EXCESS PROFITS TAX EXTENSION THURSDAY, JUNE 4, 1953 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met, pursuant to recess, at 10 a. m., in the main hearing room, Hon. Daniel A. Reed, chairman, presiding. The CHAIRMAN. The committee will come to order. The committee will continue public hearings on the President's recommendations to extend for 6 months the excess-profits tax. The first witness this morning is Mr. Robert C. Loudon, controller, Symington-Gould Corp., Depew, N. Y. Mr. Loudon, we extend a welcome to you and will be glad to hear you. If you will just give your name and capacity in which you appear for the record, we shall be delighted to hear what you have to say. STATEMENT OF ROBERT C. LOUDON, COMPTROLLER, SYMING TON-GOULD CORP., DEPEW, N. Y. Mr. LOUDON. My name is Robert C. Loudon. I am comptroller of Symington-Gould Corp. of Depew, N. Y. I am unalterably opposed to the extension of the excess-profits-tax law because no such tax can ever be equitable, in spite of the best efforts of this committee to make it a fair law. For example, this morning I want to point out to you an inequity in the excess-profits tax laws which I hope will be corrected by this committee. It is the type of inequity which clearly demonstrates the utter futility of trying to enact a fair excess-profits tax law. Undoubtedly there are many other inequities in this type of law, but our problem is such an obvious example of unfairness that I feel this committee should be apprised of the situation. The unfortunate predicament in which our company finds itself has existed since the excess-profits tax went into effect after the Korean war. Our company is engaged in the manufacture of railway equipment. On November 21, 1949, we bought all the stock of a corporation named Martin & Schwartz, Inc., which company was engaged in the manufacture of gasoline pumps. There was nothing unusual about the contract, and by its terms it provided that the closing was to take place within 40 days from its execution by the parties, and the transaction was closed on the last day. That date was January 6, 1950. On January 3, 1951, almost a year later, President Truman signed the Excess-Profits Tax Act, which act levied an excess-profits tax on our company's earnings for the calendar year 1950. In computing our company's credit for the purposes of this tax, we learned that because the legal title of the Martin & Schwartz stock was transferred after, rather than before, January 1, 1950, it caused our excess-profits tax credit to be reduced by 12 percent of the $2 million purchase price, or $240,000. Solely because of the fortuitous circumstance that this transaction was closed on January 6, 1950, rather than before January 1, our company had an increase in inadmissible assets, and under section 435 (g) (5) (B) the company had a capital reduction under that section and section 435 (g) (6). The essence of the transaction was that on November 21, 1949, we executed a binding contract to purchase the stock and then and there became the equitable owners of that stock. There are precedents in the present Exess-Profits Tax Act for treating the contract date, rather than the delivery date as controlling. For example, see sections 443 (f) (2) and 444 (f) (2) (B). 1 have here a draft of an amendment which, in our opinion, will give us relief from this injustice. It does nothing more than to make Symington-Gould Corp. start even with its competitors. It does not give us any undue advantage. It merely permits a computation of our excess-profits credit in the normal way without penalizing us for the closing of an ordinary business transaction on the 6th day of January 1950, rather than a few days earlier. Since Symington-Gould Corp. was the equitable owner of the Martin-Schwartz stock on January 1, 1950, and could not have withdrawn from its contract to purchase it, it is our contention that it should be treated as the owner of that stock on the beginning of its first excess-profits tax year. At this point in my statement I would like to depart from my prepared text. I ask permission to have my prepared text printed in the record because it contains a draft of the amendment to the statute which would cure the inequities I have described above. The CHAIRMAN. Without objection, it is so ordered. (The statement follows:) This inequity can be remedied and real recognition be given the principle that taxation is a matter of substance rather than form by amending section 435 (g) (5) (B) to add at the end thereof the following: "Stock in another corporation acquired by a taxpayer after the beginning of its first taxable year under this subchapter, pursuant to a written contract executed prior thereto, shall, for the purpose of determining such taxpayer's original inadmissible assets, be deemed to have been owned by the taxpayer on the first day of its first taxable year under this subchapter." And section 435 (g) (6) by adding, at the end of subparagraphs A and B, the following parenthetical phrase: "or contructively held on such date under the conditions set forth in section 435 (g) (5) (B).” We request the committee to correct this patent inequity, since my company has been subjected to a highly unjust excess-profits tax since 1950, whether or not the excess-profits tax is extended. Mr. LOUDON. Instead of getting into the technicalities of language, I want to discuss with you the approach made by the Honorable Secretary of the Treasury to this problem of extending the excess-profits tax and particularly on his suggestion that it be extended without amendment. Frankly, I think that such action would constitute a breach of faith to the taxpayers of this country. The excess-profits tax was passed on January 3, 1951. When the proposed Revenue Act of 1951 was before this honorable committee, the Republican members in their report pointed out that no hearings were held before this committee on the needed changes in the excess-profits tax law because the then Secretary of the Treasury stated: That tax has just gone into effect. As it gets into operation we will begin to find out how it works. We may have to have some adjustments. Some inequities may develop one way or the other as it goes into operation. We feel that it is too early a start to make recommendations until it has been in operation awhile. We thought we could catch during the second phase some adjustments that will have to be made. Based upon this assurance by the Secretary, this committee heard no testimony on needed changes in the excess-profits tax law, although certainly it was assumed that certain adjustments would have to be made effective from the inception of the law. When the Revenue Act of 1951 was before the Senate Finance Committee it did permit a few adjustments, but in its report that committee conceded that other adjustments or amendments were absolutely necessary. The Senate Finance Committee in its report stated: In addition, your committee's bill includes several new provisions which deal with various other excess-profits tax problems of a relief nature. A great number of these problems were brought to the attention of the committee during its hearings on this bill, and these problems were examined by the staff. Your committee has confined its action to those cases which present the most immediate and pressing need for statutory changes. Of necessity, the committee has deferred action upon the bulk of the excess-profits tax proposals even though a number of suggestions undoubtedly are meritorious. It is believed that further action in this entire area should be deferred until the excess-profits tax returns have been filed and there has been an opportunity to evaluate the detailed oper ation of the law. It is anticipated that this will be possible early in 1952. In the meantime, the staff will continue its study of the problems involved in this entire field. In view of these official statements, the record is clear that there has been a pledge of faith, both by the administration, which initiated the excess-profits tax, and by the two committees of Congress charged with passing that law, that inequities in the excess-profits tax law would be corrected retroactively to the date of the inception of that law. I, therefore, submit to you that these equitable adjustments should be made at this time and applied retroactively. Above all else, they should be made if this unfair and unjust law is to be extended even for so much as 1 day. The CHAIRMAN. Does that conclude your statement? Mr. LOUDON. Yes, sir. The CHAIRMAN. We thank you very much, Mr. Loudon. I believe you are represented by an attorney, Mr. Lloyd Symington. Mr. LOUDON. That is true. The CHAIRMAN. We think very highly of him and congratulate you on having the benefits of his talents and ability. Mr. LOUDON. Thank you. The CHAIRMAN. Any questions? Mr. MASON. I want to make a statement, Mr. Chairman. The CHAIRMAN. Mr. Mason. Mr. MASON. I want to say, Mr. Loudon, that in regard to your statement which says that if this excess-profits tax is continued, it will be a breach of faith to the American people, I agree heartily with that statement. That is all, Mr. Chairman. The CHAIRMAN. Any other questions? We thank you very much for your appearance and the information you have given to us. Mr. LOUDON. Thank you. The CHAIRMAN. The next witness is Mr. Paul D. Seghers, on behalf of the Federal Tax Forum, New York City. Please give your name to the reporter for the record. STATEMENT OF PAUL D. SEGHERS, ON BEHALF OF THE FEDERAL TAX FORUM, NEW YORK CITY Mr. SEGHERS. My name is Paul D. Seghers, attorney, New York, representing the Federal Tax Forum as chairman of its committee on Federal tax legislation. The Federal Tax Forum is an organization of attorneys, accountants, privately employed heads of tax departments. The members number about 200 and they represent a very large segment of industry and of finance. Our recommendations deal with remedial amendments which we believe necessary to correct injustices and inequities which exist in the present excess-profits tax law and which we believe are the result of inadvertence rather than any congresisonal intention to levy exceptional burdens or deny relief to some while affording relief to others almost identically situated. The CHAIRMAN. You are aware, of course, that the Secretary of the Treasury opposed any amendments. Mr. SEGHERS. I am aware that that is the position he has taken. I feel that that injustice is an injustice whether it lasts for only 6 months or for 3 years. We feel that those injustices should be corrected not because of sympathy for the individual who bears the burden, but for a number of good public reasons. One reason is that of taxpayer morale. I have seen taxpayer morale go down in the past 35 years, and I attribute a large part of it to inequities that could have been corrected, and also to administrative policies which I hope have been changed, of tricking a larger tax out of a taxpayer without any question of the accuracy of the facts reported. We are not down here to discuss whether or not the excess-profits tax should be continued. Our organization is technical and nonpolitical and we do not consider it within our province to make a recommendation on that point. Regardless of whether or not it is extended, however, we do feel that all existing injustices should be corrected retroactively. The present excess-profits tax law was enacted very hastily, following the invasion of Korea in the middle of 1950, and, in consequence, a number of inequities appeared in the law. In 1951 no adequate opportunity was afforded taxpayers to present recommendations for essential remedial amendments. I might say that we were enjoined to speak of nothing that would have any affect in reducing the revenue, that the only purpose was to raise more revenue in 1951, which of course was necessary. We attempted to deal with that question only and we found that only a few amendments were then pressed. They helped a few taxpayers in a very large way but there were very few of the injustices corrected then that needed to be corrected. So we feel at this time we are perfectly justified in asking for remedial amendments and asking that they be made retroactive. If an injustice or inequity exists, it should be corrected whether the adjustment is made when the tax is in force or after the tax law has run its course. We have had such remedial legislation many times in the past. The amount of relief afforded is a very tiny percentage of the revenue involved in the period of excess-profits tax but it will remove a sense of injustice, it will remove inequitable competition in many situations. We do not believe that our recommendations would cause a heavy drain on the Treasury. On the other hand, we believe that it is of the greatest importance that injustices be limited in order to encourage taxpayer morale which is so essential to effective administration of our tax laws. Under our system of self-assessment in the first instance and of dependence to a large extent on the fair recording of the facts, it is essential in connection with it that the taxpayer feel that he is getting a fair break from the Government; first of all, from you gentlemen, a fair break in the way in which the law is worded and adequate provisions made to take care of unintentional injustices and then fair administration of the law in the field. A summary of our recommendations is included with this statement. Following this summary are separate sheets presenting the facts with respect to the need for each of the amendments recommended and our suggestions expressed in general terms of the manner in which we believe that the necessary relief might be effected. These recommendations were included with other recommendations for the amendments of the general and income-tax provisions of the Internal Revenue Code which was submitted to the Honorable Colin Stam, Chief of your technical staff, at a meeting held on January 9 of this year with him and representatives of his office and of the Treasury. These recommendations are listed in the summary here, C-1 to 16. The A's were general recommendations and the B's were income-tax recommendations, which we hope to have an opportunity to present to you at the income-tax hearings. If I may do so, I would like to run over these recommendations, emphasizing those which are most sweeping in their nature and going briefly over those which are highly technical. I do not think that a taxpayer should be denied relief merely because the provision that is asked for is highly technical. It has to be highly technical to correct the technical error and at the same time not cause further difficulty. We have attempted to express the need and express the way in which it should be remedied. In skipping briefly over those, I do not minimize the importance to the taxpayer that falls into that particular group, but what I do seek to emphasize in my presentation is very general principles, general sweeping recommendations, of which 1 and 2 are the principal ones and No. 16 also is a very general recommendation, which may affect any taxpayer. It will not affect everyone, but it may affect any taxpayer and therefore it is of potential interest to every corporation which is liable or has been liable for excess-profits tax. The CHAIRMAN. Pardon me, Mr. Seghers. Where are you now in your prepared statement? |