the legislative arena. We are concerned, too, about what to do and how to even proceed to express this concern. It was only 2 weeks ago that we learned about this pending legislation and the fact that it might contain provisions which could have some dramatic

effects on our members.

Our specific areas of concern have to do with section 5, technical amendments relating to tax shelter provisions and subsections A through E.

As we understand, the "at risk" provisions of section 465 of the Internal Revenue Code were enacted in 1976 to prevent alleged abuses by so-called tax shelter transactions. As originally enacted, the provisions of section 465 applied only to individuals, trusts, subchapter S corporations, personal holding companies, and noncorporate partners of partnerships.

This proposed new section would waive the controlled group rule and allow an alternative test for determining, on a separate corporation basis, whether such separate corporation member of a controlled group is engaged in substantial leasing activity. As proposed, in order to avail itself of the separate corporation test, the gross receipts of such corporation from leasing activities must be 80 percent of the gross receipts of such corporation. In addition, proposed section 465(c)(5)(B) provides that three additional tests must be met by such corporation for the taxable year and each of the two immediately preceding taxable years of such corporation.

These three tests are (1) the group, for each of such 3 years, must have at least three full-time employees substantially all of whose services were directly related to the equipment leasing activity; (2) during each of such 3 years, the leasing members of the group must have entered into at least five separate equipment leasing transactions and (3) during each of such 3 years, the leasing members of the group must have had, in the aggregate, at least $1 million in gross receipts from equipment leasing.

By requiring equipment leasing corporations to meet these tests in not only the taxable year but also for the immediately preceding taxable years, the proposed amendments would preclude a controlled group of corporations from being excluded from the “at risk" provisions with respect to newly formed equipment leasing members of the group for a minimum of 3 years.

The way we read the statute as proposed, before you get to a separate company test there must be a control group of leasing corporations. This we understand to be two or more. We do not believe this is in the interest of Congress. However, the most troublesome requirement in the proposed legislation is the requirement that the aggregate gross receipts from equipment leasing in the taxable year, and in whatever applicable preceding period, must be at least $1 million.

The elimination of an absolute $1 million requirement would accomplish two objectives: (1) It would not penalize those controlled groups of corporations which have a leasing member in a startup position and (2) would stimulate the economy by encouraging smaller businesses to purchase and lease new equipment.

We do not believe the elimination of the flat $1 million requirement will lead to abuses because our proposals still leave intact the "80 percent of gross receipts" test, the "three employee" test and

the "five separate lease transactions" test. Since substantial capital would have to be invested by a corporation in equipment to be leased to meet these tests, it would, we believe, preclude the creation of a corporation solely for the purpose of tax avoidance. Depending on how the present wording is interpreted, it could have a significant adverse impact on many small leasing firms as well as that segment of the business community which these people serve. More than one-third of our membership has been in business less than 3 years, and a far greater percentage would not currently meet this $1 million gross receipts criteria.

The independent leasing segment is still an important part of the market and will continue to be as the total market accelerates and expands. As in every industry, we, the small lessor, offer a different degree of service and flexibility as well as personal rapport. We don't want an advantage, we just want to be able to compete on an equal basis. The small businessman supports equality in taxes for large or small.

In summary, the members of our organization feel that the amendments of the "at risk" provision need clarification and modification. As presently drafted the law could dramatically impact the small and new independent lessors and would inhibit the growth of independent lessors. It would also limit the business community in being served by the independent lessors. Our proposal relating to the 3-year provision would eliminate or substantially reduce the $1 million requirement.

Thank you, sir.

Senator BYRD. Thank you, Mr. Skinner.

As I understand it you oppose a part of the technical corrections bill. You oppose a section in the technical corrections bill as passed by the House of Representatives.

Mr. SKINNER. Yes, section 465(c)(5).

Senator BYRD. From what you say, that so-called technical correction is in your view at least a substantive change.

Mr. SKINNER. Correct.

Senator BYRD. Would the Treasury want to comment on that? Mr. FERGUSON. Mr. Chairman, the intent of the House-passedtechnical corrections bill is to liberalize an exception to the at-risk provisions. The Revenue Act of 1978 created an exception from the at-risk rules for active leasing companies. They were defined in the 1978 act as companies with 50 percent of the gross receipts from leasing activities.

The 50-percent rule applied to an entire controlled group necessarily; otherwise, a corporation could simply spin off a subsidiary, combine all the leasing activities in the sub, and avoid the at-risk limitations. However, it was pointed out to various staff members that there were certain leasing groups that could not meet the 50percent rule but nonetheless carried on substantial leasing activities; that observation led to the three-prong test mentioned in Mr. Skinner's testimony. The three-prong test in the House bill is intended as a liberalization.

I think, at this point it would be worthwhile for the staff members on the Hill and the staff members at Treasury to discuss the particular concerns expressed today. If there is a better way of stating what was intended on the House side, if there is some

unintended impact of the House provision, we would certainly like to know about it. We would be anxious to discuss this matter with the witness.

Senator BYRD. Well, does this not go beyond the scope of technical correction; that is, what the House did in regard to this item? Mr. FERGUSON. Well, if the House provision does go beyond the scope of a technical correction, it goes beyond it in the taxpayer's favor. I am not sure what particular problem arises in the case of this witness, maybe it is just ambiguity in the language. If so, we can clarify the ambiguity through a drafting change. But the clear intent of the House was to liberalize the 1978 rules for applying the exception.

Senator BYRD. Mr. Skinner, why don't you get together with Treasury and the committee staff to see what can be done.

Mr. SKINNER. We would be very happy to.

[The prepared statement of Mr. Skinner follows:]

TESTIMONY OF ROBERT SKINNER, RENNIKS LEASING, SANTA ANA, CALIF., INCOMING PRESIDENT, WESTERN ASSOCIATION OF EQUIPMENT LESSORS

SUMMARY OF PRINCIPAL POINTS

Pertaining to Section 5, Technical Amendments relating to Tax Shelter Provi

sions.

1. The wording appears, at least ambiguous.

2. Depending on interpretation it could impact dramatically on the small and new independent lessor.

3. In turn, that impact would inhibit the growth of independent lessors.

4. It would also limit the business community in being served by the independent lessor.

5. WAEL proposes to offer amendments: a. Relating to three year provision, add "or for such part of such period immediately preceding such taxable year as may be applicable." b. Eliminate $1,000,000 requirement.

6. Without causing damage to small businessmen, amendments will maintain intent of section.

Good afternoon, my name is Robert Skinner. I am President of Renniks Leasing Company, a small independent leasing firm which I started just a year ago in Santa Ana, California. Prior to this, I was a co-founder and President of a large independent leasing company for 16 years. I am here this afternoon as the incoming President of the Western Association of Equipment Lessors. With me today is William Hetts, tax partner, Deloitte, Haskin & Sells of San Francisco who are one of our members and advisors.

WAEL as we abbreviate it, is a relatively new organization with one hundred and ninety member firms located in the 11 Western States. The primary purpose of our organization has been to exchange ideas and provide an educational vehicle for the expanding leasing industry to try and keep up with the rapid changes and growth in our business. Of the one hundred and ninety firms who comprise our membership over one hundred and fifty are what we would consider small independent leasing businesses or brokers. Among our membership we also have thirteen bank leasing companies.

The members of our organization are very concerned about one section of the Technical Corrections Act, and how it will effect the independent leasing business firm as well as the effect it may have on our ability to serve the business community. WAEL is still a young organization and quite honestly this is our first venture into the legislative arena. We are concerned too about what to do how to even proceed to express this concern. It was only two weeks ago that we learned about this pending legislation and the fact that it might contain provisions which could have some dramatic effects on our members.

Our specific areas of concern have to do with Section 5, Technical Amendments relating to Tax Shelter provisions and Sub Section A through E.

As we understand, the "at risk" provisions of section 465, of the Internal Revenue Code, were enacted in 1976 to prevent alleged abuses by so-called "tax shelter" transactions. As originally enacted, the provisions of section 465 applied only to

individuals, trusts, Subchapter S Corporations, personal holding companies and noncorporate partners of partnerships.

The Revenue Act of 1978 extended the "at risk" provisions of section 465 to "closely-held" corporations. Such "closely-held" corporations were defined by reference to section 542(a)(2) of the Code to include those corporations where, at any time during the last half of the taxable year, more than 50 percent in value of the corporation's outstanding stock is owned, directly or indirectly, by for not more than five individuals.

However, the Revenue Act of 1978 excluded from the "at risk" rules those "closely-held" corporations which are actively engaged in leasing tangible personal property (or, as it is referred to in the Code, "Section 1245 Property"). In determining whether a "closely-held" corporation is actively engaged in leasing equipment which is section 1245 property, section 465(c)(3)(D)(ii)(II) now provides that "a closely-held corporation . . . shall not be considered to be actively engaged in leasing such equipment unless 50 percent or more of the gross receipts of the corporation for the taxable year are attributable. . . to leasing the selling such equipment.' Section 465(c)(3)(D)(ii)(II) now provides that "in case of a controlled group of corporations (within the meaning of section 1563(a), this paragraph shall be applied by treating the controlled group as a single corporation."

The effect of this latter provision was to apply the "at risk” limitations to a number of substantial leasing operations because the gross receipts of some members of a controlled group of corporations could be substantial in the absolute sense, but would not constitute 50 percent of the aggregate gross receipts of all members of the controlled group. The proposed Technical Corrections Bill of 1979 now proposes to solve this problem by deleting all of section 465(c)(3)(D)(ii) and substituting, a new section 465(c)(5).

This proposed new section would waive the controlled group rule and allow an alternative test for determining, on a separate corporation basis, whether such separate corporation member of a controlled group is engaged in substantial leasing activity. As proposed, in order to avail itself of the separate corporation test, the gross receipts of such corporation from leasing activities must be 80 percent of the gross receipts of such corporation. In addition, proposed section 465(c)(5)(B) provides that three additional tests must be met by such corporation for the taxable year and each of the two immediately preceding taxable years of such corporation. These three tests are (1) the group, for each of such three years, must have at least 3 fulltime employees substantially all of whose services where directly related to the equipment leasing activity; (2) during each of such three years, the leasing members of the group must have entered into at least five separate equipment leasing transactions and (3) during each of such three years, the leasing members of the group must have had, in the aggregate, at least $1,000,000 in gross receipts from equipment leasing. By requiring equipment leasing corporations to meet these tests in not only the taxable year, but also for the two immediately preceding taxable years, the proposed amendments from being preclude a controlled group of corporations from being excluded from the "at risk" provisions with respect to newly formed equipment leasing members of the group for a minimum of three years. Speaking to this narrow provision only, such a result could be eliminated by addition of a parenthetical clause in proposed section 465(c)(5)(B) which would read somewhat as follow: "or for such part of such period immediately preceding such taxable year as may be applicable.'

However, the most troublesome requirement in the proposed legislation is the requirement that the aggregate gross receipts from equipment leasing in the taxable year, and in whatever applicable preceding period, must be at least $1,000,000. This would preclude the exemption from the "at risk" rules for a corporation which is a member of a controlled group, the activities of which are solely equipment leasing, but are not of a sufficient magnitude to meet presently proposed high dollar requirement of a leasing volume of $1,000,000 in gross receipts. We would recommend that such absolute dollar limit be eliminated. The effect of this proposal would be to allow a corporation that is member of a controlled group the exemption from the "at risk" rules, provided that such corporation's gross receipts from leasing are 80 percent or more of the total gross receipts such corporation.

The elimination of an absolute $1,000,000 requirement would accomplish two objectives: (1) it would not penalize those controlled groups of corporations which have a leasing member in a "start-up" position and (2) would stimulate the economy by encouraging smaller businesses to purchase and lease new equipment.

We do not believe the elimination of the flat $1,000,000 requirement will lead to abuses because our proposals still leaves intact the "80 percent of gross receipts" test, the "three employee" test and the "five separate lease transactions" test. Since

substantial capital would have to be invested by a corporation in equipment to be leased to meet these tests, it would, we believe, preclude the creation of a corporation solely for the purpose of tax avoidance.

Many of our WAEL members could be at a disadvantage by the present wording of this act, either because they cannot meet the three year requirement or the one million dollars in gross leasing receipts.

Depending on how the present wording is interpreted, it could have a significant adverse impact on many small leasing firms as well as that segment of the business community which these people serve. More than one-third of our membership has been in business less than three years, and a far greater percentage would not currently meet this $1,000,000 gross receipts criteria.

It is anticipated that the leasing industry will continue to experience exciting and dramatic growth over the next five and ten years. As the ravages of inflation continues to impact the business community, leasing has and will continue to be a much better understood and much more used vehicle to finance the capital growth which most business and our entire economy must achieve.

Perhaps, 60% to 70% of today's leasing business is being done by what might be called the large leasing companies and banks. That's significant, however, the independent leasing segment, is still an important part of the market mix and will continue to be as the total market accelerates and expands.

The large banks and corporate lessors, may dominate the market, but they can never serve it all. There are, as in every industry a different degree of service and flexibility as well as personal rapport that the small businessman can offer, that our larger colleagues cannot.

We have our total net worth on the barrel head, right on the line everyday competing with these corporate giants. We don't want an advantage, we just want to be able to compete on an equal basis. The small businessman supports equality in taxes for large or small.

In summary, the members of our organization feel there is at very least some ambiguity in the wording of Section 5. Our proposals to amend that wording and eliminate the $1,000,000 gross leasing receipts requirement would clear up the ambiguity, without, we believe damaging the intent of the proposed section-and it will accomplish that purpose without impairing the ability of the small businessman to function or impair his ability to serve the business community.

Senator BYRD. The next panel consists of Ernest S. Christian, Jr.; Albert G. Doumar, and Patrick A. Naughton, Committee of Banking Institutions on Taxation; and Matthew Newman, international pension consultants.

Welcome, gentlemen. Proceed as you wish.

STATEMENT OF ERNEST S. CHRISTIAN, JR.

Mr. CHRISTIAN. Mr. Chairman, I would ask that my written statement be made part of the record.

Senator BYRD. Without objection, so ordered.

Mr. CHRISTIAN. The subject of my testimony, Mr. Chairman, is section 701(u)(2)(C) of the 1978 act which deals with the question of the character to be given to gain realized from the sale of stock outside the United States, most particularly the sale of stock by one corporation of stock in another corporation.

Senator BYRD. Now is this a technical correction?

Mr. CHRISTIAN. Yes, sir, I believe it is. In fact, it is a technical correction to the technical correction portion of the 1978 act. As you know, title VII of the 1978 act was in fact the Technical Corrections Act of 1978 dealing with the 1976 act.

Senator BYRD. Well, does your proposal deal with 1976 or 1978? Mr. CHRISTIAN. The proposal here is to make a correction to the technical correction made in 1978 to the 1976 act.

The background, Mr. Chairman, is that in the 1976 act, section 904(b)(3) was amended to provide substantial restrictions on the extent to which income from the sale by one corporation of stock in