CONGRESSIONAL RECORD - APPENDIX

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP57-00384R001200010028-9
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• Document Page Count: 23
• Document Creation Date: December 20, 2016
• Sequence Number: 28
• Publication Date: January 1, 1954
• Content Type: OPEN

Approved For `IAt . 1~,E 8 800120001 0028-9
one of the earliest, if not the first, Catholic
services in Delaware were 'Yield in his homes
N'ew'. Castle and was so disgusted with the
ht and mosquitoes 1hat he 'would have im-
eatoiy' ad he not been per-
suaded'to wait until the next ship for his
native land. By that time, Father fenny
realized the need of a priest to administer
the needs of the Catholic families in north-
ern Delaware, particularly the increasingly
large number of Irish families that were
rapidly settling here.. Father Kenny never
did return to his Ireland but remained to
hold services at little Coffee Run Church on
the Lancaster Pike, where he is buried, and
also' to start present day St. Peter's Pro-
Cathedral ,in Wilmington in 1816.
Another immigrant from Ireland who
landed at Nett' Castle-destined to become
gone of the great men of the American''Revo-
lution-was Charles. Thomson. He was
l nown as the'perpetual;secretary of the Con-
tinental Congresses :and was 'influential in
holding together the various factions -of the
Congresses through some of the trying years
of the country.,
The first printer in Delaware was James
Adams, a native of Ireland, who worked for
a while in the print shop of Benjamin
Franklin in Philadelphia and in 1761, set
up his own establishment in Wilmington
where he published early law books, religious
tracts, and possibly the first newspaper of
the State.
Commodore Thomas Macdonough who
gave the British such a severe and decisive
trouncing in the War of 1812, was a Dela-
warean of Irish parentage.
Gen, Thomas A. Smyth of Wilmington and
,,,% uati"e of Ireland was at one time com-
mander of the famous Irish Brigade In the
Civil Sear-and was the last general of the
Union troops to be killed in that war.
A check of the men who were not onisv high
in the military, ranks but amo,}ighe states-
men, literary men, and industrialists were
either natives of Ireland of both Catholic
and Protestant faiths or descendants Of Irish
immigrants.
111. 1, i
Atone time, Wilmington was a haven for
~o,yn~e of the noted Irish patriots, Alexander
.o?amil n Rowan, who escaped from Newgate
Prison,pfled to trance, came to'Phila~glphia
in 1795, and eventually found refuge Th Wii-
n ingtoir where he lived in re at'lve poverty
but became rich in fiends here. Among
them were the Rodneys, Pooles, Dick nsons,
Bayerds and the well-known Delaware' physi-
Clan, Dr. Tilton. He earned his money by
printing calico and selling birchbeer from a
barrow and he even worked as a gardener.
Years later, when he was permitted"to re-
turn to Irelanct and received his pardon and
his property, he attached to the door of one
of the turret rooms of his castle home a large "
label bearing the word, "Wilmington" :where,
it is said, he would often retire for hours of
relaxation 5n4, revery.
But these were the men of the headlines.
Just as important were the hundreds of Irish
families who settled in Delaware and ,partici-
pated in the development of 11 therr new State
and 11'4tiop.. And certainly these notes of the
Irish. txa ,itign, in Delaware, brief 'as they
may be, would not be complete without refer-
ence tQ the Irish, families who lived on the
i ants of the Blandyivine and worked in the
der`" mills and worshipped in old St.
tph16 on t 6-Brand1wine. Their loyalty
and devotion are. part of the annals the,
17u Pont co.
And down, to this present "day we And in
Delaware many native sons and daughters of
Breland and their children who" suj orted
the Irish Cause in our time, They, foo, in
their. way, contributed to the cause of free-
40M and independence in keeping with
Revision of'Our federal Tax Laws
EXTENSION OF REMARKS
HON. DANIEL A. REED
OF NEW YORK
IN THE HOUSE OF REPRESENTATIVES
Monday, January 25, 1954
Mr. REED of New York. Mr. Speaker,
during the first session of the 83d Con-
gress the Committee on Ways and
Means held 2 months of public hearings
on revision o our, Federal tax laws.
Testimony was received from over 600
witnesses and over 1,000 statements were
submitted for the RECORD. The entire
committee membership spent long hard
hours to complete the hearings.
At the present time the Committee on
Ways and Means is meeting in daily
executive sessions to prepare major tax
legislation which we intend to present to
the House before too many weeks have
elapsed. This legislation will contain a
complete recodification of the Internal
Revenue laws in equitable and simplified
form.
Mr. Aubrey R. Marrs, formerly head
of the technical staff, Bureau of Internal
Revenue, has prepared an excellent
summary of the testimony presented at
the committee hearings. It is my
opinion that this summary should be
available to all Members of Congress.
To that end, Mr. Speaker, I am extend-
ing my remarks in the appendix of the
CONGRESSIONAL RECORD and including
therewith a summary of the General
Revenue Revision Hearings which is a
reprint of an article contained in the
Standard Federal Tax Reports published
by Commerce Clearing House:
REVISION OF TEE INfERNAt REVEiet1E CODE
(By Aubrey R. Marrs, Attorney,
? Washington, D. C.)
The Crusade in Europe is not the only
crusade of recent times. There is another
one going on right here in these United
States. It is being conducted against heavy
odds by Congressman DAN REED and his as-
sociates in the House of Representatives. I
am referring to the "Crusade for tax simpli-
fication, tax equity, and tax understanding,"
now being waged under the auspices of the
Ways and Means Committee. The crusades
abroad have been costly in blood and money.
Congressman REED's crusade may actually
result in reducipg the tax burden of our peo-
ple. If it fails so to do, the reason will be
largely the fiscal necessities of the Govern.
ment.
His labors for a revision of the Internal
Revenue Code do not represent an eleventh-
hour conversion for DAN REED. In fact, one
might say that he is a "B. C." revisionist,
that is, before change in the administration.
Chairman REED considers that "a sound and
efficient revenue system is an essential to_ a
healthy American economy." He has a
three-point program:
"The present administration is confronted
with three major problems. First, Federal
expenditures are at too high a level. Sec-
ond, Federal, State, and local taxes are so
high that they are taking almost 30 per-
cent of our, national income. And this,
despite the e fact
repeatedly t that prominent economists
stated that it is dangerous
for a government, by taxation, to take
more than 25; percent of the national in-
come. 'Third, the Internal Revenue Code
gri numer-
A511
ous patchwork amendments that it has
become complicated, unfair, and in many
situations completely unworkable."
It is the revision of the code with which
this article is concerned. The internal
revenue laws have not had a thorough re-
examination and analysis since the compila-
tion of the revised statutes, about 80 years
ago. The code must be examined from
stem to stern. The substantive provisions
of the code, as well as the procedural pro-
visions, need to be carefully scrutinized to
see if they are fair, workable, and under-
standable. "We must make a complete re-
vision," says Chairman REED. It will be an
undertaking of the first magnitude. He
recdgnizes that due to budget limitations,
"we may not be able to go as far as we
would like in all respects," but we can at
least adopt sound, equitable, and under-
standable principles in the law. Just be-
cause it can't be done in one Herculean
operation is no reason why it may not be
done by feasible stages. Secretary of the
Treasury Salmon P. Chase once told Horace
Greeley that "The only way to resumption
is to resume." Or as the Chinese would
put it, a 1,000-mile trip begins with the first
step.
PRECODE ERA
Prior to the Revenue Act of 1928, the
general scheme of internal revenue legisla-
tion was to make each revenue act a self-
contained body. of statutory law. For ex-
ample, in the Revenue Act of 1926, there
were reenacted all the provisions of the
proceeding 1924 act, both substantive and
procedural, with such changes and omis-
sions as the current policy of Congress
dictated; the preceding act was then re-
pealed, with certain exceptions. The sub-
stantive law provisions of each revenue act
would remain in force for the years to which.
applicable, except as subsequently amended;
but as to adjective or procedural law, such
provisions were restated as to open cases
under prior acts and new provisions in-
cluded for all cases to arise under the then
current revenue act. The method did create
some confusion especially in procedural
problems. As explained by the Ways and
Means Committee: "The effort in each new
act to put in the same place all -the law
relating to the assessment and collection of
taxes for earlier years, as well as the law
relating to the method of assessment and
collection of the taxes imposed by such new
act, has resulted in many complications.
Striking examples of the difficulties en-
countered may be found in sections 277 and
278,of the 1924 and 1926 acts, dealing with
the statute of limitations, section 284 of the
1926 net dealing with refunds and credits,
and section 283 of the 1926 act, dealing with
appeals to the Board of Tax Appeals in
cases arising under the 1924 and preceding
acts. If this process is' continued, it will
produce more and more complexities. The
committee is impressed with the importance
of making a fresh start." (1939-1 (pt. 2),
CB 391, at p. 421.)
The plan 'of the early revenue acts accounts
for the arrangement employed in internal
revenue laws, a compilation once issued by
the Treasury Department at convenient in-
tervals, the last one containing the internal
revenue laws in force on April 1, 1927. The
1927 compilation combines the appropriate
sections of the Revised Statutes, the Revenue
Act of 1826, approved February 26, 1926, and
such prior acts as had not become obsolete.
For example, chapter 19, "Income Taxes,"
dontairit all such provisions in the Revenue
Act of 1926, followed by every prior revenue
act, back to and including section 38 of the
act of August 5, 1909.
As a result of the study of the situation by
the staff of the joint committee and others,
particularly a voluntary committee the mem-
compensation,
bers of which served without
or Release 20f 71C 1/16' GiA-RD057-00384E 0 1 2
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A512 CONGRESSIONAL RECORD -APPENDIX Januy` ?
certain changes were recommended 'which suit can be accomplished through use of who otherwise would be a dependent earns
took shape in the Revenue Act of 1928. This CCH Internal Revenue Code.] Since a over $600 of income).
act differed materially from previous revenue period of above 6 years occurs between edi- 2. The expenses of child or dependency
acts. 'After reciting the difficulties above tions, a large portion of the retroactive care for working wives, widows, etc.
explained, the Senate Finance -Committee amendments appears along with the original 3. The deduction of medical and dental
i'eport says: provisions. Unfortuniately, this laborious expenses (such as problems relating to the
"Therefore, the provisions of the income though convenient method cannot be follow- 5 percent minimum, the maximum dollar
tax title of the present bill apply only to the er by legislative bodies. limits, and the coverage of the deduction).
taxable year 1928 and succeeding years. CODE ERA 4. Deductions of charitable contributions.
The have no'effect whatsoever on taxes im- interest, and taxes:
They As foretold above, the Internal Revenue (a) Charitable contributions.
any Code was prepared and was approved by (b) Interest.
taxable do Posed for prier 1926 income years, nor title the pro-
effect of the m ncome tax ax f have any the President on February 10, 1939 (53 (c) Taxes.
effect ea the cor th phi sar reason ta the income for et or Statutes, pt. I). (See the explanatory 5. College and educational expenses (in-
tit a years. the ` 1926 s reason comme tax Mimeograph 4909, 1939-1 (pt. 1) CB 391.) eluding the unusual school expenses of. de-
bill air act force not repealed Then more revenue acts came in rapid sue pendents and also the professional educa-
for 1925, in , for the he collection the
cession, with hundreds of retroactive amend-
ofll taxes remains
of taxes Per 1925, acts and 1as as well as tional expenses of the taxpayers themselves).
taxes under prior acts except asmodified. by ments. From the enactment of the code on 6. Business expense deductions from "ad-
' of 10, 1939 to the end of 1943, there justed gross income (such as traveling ex-
title III, n the present bill, e containing and b by y ex-
title were 737 different amendments, 83 of which penses, entertainment expenses, work
press containing vas o to such title, and effective on the date of their enact-provi- IV, containing various administrative ment or on the following day; 77 of which clothes, and the relationship of these deduc-
active and by title nded containing few re became effective from 10 days to several tions standard deduction)
active provisiores'Iutnder p to relieve certain ertain ain months after their enactment; and 577 of (a)) Adjusted to Adjusus Traveling ted ed gross oes income.
expenses.
cases of hardship under prior acts. It is to which were retroactive for periods ranging (b) Entertainment expenses.
be noted in particular that provisions such (b) from less than 1 year to approximately 4 (c) Work clothes.
a
othct titles and thereof XII of remain the years. The same policy of frequent amend- (e) The standard deduction.
1926 s those in well titles X, XT,
force wel and d effect except as a (except aamendeed ments to the code continued during the
in full act as
6-year period 1944-49, when there were 380 7 Alimony and separate maintenance and
by the new act) for the taxable year 1928 amendments, a large number of which were support payments.
and subsequent taxable years. For instance,
section 1107 applies to income taxes for 1928 retroactive. 8. Income-splitting and head-of-house-
ad future years. Its application is not r Only a small number of the amendments hold 9. Averaging provisions.
of income (such as modi-
stricted to 'internal revenue laws' in force ce since February 10, 1939, have been made fication of section 107 to provide a different
at the time of its enactment, by reenacting the amended sections in their type of averaging and coverage of types of
"It is planned ultimately to combine pro- entirety. Most of them have been made by income not now provided for by that sec-
visions of this general nature into a compila- striking out some language and inserting tion).
tion or code apart from the revenue acts.'' other language, the consequence of which 10. Earned income credit.
_(1939-1 (pt. 2),`CB 421.) has been that taxpayers were required to 10. Ear time and manner of filing re-
At the same time the 1928 act made a Adis- make the necessary eliminations and sub- turns, and declarations for individuals:
tinctive change in the typography and style stitutions. The result of so many amend- (a) Time and manner of filing returns.
of printing of the revenue acts. This was mints to the code in such patchwork fish- (b) Declarations for individuals.
explained by the Ways and Means Committee ion has been to create unavoidable, if not un- 12. Withholding.
Report, as follows: necessary, confusion, even with the improved 13. Employee death and disability bene-
"The Joint Committee on Internal Reve- system inaugurated by the 1998 act. There fits:
is no way of avoiding this kind of confusion (a) Employee death benefits.
ilutt Taxation in its ttee on recently sub- with` annual and semiannual amendments
Miffed to the Committee Ways and nd of the code, sprinkled with many retro- (b) Employee disability benefits.
Means and to the Finance Committee of the active provisions. Such a method of rev- 14. The 3-percent annuity rule.
Senate, endorsed a recommendation that one enue legislation continued over a period of 15. Stock options and deferred compensa-
of the most helpful steps in the simplifl-
use years is conducive to many inequalities, com- tion plans:
Cation of the income-tax would be the use plications, and unsound practices. It is no (a) Stock options.
of a new typograprical setup making use exaggeration to say that the present Fed- (b) Deferred compensation plans.
of bold face e headings and subheadings and eral tax structure has been thrown together 16. Pension and profit-sharing treatment
wisp making use of indentions, so that the by disconnected enactments, usually under provided by sections 165 and 23 (p).-
reader, may more easily find the matter he the pressure of real or fancied national 17. Techniques for alleviating double tax-
is in search of. The style approved by the emergencies. Chairman REED recognizes ation Qf dividends.
Joint Committee for use in the publication that situation. A general revision of the 18. Accounting principles (such as those
of the law, when enacted, is set forth in code is overdue. relating to timing and correlation in-report-
volume II, appended to its report. The ing income and expenses).
present bill makes use of the system recom- REVISION OF THE CODE 19. LIFO inventory accounting.
mended for the printing of the law, as nearly The staff of the Joint Committee on In- 20. Depreciation and amortization.
as the styles of type in bill size available ternal Revenue Taxation was instructed by 21. Research and development expendi-
at the Government Printing Office will per- the chairman to undertake a revision of the tures.
mit." (1939-1 (pt. 2), CB 392.) Internal Revenue Code, Accordingly, the 22. Capital gains and losses Including
The, new idea was a simplification so long staff conducted a survey to elicit suggestions problems relating to basis:
as the revenue measures did not come too and comments-from the general public re- (a) Capital gains and losses,
fast and there were few retroactive amend- hating to improvements in the internal rev- (b) Problems relating to basis.
melits. The adoption of a continuing star- enue laws and their administration. The 23. Income taxes of lessor paid by lessee.
Ute applicable to the current years, with survey was conducted on the basis of a wide- 24. The net operating loss.
only occasional intervening amendments ly distributed questionnaire, the response 25.'Cancellation of indebtedness.
-and few retroactive amendments, rendered it to which was immediate and widespread 26. Consolidated returns and intercorpor-
coniparatively easy for taxpayers (and law- from all parts of the country. On April 21, ate dividends:
yers) to ascertain exactly what the law was 1953, the staff released a preliminary digest (a) Consolidated returns.
during any given year. The statute appli- of the thousands of suggestions which had (b) Intercorporate dividends.
Cable to the taxa-Tle period under considera- been received from individual taxpayers, 27. Corporate reorganizations and distri-
tion would give one the statutory law, sub- businesses, tax practitioners, professional buttons:
ject to a rundown on retrospective amend- groups, and trade assoications. Anyone de- (a) Corporate reorganizations,
ments. siring to study the matter might well begin (b) Corporate distributions.
Meanwhile, in 1922, there appeared on the with this preliminary digest. 28. Statute of limitations, assessment, and
market a publication which 'remains to this Based upon replies to the questionnaire, collection of taxes and penalties:
d the most convenient medium for aster- the preliminary digest set forth 40 carefully (a) Statute of limitations.
Ea ty statutory law in Federal income, selected subjects upon which to conduct (b) Assessment and collection of taxes.
estate and gift taxation, applicable to past public hearings. This numerical list, which (c) Penalties.
years. It is the correlation of the revenue gives the order on which the hearings were 29. Partnerships.
laws by Walter E. Barton. This work is held, is as follows: 30. The various provisions relating to in-
now in its 10th edition, and certain editions 1. Qualifications for the dependency credit come derived from foreign sources.
,taken together cover the entire period from (including such problems as to whether de- 31 Income tax treatment of estates and
1913 to, 1949, This work is a correlation, pendency exemptions should be granted for trusts
that is, the corresponding provisions of a foster children, whether a dependency ex-
eeYies ' of revenue acts are laid alongside emption should be apportioned where two or 32. Treatment of bad debts (bad-debt re-
each other in. verticle columns so that they more taxpayers are providing the support, coveries, bad-debt reserves, and deduction
may be readily compared. [The same re- and the problem arising where an individual of nonbusiness bad debts) :
Approved For Release 2007/0'1/16',:,CIA-R?P:57-00384R001200010028-9
 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010028-9
r Hn^ CONGRE5SIONA I CORD--1 pptNIDIX A513
e? a `h 1 eo le. The 5 p nde
a Bad-debt recoveries . nt restriction is
1944.) i appliable to sucheexp nses for or behalf of
( Bad-debt reserves. s the care of
must e a' bee (ca) ) nonbusiness bad debts. The " r' ax4 Act of i1944,1 approved May u Income
33. The determination Deduction of of taxable income The dependency exemption is now wholly the taxpayer p se if either has
inclusions and exclusions. free of the concept of head of a family. attained the age of 65 years. There are also
D nd code sec 25 maximum limitations on the amount of the
a
1
34. Gift and estate tax problems
(a) Gift tax problems.
(b) Estate tax problems.
relating to rates, to new taxes, or'to removal
of.existing taxes).
36. Retirement funds for self-employed
and others not covered by existing pension
plans.
37. Exclusion of pension and retirement in-
come for specific types of employees.
38. Depletion and exploration expendi-
tures:
(a) Depletion.
(b) Exploration expenditures.
39. Improper accumulation of surplus
(section 102).
Q. Excise tax rates.
In a recent study, made by Commerce
Clearing House, of the nine-thousand-odd
petitions filed between November 8, 1951, and
January 19, 1953, the most recurrent issues
were: (1) dependency exempaiuus; ss, ( adoption of children. The legislative rep-
lps; (3) capital gains and losses; ; (4) 4) p
miscellaneous "business" deductions; (5) resentative of the Panama Canal Zone rec-
depreciation; (6) travel expenses; (7) medi- ommended that section 25 (b) (3) be amend-
cal expenses (8) entertainment expenses. ed to include a dependent who is a resident
It is revealing to note that the number one of the Canal Zone. The recommendations to
Issue taken to the Tax Court was the num- increase the amount of the dependency ex-
ber one subject on the. committee's list; also, emptions sometimes had a maximum limita-
that every one of the most recurring issues tion based upon adjusted gross income
above named were covered in the commit- and/or age of the dependent. The trend was
tee's schedule of hearings. to increase the amount of the dependency
The public hearings began on June 16, exemption from $600 to $1,000, which would
1953 and were. concluded on August 14, 1953. involve an amendment of section 25 (b) (1)
It may be that, under present conditions, the (A) of the code.
primary object of Federal revenue legislation Expenses of child or dependency care for
is to find new and ever-expanding sources working wives, widows, etc.
of taxation. But sometimes the taxpayer Historical note: Medical expenses excepted,
needs a break as well as the Government. the code has never provided for the deducti-
These hearings were the first opportunity of- bility of the personal expenses of a child,
fered to the public to express ' itself before nor has it permitted the deduction of ex-
the Ways and Means Committee on the code penses incurred by a working wife or by a
in Its entirety, rather than on the specific widow for the care of a dependent.4
matters involved in a current revenue bill. The dependency credit is supposed to rep-
The entire list of 40 subjects was recited resent the extent of income-tax benefit to Hearings, June 18, 1953: The president of
above not only for 'the convenience of in- be derived from the bare of dependents. Community Chests and Councils of America.
terested readers but also for the purposes of Hearings, June 16, 1953: The unmistakable Inc., urged that the present allowances re-
this article. Each subject hereinafter will trend of the testimony was to allow a deduc- main in effect, at least at their present
be briefly discussed in its numerical se- tion as a business expense, under section 23, levels. Other witnesses recommended that
quence. Each busy reader may pick and for child care occasioned by either parent the charitable deduction to corporations be
choose the subject in which he may be In.. being engaged in gainful occupation. increased from 5 percent to 10 percent on
terested and thus conserve his time. The H. R. 305 would allow a widow or widower the assumption that it would stimulate the
plan of treatment of each subject Is as fo1- to deduct amounts paid in providing care for flow of funds from successful corporations
lows: (1) An historical note pointing out children while the parent is employed. A to private charities.
the origin of the item in our Federal tax limitation was suggested that the amount Historical note (interest) : The Interest
structure, usually going back no further otherwise allowable under this bill should be deduction to individuals first apeared in
than the act of October 3, 1913? which is reduced by the amount by which the ad- the act of October 3, 1913, section II B (see-
the first enabling act under the 16th amend- justed gross income exceeded $5,000. H. R. and). Today the deduction covers all In-
ment; and (2) a brief statement of the exist- 4394 would allow the expense of providing terest paid on indebtedness except indebted-
ing law? Than follows a brief resume of care for children under 16 years of age, where ness incurred to purchase exempt obliga-
the public testimony developed at the hear- the mother is gainfully employed. H. R. tions, The interest deduction to corpora-
ings. In this way, it is expected that the 2861 would amend section 23 to allow child tions began with the act of August 5, 1909,
coverage *111 be sufficiently informative to care expense, but would limit it to $40 per section 38 (second) (third), and, in the early
put one on notice as to the scope of the hear- week and require the children to be under acts, was subject to a maximum limitation
ings. Anyone desiring to go exhaustively 16 years of age and to live at home. which the courts upheld a Today the de-
into the matter is free to do so. Medical and dental expenses ductibility of this item is geared to several
The testimony and the submitted state- restrictions respecting promptness of pay-
ment did not al Bays coincide with the sub- Historical note: This deduction was added
jects set for hearing. to the code by section 127 of the Revenue ment and the relationship of the taxpayer
Act of 1942. (Code section 23 (x).) This and the payee. (Code sec. 24 (c).)
Dependency credit principle opened the floodgates for the retro- Hearings, June 19, 1953: Although this sec-
Historical note: The dependency credit active deductions of the 1942 net. Prior to tion relates to a limited number of business
first made its apeparance in section 1203 that time medical care was regarded as a expense deductions, occasion may be taken
of the Revenue Act of 1917. It granted the purely personal expense, expressly made non- to bring in other matters more or less re-
head of, a family an additional exemption deductible by section 24 (a) (1) of the code. lated. One witness favored H. R. 1021 which
of $200 for each dependent child. The sub- When the deduction for "extraordinary med- is a bill to amend section 127 (a) of the
sequent amendments have been numerous. ical expenses" was added, section 24 (a) (1) code relating to war losses, giving the tax-
Under resent law, an exemption of $600 is
was amended to conform. Originally, the payer a wider choice in the treatment of
present
allowed for each dependent in a specified deduction was allowed for medical care of such losses. (See Shahmoon V. Commis-
degree of relationship? for whom the tax- the taxpayer, spouse, or dependent, but only sioner (50-2, U. S. T. C., par. 9500, 185 F.
payer provides over half the support. How- to the extent that such expenses exceeded 5 (2d) 384 (CA-2); I T. 4086, 1952-1 CB 29);
ever, the dependent's gross income for the percent of adjusted gross income. The de- Kenmore V. Commissioner (53-1 U. S. T. C.,
year must be less than $600, and, if an alien,
) ( )
(Code sec. 25 (b) (
(b) (2) and (3).) deduction. The statute expressly allows
Testimony at hearing, June 16, 1953: Nu- amounts paid for accident or health insur-
merous House bills have previpusly been in- ance. The statute has been liberally con-
troduced relative to this subject. Much of strued, but the line has to be drawn some-
the testimony under this topic confuses the where .5
dependency credit with the expenses for Hearings, June 17, 1953: Numerous bills
child care for working wives. It is evi- have been introduced bearing upon this sub-
dent that the middle class and the laboring ject. All were directed to a liberalization of
class have no appreciation of the budget re- the deduction for medical care, particularly
quirements of the national debt and national the removal or alleviation of the 5 percent
security. Most of the testimony was di- rule. There was little agitation to lift the
rected to increasing the credits for depend- maximum limitations. Several organiza-
ents. The joint committee staff estimates tions of persons who are physically handi-
that to increase the personal exemption from capped or permanently disabled presented
$600 to $1,000, not to mention dependents, claims for greater tax relief by way of both
would cost approximately $9.5 billion in reve- deductions and exemptions.
nue. The American Bar Association recom- One witness would free the cost of health
mended that wages paid to the dependent insurance from the 5-percent rule and from
by the taxpayer be disallowed, where an ex- the standard deduction, on the ground that
of socialized
ossibilit
th
y
e p
emption is claimed for the dependent by the it would reduce
taxpayer. Considerable support developed medicine. The president of -a Washington,
to grant foster children dependency status D. C., Dye-Dee Wash concern urged an
4+4 f medical
on o
fi
n
amendment to the de
care to include antiseptic diaper service.
Charitable contributions, interest, and taxes.
This is an unrelated combination of de-
ductions, although in the absence of statu-
tory authorization, and when not connected
with business or the production of income,
they would all be regarded as personal or
nondeductible disbursements. They now ap-
pear in the code as section 23 (o) and (g)
(contributions); section 23 (b), and 24 (c)
(interest) ; and section 23 (c) (taxes).
Historical note (contributions) : The de-
duction to individuals for charitable contri-
butions first appeared as section 1201 of
the act of October 3, 1917, amending the
act of September 8, 1916. It is now limited
to 20 percent of the taxpayer's adjusted
gross income. As to corporations, the char-
itable deduction was first granted by sec-
tion 102 ,(c) of the Revenue Act of 1935.
This deduction is still limited to 5 percent
Footnotes at end of speech.
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A514 CONGRESSIONAL RECORD - APPENDIX
January 25
par. 9434 (C. A.-2), affirming CCH Dec. 19, witness urged the deduction of both sec- the foregoing suggestion is not as radical
110, 18 TC 754 (1952) ).) ondary and college educational expenses. . as that made by another witness to the effect
The Federal Tax Forum. Inc., and the A certified public accountant made a very that home should be deemed to be the place
American Bar Association recommended the interesting contribution. He recommended of the taxpayer's family residence. (See
amendment of section 24 (c) to provide that that no deduction be allowed to a taxpayer Commissioner v. Flowers (46-1 USTC, par.
no deduction would be disallowed thereunder for educational expenses paid for dependents. 9127, 326 U. S. 465).)
for an expense or interest item where the The deduction should be allowed to the per- Alimony, etc.
related taxpayer included the accrued item son receiving the education, and be written
in his return and signed a binding election off as a capital expenditure similar to the In Gould v. Gould (1 U. S. T. C., par. 13,
to be taxed thereon. depreciation of fixed assets. The deduction 245 U. S. 151 (1917)), the Supreme Court
H. R. 1018 and 11. R. 4166, were also urged should be allowed against either employment held that support and maintenance pay-
for favorable consideration. These bills or self-employment income in an amount ments under a decree of permanent separa-
would amend section 23 (e) to allow the not to exceed the lesser of 10 percent of cost tion was not income to the former wife
deduction of losses and other expenses oc- or 25, percent of actual employment for the under the 1913 act; nor were such payments
casioned by abnormally high-water levels in year. Any amount remaining after 10 years deductible from the income of the husband.
any body of water, including a river. would still be available under the same rules Thus the matter stood until the 1942 act.
Historical note (taxes) : This is a compli- of deduction. Refresher courses and seminar (Secs. 22 (k), 23 (u), and 171 of the Inter-
cated subject. On its face it deals with the expenses of persons already started on their nal Revenue Code.) The constitutionality
deductibility of taxes and not their imposi- careers should be either fully deductible of this legislation was upheld, and its pro-
tion. The deduction to individuals for when paid or incurred, or added to the un- visions interpreted in Mahana v. U. S. (50-1
taxes began with the act of October 3, 1913, amortized base similar to the handling of a U. S. T. C., par. 9164, 88 F. Supp. 285 (Ct.
section II B (3d). To corporations, it began major overhaul of assets for future amor- CIs.), cer. denied, 339 U. S. 978; rehearing
with the act of August 5, 1909, section 38 tization. denied, 340 U. S. 847).
(2d) (4th). In the 1917 act,"Federal income Business expenses Although considerable interest was shown
s d
a
Hist
a
e
table items.
section 111 of the~Re
nue
The necessary expenses many tax inequities which still beset the
Act of 1943, Federal excise and stamp taxes, actually paid in carrying on any business divorced, or legally separated man, the hear-
ere were allowed as deductions
a
1)ng
wtt
as business
expenses,
w
nothin
of
th
i
ifi
not d
tib
le
(
of
g
s
gn
cance except
(
e 19913 act. Section 211 14 (a) 1 a recommendation by the Federal Tax Forum
ated
(Sec.
from
d
eductible taxes.
23
e a recommendation
(c) (1) (F).) To summarize the present o918
changed necessary wording es "all the that section 22 (k) be amended to provide
law on this item would carry the writer y and a ex
pens paid or that payments for support of the wife under
beyond necessary space limitations. incurred during the taxable year in carrying a private separation agreement be given the
Hearings, June 18, ce li The Ion any trade or business." The concept of same treatment as alimony, provided the
Natear Gas une 1953: of he t adjusted gross income was adopted by sec- parties do not file a joint return.
mended G t the stains America in e Independent n con- tion 8 (a) of the Individual Income Tax Act
p s of 1944, In connection with the simplified Income splitting
neetion with stock issues be allowed as de- tax table, and for use in determining Historical note: Since the Revenue Act of
ductions from gross income. 1. T. 8806, standard deduction, medical expenses, etc. 1948, married couples are allowed to split
1946-2 CB 41, ruled that stamp taxes on Section 22 (n) of the present' Code creates their combined incomes in.computing their
bond issues were deductible on an amortized a discrimination between taxpayers similarly tax liability. (See. 12 (d) of the Internal
basis over the life of the bonds. (See situated for all practical purposes. Revenue Code.) Section 301, Revenue Act of
Hirshon v. United States (53-2 U. S. T. C., , or aA sy
employed. person in business, or an employer,
er, 1951, extended some of the benefit of income
par. 9499 (Ct. Cls.) ).) may deduct all his section 23 expenses in splitting to heads of households by giving
An individual witness recommended an arriving at adjusted gross income. Be may them approximately one-half of the benefit
amendment to section 23 (c) which would then take the standard deduction where it received by married couples from full income
.provide that taxes will be deemed to have is not beneficial to itemize other deductions. splitting. (Sec. 12 (c)) The "head of a
been paid or accrued in respect of the vendor By contrast, a salaried employee or a person household" is defined by the statute as being,
and the vendee of real property, in accord- working on a commission basis may deduct in general, a formerly married, but now un-
ance with the adjustments made between business expenses other than travel, meals, married, person who maintains a household
them on the settlement date. and lodging while away from home, in arriv- consisting of himself, children, stepchildren,
College and educational. expenses ing at adjusted gross income, only to the ex- and grandchildren. The splitting of incom
e
Historical note: Section 23 (a) (1) (A) tent of the reimbursement arrangement with is the solution. provided by the code for the
allows as deductions all the ordinary and the employer, This places the salaried or tained taned discriminations spouse spouse ses of which comm
forerly
u unity-nity- ob-
necesary expenses in carrying on a trade "commission salesmen at a disadvantage in prop-
or business. Section 24 (a) (1) expressly respect of unreimbursed expenses, in that he erty States and those of the common-law
prohibits any deduction for personal, living, must item them to obtain the deduction States. After several abortive efforts to take
or family expenses. Educational expenses, under section 23. This offsets much of the away the tax benefit from the division of
either for the taxpayer himself or for a tax advantage connected with the standard income between spouses in the community-
dependent, usually fall under, prohibition deduction. property States, the problem was success-
of section 24 (a) (1). Hoever, in recent Hearings, June 23, 1953: The discrimina- fully approached from the standpoint of
years a breach has been driven in the Gov- tion above described was attacked by several granting to common-law States agesten-
ernment's defensive wall. In Hill v. Coin- witnesses, primarily from the standpoint of toally the same income-tax advantages n-
missioner (50-1, USTC, par.-9310,181 F. (2d) the commission salesman. In this respect j This by the ca good fproperty States.
906 (CA-4) ), the fourth circuit reversed the the commission salesman seems to bere-This may afford a good object lesson in any
Tax Court (CCH Dec. 17,166, 13 TC 291 attempts to iron out the inequalities in the
goaded as an employee. It was submitted code. Take no unfair advantage away from
(1949)) and held that where a public school that in arriving at adjusted gross income anybody; but extend it to everybody.
teacher was required under State law to and in using the standard deduction, there
either attend summer school or take exami- should be no distinction as between the self- (The heads persons who householdscanno
of un-
t and certain such, married nation on five selected books as prerequisite employed or an employer, and an employee, but who have a s serious urrden infcaring for
for renewal of her teacher's certificate, the Different solutions were advanced, one of relatives claim they are being discriminated
cost of attending summer school was an or- which would repeal the restrictions in re- against.)
dinary and necessary business expense. In . ?spect of an employee's expenses not ream- Hearings, June 23, 1953: One witness be-
Coughlin v. Commissioner (53-1, USTC, par. bursed,by his employer. the 9321, 202 F. (2d) 307 (CA-2)), the second
p' similar discrimination moaned received fact that no benefit Whatever
circuit rthe TCourt (CCH Dec. exists as between was received from the income-splitting pro-
crcuit reversed 528 (e Tax a and held that the city salesmen and traveling salesmen. Trav- visions by married couples. subject only to ,, IS expense of T C 528 (19 New York ld- that cling expenses while away from home are the minimum rate-of tax. (With equal force
Tax Institute, incurred b a deductible in arriving at adjusted gross in- it could be said that no benefit whatever was
y practicing law- come. A salesman who is assigned to city received from sec. 12 (d) by married
yea, was a business ..expense. and suburban territory incurs the same type couples in the communit States
Hearings, June 18, 1953: The president- of expenses but cannot so treat them be- who fell in the highest surtaxebra kets.)
elect of the American Medical Association cause he is not away from home. The re- The witness sought to correct the alleged in_
urged an amendment to the code authoriz- moval from the statute of the words "while equality by granting a special personal ex-
ing the deduction of postgraduate educa- away from home" was urged in that con- emption of $300 to heads of households in all
ti,nal expenses. nection. And one witness went so far as categories, and to married couples whose ad-
Support was urged for two bills, H. R. to suggest that personal commuting expense justed gross income is less than $5,000.
1274, which would allow a deduction with- to his place of employment should be al- The purpose of income splitting was not to
out limitation of expenses for the education lowed on the theory that it is imperative to reduce the tax rates but to level off the Seri-
of a dependent; and H. R, 3469, to provide be at work to earn the income taxed. The ous discrimination which obtained for so
a deduction for expenses for the taxpayer's last-mentioned suggestion would apply to a long between the community-property States
own education or that of another person numberof Items presently regarded as purely and the common-law States. If everybody
but not below the college level. Another personal. For the traveling man, however, were taxed at one constant rate, income
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1954
CONGRESSIONAL RECORD - APPENDIX
splitting would not have been necessary and
the community-property States would not
have enjoyed any advantage over the tax-
payers in the other States. It was the pro-
gressive surtax rates on combined income of
spouses which brought about the disparity.
The splitting of income did not change the
rates of taxation but to the extent above
placed all spouses on a community-property
basis. Under the proposal, the upper
bracket spouses in the community-property
States could also claim some special benefit
from section 12 (d). If the lower Income
.groups are entitled to relief from income tax-
ation, it should be accomplished by a change
in the minimum rate or in j;.he exemptions.
Since all married couples subject to the min-
imum rate have always, in effect, had the
benefit of splitting income, there Is no oc-
casion to do more on that score.
It was also contended that the splitting
of income created an inequality as between
married couples on the one hand, and heads
of households and single persons on the
other, This was the occasion in the 1951 act
for giving the head of a household about half
of the advantage enjoyed by spouses. It was
accomplished by a change in the rates for
surtax. Historically speaking, the income-
splitting provisions have their origin in the
marital status of the--civil law. Naturally
the attributes of the marital status under
civil law have no application to unmarried
heads of households or single persons gener-
ally. In the community-property States,
where spouses have always been able under
Federal income taxation to divide their in-
comes, no great movement arose to grant
similar benefits to the heads of households
.and single persons within those States. Now
that the community-property system, as re-
gards Federal income taxation, has been ex-
tended to the entire country, it is not clear
to this writer just how far Congress should
go in respect of unmarried persons. The
problem does not exist so long as surtax net
income is not over $2,000, and does not be-
come serious until the unsplit surtax net
.Income steps into the progressive rates. At
least one solution is available to the tax-
.payer-get married. That's what the other
:fellow did.
Averaging of income
Historical note: The refusal of the Govern-
nient to prorate the gain on capital transac-
tions over the period of time in which the
asset was held proved to be as costly as it was
Inequitable. To subject to the ordinary sur-
tax rates the gain realized in the year of sale
but which had been accruing over a period
of years, was pretty rough. The result con-
tributed in no small measure to the alternate
method of taxing capital gains, first adopted
by .section 206 of the Revenue Act of 1921.
A somewhat analogous situation was pre-
sented by compensation received for personal
services rendered over a protracted period of
,time. That situation was recognized by sec-
tion 220 of the Revenue Act of 1939, which
added a new section. 107 to the Code. By
section 107, under certain circumstances, the
compensation is prorated over the prior years
in which the services were rendered so that a
computation at the :rates applicable for those
years may be made, and the aggregate tax so
.computed becomes the maximum tax in the
year of receipt. This method of proration
has been extended to the gain derived by the
taxpayer from a particular artistic work or
invention by, him; and, also, to certain kinds
ably Inadequate in that it does not provide
for lump-sum payments made at infrequent
wider front. One proposal was to reduce the
period during which personal services must
be rendered from 38 to 13 calendar months
and, also, permit the exclusion of taxable
periods during which a small percent of the
total services are rendered. H. R. 6126 has
been introduced along such lines.
Another proposal would permit lifetime
averaging of income by all individuals. It
recommends a moving average base for the
averaging of taxable income. It is claimed
that this method will improve the tax struc-
ture (1) by removing the repressive effect
of imposing the tax on the annual income
as if each year stood by itself unrelated to
any other year, and (2) by equalizing the
tax burden among individuals who earn the
same amount of income over the same ex-
tended period of time.
Various other methods of averaging were
suggested to find the income for the taxable
year, each with its distinctive features. The
Associated Actors and Artistes of America
recommended an amendment to the Code
which would allow the averaging of irregular
and fluctuating income. It presented three
methods for so doing, with a preference ex-
pressed for the simple averaging method.
This method contemplates that, at the end
of a given period, the taxpayer shall be en-
titled by proper election to a credit against
the tax otherwise due for the current year,
measured by the excess of taxes actually paid
for the averaging period over the taxes that
would have been paid for such period, had
the income in each year of the period been
the average of his entire income for all years
within the period.
The Chamber of Commerce of the United
States made a strong justification for ex-
tending the principle of section 107 to all
types of fluctuating income, including inter-
est, rents, dividends, royalties, bonuses, etc.,
applicable to two or more years, or attribu-
table to subsequent years. They point out
that the business operating loss carryback
and carryover provisions (section 122) con-
stitute a limited and incomplete recognition
of the need for a more comprehensive income
averaging device. The injection of the ac-
countant's concept of deferred income, that
is, income received in the current year but
attributable under accepted principles of ac-
counting to subsequent years, is a unique
contribution to this subject. The chamber
also points out that a great deal of the neces-
sity for an averaging device is due to the
highly progressive rates of surtax. The best
cure for the problem would be to attack the
high rates.
The incentive motive as a guiding principle
was also injected into this topic. Of course
incentive can be raised in every detail of
taxation. One witness recommended that
the Federal Government offer all taxpayers
a rate cut as a business incentive, to the
extent that their annual earnings exceed
their moving average earnings of their last
4 years. Another witness recommended as
a method of incentive taxation that any em-
ployer of labor, collecting and reporting with-
holding taxes, may deduct from its taxable
income varying amounts per worker per fis-
cal year, provided such amounts were rein-
vested in capital assets during the taxable
year. Were some such provision adopted, it
might also be regarded as an indirect reim-
bursement for all the tax collection activities
to which the employers of labor are subjected.
A515
dollar for dollar, unearned income is as able
to pay Income taxes as earned income. Par-
.ticularly, since the enactment of section 206
of the Revenue Act of 1921, giving special
treatment to gains from capital transactions,
the taxpayer who earns his income by the
sweat of his brow or other personal services,
is at a disadvantage?
The first provision attempting to compen-
sate for the unfavorable position of the tax-
payer who earns his Income was section 209
of the Revenue Act of 1924. It took the
form of a credit of 25 percent against the tax
on earned net income (not in excess of
$10,000). The principle of the credit was
continued in the 1926 and 1928 acts. It was
eliminated in the 1932 act; but restored by
the 1934 act in a limited way.e It was then
continued in every act until repealed by sec-
tion 107 (a) of the Revenue Act of 1943.
Hearings, July 9, 1953: There was very little
Interest shown in the hearings over this
topic. This was in sharp contrast with the
fine presentations made where the topic was
of vital interest to well-organized businesses
and professions.
The National Association of Manufacturers
submitted an adverse statement on the sub-
ject. They pointed out that the major in-
come-tax problems stem from the high rates
and especially the steep progressivity of the
structure. An earned income credit would
not benefit retired persons, and others de-
pendent upon income from pensions and in-
vestments. It would further complicate the
tax laws and constitute a dangerous prece-
dent to introduce gimmicks in the law which
tend to divert attention from the basic prob-
lem. The association strongly recommended
that excessive income taxation be dealt with
directly, and not circumvented by special re-
lief provisions for various classes of taxpay-
ers which would have the effect of perpetuat-
ing the high-rate policy.
A lawyer in private practice submitted a
statement which pointed out that one of the
-most significant social changes brought
about by our present rates of taxation is that
it has become virtually impossible for a per-
son to accumulate out of earned income a
-substantial reserve for his old age, or an
estate of sufficient size to support his widow
or other dependents. He maintained that
the Government should never take more
than half of a taxpayer's earned income. He
recommended a 50-percent maximum limita-
tion on earned income, and a reasonable
.earned income credit for taxpayers below the
50-percent average tax rate. Under present
conditions, the writer agrees with, that ap-
proach to the existing Inequity.
The United States Chamber of Commerce
took the position that there should be a rea-
sonable differentiation between earned in-
come and other income. Therefore, consid-
eration should be given to the development
and allowance of "a substantial credit for
earned income."
Time and manner of filing returns, and
declarations for individuals
Historical note: The filing of returns of
income has always been a required feature
of Federal income taxation, beginning with
the Civil War Acts. In fact, most all taxes
except those paid by stamps require periodic
returns. In the act of August 5, 1909 (sec.
38, 3d), and the act of October 3, 1913 (sec.
II D and G (c) ), the due date of the return
was March 1 of the following year. Such
The American Newspaper Guild recom- date was changed by the Revenue Act of 1918
mended an amendment to section 107 (d) to "the 15th day of the 3d month following
{2), relating to back pay, in order that sever- the close of the fiscal year, or, if the return
is made on the b
i
i
f th
i
l
h
as
s o
sm
ssa
pay, suc
e calendar year,
as is provided for
intervals on continuing as distinguished ante d
from completed projects; nor does it take by American Newspaper Guild contracts, may then the return shall be made on or before
into account lump-sum payments received be allocated to taxable years in which the the 15th day of March." (Sec. 227 (a) and
as cumulative dividends and delinquent income may be assumed to have been earned. sec. 241 (a) of the Revenue Act of 1918.)
Since that time (1919), the regular filing
interest. Earned income credit date on the final income returns for both
Hearings, July 8, 1953: At the hearings Historical note: The underlying theory of individuals and corporations has not been
there was considerable agitation for different income taxation is to place the burden of
methods of averaging and for covering
a tax upon ability to pay. It would seem that. Footnotes at end of speech.
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1954 CONURE$SIONALlRECORD - APPENDTXA517
iii the form of a contract with an insurance 85 percent of fair market value of the stock Section 22 (b) contains the provisions re-
co'mpany or on a self-insurance basis satis- when the option is granted; (b) the option specting the taxation of annuities and the
not tr
the r option tis granted na thec)em- texclusions he employee's estateorobenefic arriies.fits to
factory to explain
vivos; abo e, I TS.tate
4107, umodifying everal prig the timeansfe
rulings, has ruled that certain types of self- ployee does not own, directly or indirectly. The foregoing provisions contain the broad
insured plans, although meeting the re- more than 10 percent of the optionor's voting outlines of the system for tax treatment of
quirements under State laws, do not con- stock. Where the employee exercises a re- employees' annuities, pension, and profit-
stitute plans of insurance within the mean- stricted stock option after 1949, and no dis- sharing plans. The system now goes much
ing of code section 22 (b) (5). position is made of the stock within 2 years further than any exact correlation of de-
Under these circumstances, a practicing from the date of granting the option nor ductions and income receipts could recon-
attorney recommended that the code be within 6 months after the transfer of such cile. Business and social policy have entered
amended to exclude from the employee's stock to him, then (1) no income shall result into their formation. The applicable pro-
gross income disability benefits paid under at the time of acquisition of the stock upon. visions are already so complicated that the
self-insured private plans whether or not the the exercise of the option, (2) no deduction complete explanation of detailed recom-
employer is insured. The same party rec- under section 23 (a) shall be allowed the mendations to change inequities, imaginary
ommended that the code be amended to corporation, and (3) no amount other than or real, is beyond the necessary limits of this
allow a deduction under section 126 (c) with the option price shall be considered as re- survey. (See discussion in the joint com-
respect both to installment payments and to ceived by the optionor; provided, the op- mittee's preliminary digest of suggestions,
lump-sum payments to beneficiaries of de- tionee, at the time he exercises the restricted dated Apr. 21, 1953, pp. 35-40.) A number
ceased members' of employee retirement stock option, is an employee of the optionor, of proposed amendments will be briefly men-
plans, if such payments are not made under or the option is exercised by him within 3 tinned.
In-
Hearings, July 15, 1953: Considerable joint and survivors' annuities described in months ceas
14es 1953beH. R. 4311loyee.
has terest was shown in this topic and numerous
section 113 (a) (5). been Introduced to amend Code section 112 amendments were proposed, largely of a
Three percent annuity ule so that the gain shall not be recognized to technical nature.
Historical note: The 3 percent annuity the corporate employer upon a sale of treas- The section of taxation of the American
the fieven ue Act ed in section 22 (b) (2) of ury stock to an employee pursuant to a re- Bar Association made four recommendations
CB B 569, 569 at pp? of 604 19 and 628 (See (amendment (Pt?amendment stricted stock option plan as defined in see- all of which were contained in the Reed-
the
2d session of
(dl (2) and (3). A director of
2)
No. 14).) It continues at code section 22 lion the 130A Wilcox 011 Co. urged favorable acti Camp bills introduced in the
on the 82d Congress. They are:
(b) (2). The 3-percent rule is not too Im- ts on this bill. 1. The exclusion from gross income of the
since o retired r elnment annuitants An official of the American Telephone and amounts paid by employers for life insurance
pQrtant
since owi wing i t their relatively small con- Telegraph. Company recommended that the protection plans created for the benefit of
tributie their cost Is recovered ordinarily o whtax position of capital-raising employee's P
stock purchase plans as opposed to incentive employees.
h somquired over 2 annuity To a person who
has acquired his auiton less favorable option plans for top management be clearly 2. Employers on the accrual basis should
terms, or by purchase from an insurance set forth In the law. He suggested adding a be allowed 75 days, instead of 60 days, with-
company, the rule may take on some impor- provisions to the code which would deal ex- in which to make contributions to trusts for
tance. never result is that many annuitants pressly with the capital-raising type of plan. their employees---amend section 23 (p) (1)
arehi able others, ecapture their outlay tax The provision would exclude from gross (E) accordingly.
n a while prisIn roxab such m I the income the entire differential between pur- 3. Payments to union welfare funds created
free,
incur a sharp rise in Which income l the chase price and market value of stock when under the Taft-Hartley Act should be de-
year has been following that recovered. in which the total cost issued to employees under the plan, even ductible under section 23 (a), whether or
as though such differential is in compensation. not they qualify as deductions under section
on Hearings, July eri 1953: The section of too- This would permit the reasonable under- 23 (p).
ation of the endme nt Bar substituting a con- - pricing of the stock required to induce em- 4. Provide capital-gains treatment for
posed an ymendmo sttutg a eapparticipation, without fear of tax lump-sum payments received by employees stant nuit syearly edclusio his for the life of an- ployee oplica ions. Of course, the cost basis of or their beneficiaries from an employee's
is the , based th dit life expectancy. Reed- the stock presumably for all purposes, would trust or from employee's annuities In con-
C me same what b coa so contained the Reed- be the price paid by the employee. nection with nontrusted plans-amend sec-
sions relating That annuities lso in discharge ch provi- Another recommendation was made which tion 22 (b) (2) (B).
alimony; another of would permit employee's stock options All of these recommendations were also
nuttpa amounts ts; and received other than ae granted prior to the 1950 act to be modified urged by one or more other witnesses.
nutty payments; aannuities having a re- to prohibit their assignment without being It was believed desirable by one party to
Th featuree treated as new options under section 130A extend the coverage of such plans to indi-
fund
tne American Life Convention and other e The full effect of such an amendment viduals who are not employees under the
witnesses submitted a proposal for annuity is not clear, but no objection is seen where strict common law concept or within the
taxation which involved changing the 3-per- the option can qualify under the other pro- statutory definition. He suggested that the
mine the I t a ti%e ement percent factor annnti deteres, visions of section 130A. definition of "employee" set forth in code
cent to mine l inon of ele this ment factor continuously and Historical note (deferred compensation. section 3797 (a) (20) be amended to include
throughout the application the o life of the annuity rather her plans): This subject includes employees' all persons who perform services for a life
ui
than terminating it upon the recovery of the annuities, pension and profit-sharing plans. insurance company as commission salesmen.'
capital investment. (Code sees. 23 (p). 165 and 22 (b).) It would be interesting to consider this sug-
Code section 165 had humble origins. It gestion from the standpoint of commission
The National Association of Life under. began as section 219 (f) of the Revenue Act salesmen generally. Another witness recom-
writer the ps re-1934 a rocommenng a return to of 1921, a new subdivision providing that an mended code amendments which would give
come, under method of taxing annuity in- irrevocable trust created by an employer as a an employer seeking to establish a pension
permitted which recover, tax-free, annuth would be part of a stock bonus or profit-sharing plan plan greater time within which to obtain an
he has paid for the the purchase annuity and, andd, , shall not be taxable, but that the amounts advance ruling on the qualification of the
price t that to
price actually distributed to any employee shall be plan under section 165 (a) ; also, clarify sec-
thereafter, be as taxable income. required to ssocia all annwtd taxable to him when distributed, to the ex- tion 165 (a) (4) as to the extent to which
as taxable inn choice hassociation f d ad- tent that they exceed the contributions made contributions or benefits under a plan may
as a strong eAnLife Convention. the method ad- . by him. (1939-1 (pt. 2) CB 192, at p. 218.) be provided for shareholder employees.
vanced by the American The pension concept was added to the ex- Techniques for alleviating double taxation
Stock options and deferred compensation emption status by the 1926 act. It was re- of dividends
plans numbered to section 165 by the 1928 act.
Historical note (stock options) : The In the 1942 act, it underwent a major over- Historical note: Beginning with the 1913
proper treatment of employee stock options hauling and enlargement, which with certain act, dividends were included in the statutory
has always been uncertain YO Section 218 of amendments represents its form today. definition 1913.) In recogn ition of of the the t of
the Revenue Act of 1950, added a new section (Code sec. 165.) October the double taxation if hed ny
(130A) to the Code, in respect to restricted Section 165 establishes the exempt status fncluding dividends le the shareholder's in-
68T, stock options. (1950-2 CB 586- of the trust. Section 23 (p) allows a deduc-
587; code sec. 130A.) A "restricted stock tion to the contributing employer. It began come, the 1913 act allowed as a deduction in
option" means an option granted after Feb- as section 23 (q) of the 1928 act which computing net income for the purpose of the
ruary 26, 1945 (the date of the Supreme allowed the employer reasonable amounts in normal tax (sec. II B, seventh) :
Court's decision in the Smith case), to an addition to the contribution needed to cover "The amount received as dividends upon
individual for any reason connected with his the pension liability accruing during the the stock or from the net earnings of any
employment by a corporation to purchase taxable year. The subsection was later re- corporation, joint 'stock company, associa-
its stock if: (a) The option price is at least lettered as section 23 (p), and as such, it was tion, or insurance company which is tax-
enlarged by the 1942 act to substantially its able upon Its net income as hereinafter pro-
Fpresent forn-L t (Code section 23 (p)?) vided.
ootnotes at end of speech.
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A518 CONGRESSIONAL RECORD - APPENDIX
January 25
In the 1916 act, the relief took the form "Recommendation: Give stockholders income Is left to the administrative authori-
of the allowance of a credit for normal tax other than corporations a credit against in- ties with appeal to the courts. The certified
purposes only. (Sec. 5 (b).) come tax equal to 20 percent of dividends
In the Revenue Act of 1918, the relief received from domestic corporations. Such pre oc tivountant thinks that should be his
continued to take the form of a credit for a credit should not exceed the amount of prerogative.
normal tax only, imposed upon individuals. the tax imposed before allowance of the Hearings o, JMa of 195re The National Ax-
As-
(Sec. 216 (a).) In the 1918 act, corpora- credit and it should not be allowed with re- isting revenue ng practices are hink that ac-
tions secured relief by way of a deduction in spect to dividends from section 251 corpo- bitrary isting Invasion arof managerial
acomputing net income. (Sec. 234 (a) (6).) rations or China Trade Act corporations. prerogatives their neerof mnagThe. 1928 act made it clear that all section 25 No credit should be allowed with respect to business practices. and in They onte wth sherd
credits to individuals, including the dividend capital-gain dividends received from re u- management They contend that where
credit, were "against the net income." Thus lated investment companies. If the Credit accounting accoprocedures, accepted standard
the matter stood until the Revenue Act of is allowed to nonresident aliens, it should some cases
e, modified consistently
1936, when the relief was withdrawn com- not exceed the tax rate on their dividend operating e reflect the taxpayer's own
pletely as to individuals and reduced to 85 income. The credit with respect to divi- conclusive experience, the results net inco e.
percent of the dividends in the case of corpo- dends received by an estate or trust should In opinion, my to the philosophy onot aoad-
rations.
rations. That is the position today. (Code be allocated between the fiduciary and the that of tax ad-
sees. 25 and 26 (b) (1).) Several bills are beneficiary on a basis similar to that pro- ministration r, unsound. Getting
gave own to
pending on the subject. vided in section 163 (b) of the Internal Rev- cases, however, she association goseveral
Hearings, July 16, 1953: There is a great enue Code with respect to partially tax- specific examples where they seem to be on
amount of literature on this topic and from exempt interest." solid ground.
the number and character of those who testa- Under the elusive topic of "accounting
fled,. or submitted statements for the record, Accounting principles principles," several witnesses advocated
d
It is regarded as a major problem. Every- Historical note: This is one of the most changes at complete variance with the pres-
body was against the so-called double taxa- elusive subjects in the entire field of Federal ent state of the law as to what constitutes
tion of dividend income. The National Asso- income taxation. The lawyer and the judge income. For some reason, under this sub-
ciation of Manufacturers pointed out that think in terms of equal protection of the ject, several witnesses urged a change in
aside from the discrimination against stock- laws. The law shall apply to all alike and the basis of depreciation which amounts in
holders, the most serious aspect of the taxa- have the same meaning for everybody. The effect to a kind of percentage depreciation.
tion of corporate profits which are disbursed accountant thinks in terms of reflection of Most of such witnesses recognized that the
as dividends is the bias created in favor of income for a specific business. His approach Code itself would have to be amended, al-
debt financing. If a corporation borrows at Is more flexible. A method of accounting thought they relied heavily upon sound ac-
4 percent, and has a 6 percent dividend rate, may be satisfactory for one business but not counting practice in justification for their
it requires three times as much gross to for another. The same busines may change stand.
service new stock as it would in the case of from one method to another as new manage- This writer has always regarded discovery
a debt. This is doubtless one of the reasons meat desires or new accountants advise. depletion and percentage depletion of min-
why net new corporate stock issues during This explains the recurring attempts of the erals as a tax subsidy, not based on legal
the period 1946-51 averaged only $1.6 billion accounting profession. to have the tax stat- principles of income derivation. The Treas-
a year, while new corporate borrowing av- utes recognize, without question, the net in- ury Department has attempted on several oc-
eragd $11 billion a year. If that trend come statement of a certified public account- casions to eliminate or curtail those provi-
continues, this writer suspects that Con- ant as being in conformity with sound ac- sions in the statute. That approach is futile.
gress will restrict the corporate deduc- counting principles. To a lawyer, that is like with oil, gas and minerals, commerce gsetting thepa in-
tion for interest on indebtedness, as it once saying that the professional opinion of a ce it is curious that and er-
did. See sec. 12 (a) (Third) of the Revenue member of the bar shall be accepted by the dustry dustry has not launched a drive for per-
Act of 1916.) revenue authorities without question as to tentage depreciation, or its equivalent. One
All interest on indebtedness is now deduct- the state of the law. By legal so did, using impressive terminology
al standards, such
Ible, with a limitation not here important. an opinion may serve as an exposition of the mit an amendment to the Code to neo
The trend to debt financing may have led an law of a foreign jurisdiction, but not as the mt a
co ost realistic liofic can plant consum equitable
consume d. He d. He re co areco o-
accountant witness to suggest that corpora- authoritative on the law of this country. To the me
tions be allowed to deduct dividends paid in apply the same code differently depending mended ahe use of o authoritative
the th tive pd d
tract another witness ttaxable ae would cure e. B double upon accounting broad limits "generally n have different index of a varying means odollars conver into a homogeneous
treat, trastian dividends by would curthe acs for dipr principles" is isets. cost deduction of x puh su-
taxati too on ndends bae et oo the c
ug
l stockholders. des f r d 19re act, there has been estate- ring the for tax ers purposes. Although
ggnizec Consumers Price Index, should re-
Many other suggestions were made to al- tory prov
the og pre-
ision in respect of the basis of scribe the that the Government should tang
leviate the tax pain on the stockholder. In keeping accounts. (Sec. 8 of the Rev- recorded indices to in used in converting eepre
apparent recognition of the fiscal necessities enue Act of 1916.) Even at that 'time, there e cation d plant costs into allowable dpre-
of the Government, most of the recommenda- was a caveat that the taxpayer's method cis deductions.
tions went at it by stages. Several witnesses must clearly reflect his Income. A clariflca- Several other witnesses urged changes in
Urged lifting the corporate credit from 85 tion of the provision occurred In Section t
law, he tempo of capital recovery under existing
percent to 100 percent of the dividends re- 212 (b) of the Revenue Act of 1918, and has was but ohs pt most significant contribution
ceived from domestic corporations. As to continued to this date. Code section 41 was the concept that the depreciation base
individual stockholders, the usual remedy reads: reflect should be adjusted from time time of
took the form of a credit, although it was "General rule: The net Income shall be the dollar. changes in the purchasing not always clear whether the witness meant computed upon the basis of the taxpayer's power
e-
?credit against tax or against net income. annual accounting the dThis method would occasion
period (fiscal year or cal- covery, changes in the basis for in ace
Several stock exchanges were represented, endar year, as the case may be) in accord- Indices. measured by fluctuations s in the capital
general approach being to allow as a first ance with the method of accountin re u- tion pr. It revives of memories 1 the valuer
step a 10-percent credit against tax, that is, larly employed in keeping the books of such the p early roblems as of acts. s1, 1e13, and problem of
a credit against tax of 10 percent of the taxpayer; but if no such method of account- fully depreciated the
prevenue assets The pee will o
amount of dfvidends received. In other Ing has been so employed, or if the method difficult. in use ebe
words, an investor with $500 of dividends employed does not clearly reflect the income, method with the percentage vue rvc has
would compute his tax exactly as he now does the computation shall be made in accordance method with which the Revenue Service lu
and then deduct 10 percent of $500, or $50, with such method as in the opinion of the had experience, would offer the best so-
from the tax. This would amount to taxing Commissioner does clearly reflect the in- tion.
dividend income at 10 points less. As soon come. n a lawyer one of the most intriguing
as the Federal budget permits, a second step As we see, the code does say, in part, that tentprinciples of income taxation Is the aecoThe
could increase the credit to the percentage net income shall be computed in accordance legal 's concept of deferred Income. The
representing the lowest combined normal with the method of accounting regularly saying authorities
that you are t derive nanimous e
and surtax bracket, presently 22.2 percent. employed in keeping the books f thntax-- after that you cannot Segross income
A variation of this method would allow as a after the date of receipt. You may accrue
deduction from gross income a minimum wider. However, those who seek to open It before receipt when becomes a fixed
amount of say $200, with an option in the wide the floodgates for accounting conven- liability, but when received, that hat Is the end
taxpayer to take the percentage credit or fence fail to note note that tenon 41 also states of it. (Automobile Underwriters, Inc. (CCH
the dollar deduction. The amount of the that, when the method employed does not Dec. 6088, 19 BTA 1160 (1930) ); G. C. M. percentage credit varied as between wit- clearly reflect the income, the computation 20021 1938-i CB 157; I. T. 3496, 194i-2 CB
messes. shall be made in accordance with such meth- 107); Your Health Club, Inc. (CCH Dec. 14,
To this writer, the best rounded-out rec- od as in the opinion of the Commissioner 250, 4 TC 385 (1944)); Montgomery, Federal
does clearly came from a practicing attar- as to whe her reflect
hey, as follows; pp. 35458.) A
particular the 1method of sac- finer tech icalObrief lwas submitted urging . II,
Counting does or does not clearly reflect the that the code be amended to provide that
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CONGRESSIONAL RYCQRD - APPENDIX
amounts, receiyed-for the servicing of tele-
vision receivers and apparatus over a pe-
riod of time be considered taxable. Income
over the same period of time. It was.argued
that the reporting of taxable income would
then match. with the expenses incurred, and
would reflect true economic income,,,
The representative of the American In-
stitute of Accountants testified In favor of
the same basic idea but in different words.
He advanced the philosophy that sections
41, 42, and 43,pf the, code should be cross-
referenced and, keyed to section 22 (a), hav-
ing to do with gross; income, and to section
23, having to do with deductions, The Fed-
eral-Tax Forum, Inc., would accomplish the
same, objective by a general amendment of
section 42, with specific amendments pro-
viding that a successor corporation in a
tax-free reorganization should step into the
"tax shoes" of the predecessor corporation
for all tax purposes.
LIFO inventory accounting
Historical note: The first statutory provi-
slon dealing specifically with inventories was
section 203 of the Revenue Act of 1918. .It
has continued In almost identical language
to this date. (Code sec. 22 (c).) The
original regulations 45, promulgated April
16, 1919, provided that, in order to reflect
the net income correctly, inventories at the
beginning and end of each year were neces-
sary in every case in which the production,
purchase, or sale of merchandise was an in-
come-producing factor. The regulations
were, based largely upon regulations 38,
promulgated under the 1916 act, At that
time, the two bases recognized for the valua-
tion of Inventories were cost, or cost or mar-
ket, whichever was lower. (Where inven-
tories. are kept at cost, the effect is the same
as computing the gain or loss' on the sale
of each Item of merchandise on the basis of
cost.) To a limited extent an average cost
method was recognized. (See A. R. R. 18,
2 CB 50.) (Where Inventories are kept on
the basis of cost or market, whichever is
lower, the effect is to allow a. reduction in
gross income of the unrealized shrinkage
in value of goods on hand at the end of the
year.) Article 1586 of regulations 45 (1920
edition) permitted livestock raisers and other
farmers to value inventories by the "farm-
price method," which provided for a valua-
tion at market price less cost of marketing.
Article 1585 of regulations 62, approved Feb-
ruary 15, 1922, permitted dealers In securities
a third method of inventory pricing, namely,
market value. (To value inventories at mar-
ket, is to report gain or loss on the fluctua-
tions in market value of goods on hand in the
closing inventory.) A similar result is in-
volved in' the farm-price method. The "re-
tail method" of pricing inventories, author-
ized by article 1588, regulations 62, is an
approximate cost method. The special
method granted miners and manufacturers
is an allocated cost basis of pricing inven-
tories.
In finding cost for inventory purposes, tax-
payers must use the actual cost of the par-
ticular goods in inventory, when such costs
can be identified, or the latest purchase in-
voices when Identification is not possible.
The use of latest invoices has the practical
result of putting inventory costs on a "first-
in, first-out" basis, which, in. general, has
been required to the exclusion of average
cost. Certain industries which carry large
inventories subject to wide price fluctuations,
long desired to u$e the "last-in, first-out"
method (LIFO) of determining cost, since
that method tends to prevent Inflated profits
in a rising commodity market, with the in-
evitable losses when prices turn downward.
The Treasury declined to amend the regula-
tions to accommodate such industriep.? The
1938 act permitted a limited use of LIFO to
producers and probessors of nonferrous met-
als and to tanners. (Code sec. 22 (d).),
Finally, the 1939 act amended code section
22 (d) to permit all taxpayers using inven-
tories to elect to use a prescribed LIFO cost
for the valuation of all or part of their inven-
tories, subject to the Commissioner's ap-
proval. The LIFO method is a substituted
cost method, which uses the highest recent
cost to compute profits, irrespective of which
goods are sold, and keeps the low costs in
inventory. The rationalization of LIFO cost
is that it provides a means through which
the increased cost of carrying the same re-
quired inventory investment, due to price
rises, would not be considered business prof-
its. Of course, they are business profits
underrfthe closed and completed transaction
principle of income derivation. This writer
admits that LIFO cost and the so-called in-
voluntary liquidation and replacement pro-
visions of section 22 (d) (6) are a departure
from the closed and completed transaction
principle of income derivation. Neverthe-
less, in a nation noted for its booms and its
busts, it is good policy to narrow In some
way the drastic income and loss effects of
those extremes. When the drop in price
level occurs, the losses are then computed
with reference to sales of the lowest cost
merchandise and inventory is replenished in
a falling market.
The LIFO taxpayers soon found themselves
in a jam. They had used the years 1939, 1940,
and 1941 to work out their mounting high-
cost goods. So, on the outbreak of World
War II (not to mention the Korean war),
they found themselves liquidating their orig-
inal low-cost inventories at mounting prices
with serious economic and governmental re-
strictions on the ability to replace at any
cost. They ran to Congress for relief and got
it. (Sec. 119 of the Revenue Act of 1942;
Senate Finance Committee report, p. 82; sec.
110 of the Revenue Act of 1943; Public Law
756, 81st Cong.; sec. 306 of the Revenue Act
of 1951; Montgomery, Federal Taxes (1949-
50), vol. II, pp. 40"61.)
Although practically all of the inventory
provisions are in theoretical conflict with
the legal principles of income derivation,
the writer defends them as a means of
smoothing out the fiscal extremes to which
this country seems addicted. Judging from
some of the difficulties in administering the
involuntary liquidation provisions, the ob-
jective might have been better accomplished
by an income averaging device over a period
of years.
Hearings, July 21, 1953: The substituted
cost of LIFO is beneficial, taxwise, in a
rising market; but, on a receding market
which falls below the LIFO cost, LIFO loses
its tax glamour. Apparently some business
men are concerned lest the price level fall
below their LIFO cost. Numerous witnesses
testified in favor of permitting LIFO tax-
payers to elect to inventory at cost or mar-
ket, whichever is lower. It is' presumed
they mean to use the basis of LIFO cost or
market, whichever Is lower. This would
combine the tax advantages of both systems.
In an inflationary market, it would reduce
income and stabilize inventory replace-
ment; in a receding market, it would mini-
mize losses and also permit the reduction
in income of unrealized depreciation in in-
ventory below the cost under LIFO.
One of the witnesses favoring LIFO cost
or market, whichever is lower, went a step
further. In order to remedy an injustice
done to taxpayers who might have elected
to use LIFO in the past, "but who were dis-
suaded from doing so by the advice of the
Bureau of Internal Revenue," it was pro-
posed to permit them now to elect LIFO cost
or market, whichever is lower.
One witness made a lengthly statement in
defense of LIFO as a management control
tool, He contended that it is erroneous to
look upon LIFQ as a tax deferment device.
A519
peacetime, which produces extraneous
charges or credits to income which tend to
mitigate against the effective use of LIFO as
a management control mechanism. He
recommended that the code be amended to
enlarge the present definition and treat-
ment of "involuntary liquidation." (Sec-
tion 22 (d) (6) (B).)
Another recommendation would amend
section 22 (d) (6) (A) to provide for the
payment of interest on refunds arising from
adjustments occasioned by replacement of
involuntary liquidations. It was also urged
that the time within which replacements
could be made of World War II liquidations
of LIFO inventories be extended from
January 1, 1953 to January 1, 1956, so that
the time for replacement of World War II
and Korean liquidations would expire at the
same time.
Depreciation and amortization
Historical note (depreciation) : Although
there is respectable authority to the effect
that the depreciation deduction is entirely
a matter of legislative grace, the revenue
acts have always treated it as a deduction
from gross income in arriving at taxable
net Income. In the Corporation Excise Tax
Act of 1909, and the regulations thereunder,
the depreciation deduction was regarded as
a type of loss. (Sec. 38 Second (secod).)
The 1909 regulations provided that "This
estimate should be formed upon the assumed
life of the property, its cost value, and its
use." Beginning with the Revenue Act of
1913, depreciation has been granted the dig-
nity of a separate deduction. (Sec. II B
(sixth) and sec. II G (b) (second).) By arti-
cle 161 of original regulations 45, promulgat-
ed under the Revenue Act of 1918, the stated
purpose of the allowance was to provide
an amount which, with salvage value at
the end of its useful life, would provide,
in place of the property, its cost, or its value,.
as of March 1, 1913, if acquired by the tax-
payer before that date. Prior to the Rev-
enue Act of 1921, the statute did not specify
the basis for the depreciation allowance.
After the Frierson concession and the Su-
preme Court's decision In Goodrich v. Ed-
wards," the 1921 act attempted to remove
all doubt about the matter, and, where the
property was acquired prior to March 1,
1913, based the allowance upon fair market
value as of that date; otherwise, the allow-
ance would be based upon cost. (Sec.
214 (a) (8) and sec. 234 (a) (7).) In
that respect, the statute has remained un-
changed to this day. (Code sec. 114.)
In the purchase and sale of property, the
cost must be recovered in arriving at gross
income 12 In keeping with the principle that
deductions per se are a matter of legislative
grace, the regulations, until recently, ex-
pressly provided that depreciation was not
to be regarded as a part of the cost of goods
sold. This was recently changed by T. D.
6028, promulgated July 6, 1953, 1953-16 IRB
8. Revenue Ruling 141, 1953-16 IRB 5.
Even so, the allowance itself is still based
upon cost, or adjusted cost. The new policy
of revenue in respect of depreciation adjust-
ments Is set forth in Revenue Rulings 90
and 91, 1953-11 IRB 4-5.
Hearings, July 22 and 23, 1953: There
was probably more activity concerning de-
preciation and amortization than any other
topic except excise-tax rates. To read the
oral testimony and statements submitted is
to take a course in economics. The Amer-
ican Federation of Labor opposed most of
the reforms suggested by industry. The
testimony at the hearings unfolded in two
directions: first, more liberal deductions
under the existing conception'of the depre-
ciation allowance; and, second, an elective
departure from investment cost as the basis
for the allowance and the injection into
the subject of replacement cost, or other
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A520 CONGRESSIONAL
standards, as an optional method. Taking
them up in order: -
1. A private practitioner observed that, in
an expanding economy, a business must be
able to recover the current high cast of in-
vestment out of current earnings. Today.
rising prices have resulted in replacement
costs far in excess of depreciation reserves.
The tax policy in respect of depreciation
should stand on the basic principle that the
purpose of the allowance is to permit the
tax-free recovery of the cost of invest-
ments. This is the- orthodox conception of
depreciation for tax purposes. He, therefore,
recommended (1) that taxpayers be per-
mitted, at their election, to deduct 50 percenit
Of expenditures for depre able property
either in the year made or over a 6-year
period, with the remaining 50 percent subject
to the ordinary depreciation deduction; and
(2) that depreciation, whether allowed `or
allowable, should not reduce basis unless it
resulted in a tax benefit. (See Code sec. 113
(b) (1) (B) and (d), as amended by sec. 162
of the Technical Changes Act of 1953.)
The representative of the National Machine
Tool Builders Association proposed a system
of optional depreciation for durable produc-
tive equipment acquired after December 31,
1952. The taxpayer would have the election
to write off all or any part of the cost of new
equipment in the year acquired and placed
in operation, the balance to be written off in
a manner designated by the taxpayer.
- The Association of AmericatiRailroads rec-
ommended annual depreciation, at a new rate
up to a maximum of 20 percent, with respect
to depreciable property acquired after De-
cember 31, 1953, until cost less the estimated
salvage had been charged off. The maximum
20 percent limitation would not apply where
the useful life of the property was less than
5 years; but the deductions would, in1 no
event, exceed cost less salvage value upon
retirement. It should be noted that rapid
recovery of invested cost is only a palliative
in an inflationary period.
Other witnesses urged various methods of
accelerating cost recovery, without abandon-
ing the present cost basis for the allowance.
In general, the taxpayer would be permitted
to determine the life of the asset and the
manner of cost recovery. H. R. 2128 would
allow depreciation to be taken on a- private
home. H. R. 2720 would provide for accel-
erated depreciation of devices, buildings, 9a-
el Inerp and equipment for the collection at
the source of atmospheric pollutants and
contaminants, based on a period of '$0
months. There are other similar bills. There
were many statements urging relief on that
and allied grounds. The smog problem and
pollution abatement are getting into the act.
2. The most exciting testimony was In con-
nection with the replacement-cost theory of
depreciation. To compute depreciation on
,the basis of