilities under SEC rule U-45 (b) (6). The Commissioner granted approval of such method of allocation subject to the condition that the limitation with respect to the tax allocated to each subsidiary shall be based upon the tax of such member computed as if a separate return had been filed by such member for the current taxable year, without regard to net operating losses sustained by such member in prior or subsequent taxable years. Thus, a conflict exists in the method of allocation approved by the Commissioner and SEC rule U-45 (b) (6).

In order to avoid this conflict the code should be amended to provide an election to allocate consolidated tax liabilities under SEC rule U-45 (b) (6).

APPENDIX

BULE U-45-LOANS, EXTENSIONS OF CREDIT, DONATIONS AND CAPITAL CONTRIBUTIONS TO ASSOCIATE COMPANIES

"(a) GENERAL PROVISION-No registered holding company or subsidiary company shall, directly or indirectly, lend or in any manner extend its credit to nor indemnify, nor make any donation or capital contribution to, any company in the same holding-company system, except pursuant to a declaration notifying the Commission of the proposed transaction, which has become effective in accordance with the procedure specified in rule U-23, and pursuant to the order of the Commission with respect to such declaration under the applicable provisions of the Act.

"(b) EXCEPTIONS-The following transactions shall be exempt from the declaration requirements of this rule:

"(6) A loan or extension of credit or an agreement of indemnity arising out of a consolidated tax return filed by a holding company (or other parent company) and its subsidiaries; Provided: That the consolidated tax liability of the companies joining in such consolidated tax return shall be allocated among the members of the group in accord with either of the methods of allocation prescribed by subparagraphs (a) (1) and (a) (2) of Section 1552 of the Internal Revenue Code of 1954; and Further Provided:

"(i) That the tax allocated to each subsidiary company shall not exceed the amount of tax of such company based upon a separate return computed as if such company had always filed its tax returns on a separate return basis; and

"(ii) That any excess of liability over a separate return tax which would be allocated to a subsidiary company but for clause (1) above shall be apportioned among the other members of the group, including the holding company (or other parent company), in direct proportion to the reduction in tax liability resulting to such members as measured

by the difference between their tax liabilities computed on a separate return basis and their allocated portion of the consolidated tax liability."

SECTION 4253 (F)-THE 10 PERCENT FEDERAL EXCISE TAX ON LEASED MOBILE RADIO EQUIPMENT

The majority of public utilities operate mobile radio communications systems on their properties to facilitate their operations. Some of these systems are owned by the public utilities while other systems use equipment leased from the telephone companies.

In order for a public utility to operate a radio communication system, whether leased or self-owned, it must first receive licenses for land stations and mobile units from the Federal Communications Commission, together with authorized and assigned radio frequencies. While the local telephone company installs the necessary radio communication equipment under a rental contract and makes required repairs, the typical system is, in fact, operated by the public utility whose personnel must be licensed by the FCC. Under conditions imposed by the FCC, the public utility, so licensed, can only use the radio communication system in the conduct of its utility business. Radio channels assigned to public utilities by the FCC are not open to general public, or nonbusiness conversation.

The primary use and purpose of the system, as applied to public utilities, is to make prompt repair to the facilities used in the service to the public, particularly restoration of service during emergencies, such as wind or sleet storms, when normal wire communication facilities are inoperative.

The mobile radio service is likewise of daily value to the public, in speeding up service calls, facilitating prompt responses to gas leak reports, and preserving continuity of electric service. With the expanded use of electricity a household can be without light, heat, and cooking facilities if electric service is disrupted. The continuity of service is even more important in rural areas, which have become increasingly dependent upon electric energy for automatic heating, incubators, milkers, and other electrified farm uses.

Prior to April 1, 1954, the public utility was required to pay a 25 percent tax on the installation and monthly rental charges in cases where the mobile radio communications system was leased from a telephone company. The Treasury Department ruled that the phrase "talking circuit special service" which originally apeared in the Revenue Act of 1918 included mobile radio communications systems which were not known in 1918. The excise tax rate was reduced to 10 percent as of April 1, 1954. In June 1954, the Internal Revenue Service ruled that a 'private mobile telephone system' does not constitute a communication service or facility in respect of which the tax on amounts paid for 'leased wire, telewriter, or talking circuit special service' imposed by section 3465 (a) (2) (A) of the code applies."

In September 1957, the Internal Revenue Service revoked the ruling issued in June 1954 and ordered the telephone companies to have the tax collecting procedures reinstituted.

Common carriers, telephone, telegraph and broadcasting networks have been exempted from this excise tax where such equipment has been leased and used in the conduct of its business as such. This exemption has been granted to common carriers and other organizations due to the fact that they have peculiar vital operational needs with respect to communications. The public utilities similarly have vital operational needs with respect to communications. For this reason the exemption should be applied to public utilities along with the others now enumerated in section 4253 (f) of the 1954 code, since the use of such radio communication by public utilities in the restoration of essential utility services and elimination of danger, is distinctly in the public interest.

PROPOSED AMENDMENT

It i sproposed that section 4253 (f) of the Internal Revenue Code of 1954 be amended to read as follows:

"No tax shall be imposed under section 4251 on the amount paid for so much of the service described in sections 4252 (d) and (e) as is utilized in the conduct by a common carrier, or a gas or electric utility or a telephone or telegraph company or radio broadcasting station or network, of its business as such." [The added words are italicized.]

SECTION 14 OF H. R. 8381

This section deals with improvements to leased property. It is unnecessary, unworkable, and vague; and we urge that it be eliminated.

The useful economic life to a lessee of the improvements to leased property is of course not greater than the length of time he expects his lease to continue. A series of court decisions has established that this period is ordinarily limited to the original term of a lease without regard to lessee's option to extend it. It has been suggested that a lessee can distort taxable income by renting property for a short term with an option to renew for a long period, improving the property immediately, and writing the improvements off over the short term. Section 14 is intended to prevent this and to prevent leases between related interests from fixing useful life.

No legislation is needed. The postulated situation is quite unrealistic and the courts have always supported the Internal Revenue Service in the doctrine that when "things are not what they seem" taxes should be levied on what they are rather than on what they seem to be. Furthermore the Internal Revenue Service has already (Revenue Ruling 57-361) that, under present law, leases between related parties don't fix useful life. The proposed section therefore is not needed; it is also unworkable because it seeks to determine taxable income from a state of mind and to require taxpayers generally to shoulder a burden of proving a negative fact.

Furthermore, the proposal is vague and confuses the application of other sections. It is vague as to leases with two or more renewal options, as to renewal options at changed rent or rent to be fixed later, as to the burden of proof on when the probability of renewal changes. It confuses the application of sections 167 and 1231, in some cases of chapter 12 and other chapters.

For all these reasons we urge that section 14 of H. R. 8381 not be enacted.

STATEMENT OF GEORGE R. LESAUVAGE ON BEHALF OF THE NATIONAL RESTAURANT ASSOCIATION

I am George R. LeSauvage, chairman of the government affairs committee of the National Restaurant Association, in which capacity I have served for the past 25 years.

Our association represents 70,000 establishments directly, in addition to 65 State and local restaurant associations which have authorized us to represent them in national matters. Therefore, I am appearing on behalf of 190,000 restaurants which do about 80 percent of the total dollar volume of restaurant business. This group includes every conceivable type of food service: table service, counter service, cafeteria, drive-in, in-plant food service, department stores, variety stores, drugstores, food facilities in national parks, just to name a few. Of this group, 90,000 are small business establishments consisting of single restaurants doing an annual dollar volume of business less than $100,000 a year. As an association, our first interest is for the welfare, prosperity, and security of our country. We understand that sacrifices are necessary to preserve our security and we are willing to do our share. In meetings of our group, the burden of taxes is a vital question. Because of the tax structure many of our small operators are unable to make necessary improvements. They likewise find the time consumed in various record keeping, filling out reports to an increased burden and expense.

We hope that even though your committee is faced with a tremendous task, it will find within its power to provide relief on many of the tax problems now seriously confronting our industry.

The tax problems giving us the greatest concern are:

1. Sections 501, 511, 512, and 513, tax-exempt establishments: Many nonprofit clubs and organizations are openly advertising for restaurant patronage, and are offering their services to people in no way related to their membership. This becomes a problem of unfair competition as restaurants cannot compete and pay their just share of taxes with an untaxed group. Therefore, this group should be in no better position profit wise than other commercial restaurants. One step toward correcting this problem would be compelling such organizations to list their unrelated income on the annual information return Form 990 and pay a tax on such business activities of the tax-exempt organization.