with competent people who do a good deal of work and do not get full credit whether it is my organization or on CED. The CHAIRMAN. Mr. Curtis will inquire. Mr. CURTIS. I have just 1 or 2 points. One, it seems to me that tax revision is always timely when you actually need a tax revision which will produce more revenue and it seems to me particularly at this time we have many areas where if we would remove some of these impediments to growth that persist in our tax laws, we would gain revenue, so I just wanted to be sure that that was your view, too. I was a little worried when you said that you thought this had to be mulled over further in some of these areas. Mr. WILDE. Mr. Congressman, I am a little unclear, I think, in this paper. I am clear in my own mind. We have talked for a long time about tax reform and have not been able to do much about it. I think the time has come to make a definite effort to meet a schedule. I suggested, myself, to your chairman, that I would hope the Congress in January of 1959 would be ready to enact a comprehensive and adequate tax reform bill that would recognize the importance to the economy of stimulating growth, but I do not press for it right now because I think, as the chairman has said, it is not likely that there is enough time to do an orderly, constructive job. I think we can do it before we see clearly how the revenue and the expenditures are going to match because it could be done under some of these programs where perhaps you do it on a 2, or 3, or 4, or 5-year plan and not accomplish everything in the way of reduction overnight so that as the economy grows and catches up with it, you still meet an old-fashioned ambition such as to see a balanced budget. Does that answer your question? Mr CURTIS. It seems to me that you are talking about something that is a very comprehensive thing while I am trying to call attention to many, many specific things that at least have been pointed out that are impediments to economic growth. In other words, there is no reason, it seems to me, for a delay in those. Where we have specific examples in our tax code where we are impeding growth, it seems to me we ought to move ahead right now and remove those, the sole objective being revenue. Let me illustrate: I have suggested that a 52 percent corporate rate is beyond the point of diminishing returns, that if you reduce it to only 49 percent, you probably would gain more revenue because you would have passed a psychological barrier. Whether I am right or wrong in that thinking, that is an example of something I think that could be grappled with right away to find out if it is not right or wrong, the sole objective being to gain revenue. Mr. WILDE. Of course, you are in a better position to answer that question than I am. I would be inclined to believe that you are right in your statement that 52 percent passes the point of diminishing returns and that 49 percent or 50 percent might produce equal or greater revenue. I think it would, particularly if the economy is going to start forward and that might contribute to it. If the economy has to go further in readjustment, it might not. I like your point, but may I ask you a question on which you are an expert and I am not? Can you do one thing without another thing from the standpoint of political feasibility? Mr. CURTIS. My answer to that is that I would like to see the grand reform, too, but I certainly think that it is always pertinent to pick up points that we see in areas. I just used the corporate tax as an illustration. I could use the $10.50 a gallon liquor tax an another example where I think we are beyond the point of diminishing returns. If we reduced it to $9, I think we would gain more revenue because the bootlegger who is paying nothing would lose considerable business and it would be channeled back into legitimate areas. Again, though, I am only using those to illustrate points, if we do see areas where there is an impediment to growth or where there is a tax rate that is beyond the point of diminishing returns, it seems to me it is always time to move in on that, even though you could say it is a piecemeal proposition. That is the point I was trying to illustrate. I have one other thing. It is because I do appreciate your paper and the work that your group has done that I bring out these few things that do worry me. On page 4, you refer to the numerous preferential provisions in the tax law and I would hope that what you really meant was differential provisions, although any differential can be preferential. You make the statement: "Taxes must be fair among persons in different economic circumstances," which is a very correct statement. In our tax laws we seek to measure those differences with differentials. I have always maintained that any differential can become preferential, but we have gotten into the habit, I am afraid, of referring to all differentials as if per se they were preferential. That is the reason I am dwelling on this point because then you go on to say that you want to remove these special provisions. I would not say remove them if it is a differential. What you do is examine them and get them back so that they accurately measure the economic difference, so that they no longer are preferential. Am I right in saying that is your thinking on that? Mr. WILDE. Oh, entirely. It is a matter of definition of words. Mr. CURTIS. That is a point on which I wanted to be sure. I thought that was the case and I wanted to clear it up in my own mind. you. Thank The CHAIRMAN. Are there any further questions of Mr. Wilde? If not, thank you, sir, again, for coming to the committee and giving us the benefit of your views. Our next witness is Mr. Andrew B. Young. STATEMENT OF ANDREW B. YOUNG, CHAIRMAN OF THE FEDERAL TAX COMMITTEE OF THE TAX SECTION OF THE PENNSYLVANIA BAR ASSOCIATION Mr. YOUNG. Mr. Chairman and members of the Committee on Ways and Means, my name is Andrew B. Young. I am chairman of the Federal tax committee of the tax section of the Pennsylvania Bar Association, and appear on behalf of the Pennsylvania Bar Association, to urge consideration by your committee of the association's 13 proposals for amendment of the Internal Revenue Code of 1954 that are summarized and outlined in the statement of proposed testimony that was filed with your committee in December. The CHAIRMAN. You may have consent to supplement the remarks to which you refer. (The information is as follows:) PROPOSED TESTIMONY OF ANDREW B. YOUNG, CHAIRMAN, FEDERAL TAX COMMITTEE OF TAX SECTION, PENNSYLVANIA BAR ASSOCIATION, ON BEHALF OF SAID ASSOCIATION 1. INCOME FROM DISCHARGE OF INDEBTEDNESS Transfer of property by executors in satisfaction of martial-deduction bequest or legacy. Reference: Section 108, Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed toward the problems proposed by the Internal Revenue Service position, announced in Revenue Ruling 56-270 (1956-1 C. B. 325), that an estate may realize gain or loss where the executors, in satisfaction of a martial-deduction bequest or legacy, transfer assets of the estate which have appreciated or depreciated in value from the values at which such assets were included in the gross estate, for Federal estate-tax purposes. The evidence will be with a view to resolving such problem by amending section 108 of the Internal Revenue Code of 1954 by the addition thereto of a new subsection (c), to specifically provide that no gain or loss shall be recognized to the estate upon any such transfer. 2. EXPENSES FOR PRODUCTION OF INCOME Nonbusiness expenses, otherwise deductible but relating to establishing title to or possession of property, or an interest therein. Reference: Section 212, Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed toward the problem created by the policy of the Internal Revenue Service of disallowing, as ronbusiness expenses-relating to property which either is producing income, or is being held for the production of income-expenditures which can be attribuable in any way to securing or perfecting title in, or possession of such property or any rights therein. The testimony will further point out the fact that the court decisions on such problem are apparently erreconcilable. Since section 212 of the Internal Revenue Code of 1954 provides for the deduction of ordinary and necessary expenses incurred and paid either (a) for the production of income, or (b) for the management, conservation, or maintenance of property held for the production of income, the evidence will be directed to resolving the instant problem by amendment of section 212 by adding thereto a provision that deductions otherwise allowed by that section in the computation of net taxable income, shall not be denied solely by reason of the fact that they may relate to establishing title or possession of such property or any right therein. 3. EXPENSES FOR PRODUCTION OF INCOME Nonbusiness expenses, otherwise deductible but relating to estate planning expense. Reference: Section 212, Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed toward the uncertainty resulting from lack of administrative conformity on the question of deductibility, in computing net taxable income, or fees and expenses incurred and paid in connection with the setting up of plans for the disposition of an estate, its administration, etc. The evidence also will be designed to show that policy obstacles which would have cast some doubt on the deductibility of such expenditures, have now been overcome at least insofar as expenses relating to gift and estate taxes are presently deductible. See section 212 (3). The evidence will be designed to point out the solution to this problem by amending section 212 of the Internal Revenue Code of 1954, by adding thereto a provision that expenditures otherwise deductible under that section in the computation of net taxable income, shall not be denied solely by reason of the fact that they are incurred in the advance planning of the disposition or administration of taxpayer's estate. 4. ORGANIZATIONAL EXPENDITURES. 2973 Expenditures relating to issuing equity securities and/or amending articles of The evidence will be designed to point out that the solution to this problem can be effected by amending section 248 of the Internal Revenue Code of 1954 by expanding subsection (b) thereof to include expenditures incurred or paid for the issuance of equity securities upon original incorporation and also such expenditures which relate to any subsequent amending of the corporate charter. 5. DISTRIBUTIONS IN REDEMPTION OF STOCK Redemptions of preferred stock issued for money or other property (other than in reorganization or in an exchange for section 306 stock). Reference: Sec. tion 302 (b), Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed toward the lack of justification for any distinction between, and more favorable treatment of, the repayment of notes for advances to corporations, on the one hand, and the possible treatment as a dividend of a redemption of preferred stockoriginally issued for cash or property (other than in a reorganization or in exchange for section 306 stock or preferred stock issued on a discount basis), on the other hand. The evidence will be designed to show that such statutory distinction, inherent in section 302 (b), has led to unnatural, and certainly economically disadvantageous, capitalization, and financing of closely held corporations by debt obligations, rather than by senior equity securities, in order to avoid the risk of a dividend equivalent upon repayment of such debt obligations. It will be also designed to show that the result attempted to be obtained by statutory amendment will not conflict with the present statutory provision relating to preferred stock received in a reorganization or in exchange for section 306 stock, and will not conflict with any judicial decisions or legislative proposals relating to the problem of thin incorporation. The evidence will point out that the solution to this problem can be achieved by amending section 302 (b) of the Internal Revenue Code of 1954 by inserting, as part of subsection (1) thereof, a provision that the redemption of preferred stock issued solely for cash or property (except in a reorganization, or in exchange for section 306 stock, or issued on a discount basis) will not be considered as the equivalent of a dividend; further, that such proposed provision be appropriately limited in its application so as to be ineffective in cases involving thin incorporation in the event that presently proposed statutory standards are provided for determining the existence of thin incorporation. Further, it will be pointed out that such proposal will not conflict with the problem of the treatment of gain on the redemption of preferred stock issued at a substantial discount. 6. DISTRIBUTIONS IN REDEMPTION OF STOCK Redemption in complete termination of stockholder's interest where stock is held by estate or trust. References: Section 302 (c) (3), Internal Revenue Code of 1954; section 302 (c) (2), Internal Revenue Code of 1954; section 318 (a) (2) (A), Internal Revenue Code of 1954; section 318 (a) (2) (B), Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed toward the problem which exists where, in a case in which a stockholder's interest may, without risk of a dividend equivalence, be completely terminated during his lifetime, within the provisions of section 302 (b) (3) and 302 (c) (2), without the application of the attribution rules of section 318 (a) (2) (A), and (B), such interest cannot be similarly terminated when, following his death, his shares are held by his executors or trustees because of the then applicability of such attribu tion rules. The evidence will be designed to show that there is no justification for treating a complete redemption of a decedent's stock, from his executors or trustees, in any manner different or less advantageous than a complete redemption of his interest, as a stockholder would have been treated, during his lifetime. The evidence will point out that this problem may be solved by amending sections 302 (b) (3) and 302 (c) (2) to include complete redemption of a stock interest where such stock is held by the deceased stockholder's executors or trustees, by providing that the attribution rules of sections 318 (a) (2) (A) and (B) shall not, in such case, be applicable; and that a coordinating amendment be made to section 318 (a) (2) (A) and (B) to provide that there shall be no attribution of shares held by an estate, or trust, to the beneficiaries, in any case where, but for the application of such attribution rules, a stockholder's interest would have been completely terminated during his lifetime under section 302 (b) (3) and 302 (c) (2). 7. CORPORATE INDEBTEDNESS "THIN INCORPORATION" DEFINITION Interest payments on, and redemption of, corporate indebtedness-“thin incorporation" definition. References: Section 163 (a) Internal Revenue Code of 1954; section 301 (a) (c), Internal Revenue Code of 1954; section 316 Internal Revenue Code of 1954; section 317, Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed to the uncertainty existing by reason of the absence of any statutory standard or guide to the determination of whether, and under what circumstances, the ratio of debt to equity capitalization of a corporation will be held to be unrealistic, and whether, and under what circumstances, corporate debt obligations will be deemed to be in fact preferred stock, with the resultant disallowance, as a deduction under section 163 of the Internal Revenue Code of 1954, of interest paid thereon, and with the treatment of redemption or repayment thereof as the equivalent of a dividend, within the meaning of sections 301 and 316 of such code. It will be further shown that such uncertainty relating to this problem has been added to by the recent decision in Gooding Amusement Co. (23 T. C. 408, affirmed by C. C. A. 2, 236 F. 2d 159 (1956) (cert. den. 352 U. S. 1031)). The evidence will point out a solution to the problem by adding to section 317 of the Internal Revenue Code of 1954 a new subsection (c), which will provide, in a nonexclusive definition, the area of thin incorporation insofar as such status may affect the deductability of interest paid by the corporate debtor under section 163 (a) and insofar as a repayment of such debt obligations may effect the distribution of a dividend within the meaning of sections 301 (a) and (c) and 316 of the code. 8. REQUIREMENTS FOR, AND DENIAL OF, EXEMPT STATUS-CHARITABLE CORPORATIONS AND PENSION AND PROFIT-SHARING PLANS Retroactive denial of exemption for transaction of prohibited transactions. References: Section 401, Internal Revenue Code of 1954; section 501 (c) (3), Internal Revenue Code of 1954; section 503, Internal Revenue Code of 1954; section 504, Internal Revenue Code of 1954 The testimony proposed to be given on this subject will be directed to the uncertainty arising by reason of the general unwillingness of the Internal Revenue Service to issue ruling letters relating to such organizations and to whether the exemption, once granted to such organization, will be denied by reason of any transaction alleged to be prohibited. It will be further testified that the present policy of retroactively denying exemption, for alleged prohibited transactions, to organizations otherwise qualifying as exempt under section 401 (pension and profit-sharing trusts) and section 501 (c) (3) (charitable corporations, trusts, etc.) creates a substantial jeopardy, not only relating to those organizations and their capital but also to the denial of deduction for contributions thereto by persons who, justifiably, relied upon the right to obtain such deduction. The evidence will point out that if the prohibited transaction rules now contained in sections 503 and 504 of the Internal Revenue Code of 1954 are to con |