discriminates among large, well-established companies as well as having a depressing effect on small and young businesses.

As an illustration, section 519 of the Revenue Act of 1951 amended section 459 of the Internal Revenue Code by granting excess-profits-tax relief to taxpayers engaged in the business of television broadcasting which had depressed earnings in the base period as a result of their television operations. Proposed regulations of the Bureau of Internal Revenue relating to this section of the code (459 (d)) appeared in tentative form in the Federal Register of December 13, 1952. Such regulations would limit the benefits solely to television stations and networks and would specifically exclude other companies, such as advertising agencies, also engaged in the business of television broadcasting.

Young & Rubicam, Inc., one of the leading advertising agencies engaged in the business of television broadcasting, protested the proposed regulations in a letter addressed to the Commisioner of Internal Revenue under date of January 9, 1953. The gross inequities of this section of the code, as interpreted by the Bureau, are discussed in some detail in a letter addressed by the company to Mr. Colin F. Stam, Chief of Staff of the Joint Committee on Internal Revenue Taxation, under date of February 17, 1953. A copy of this letter will be made available to members of the Committee on Ways and Means upon request.

Mr. MASON. I hereby request it.

Mr. ENDERS. Yes, sir.

(The letter referred to is filed with the committee.)

Mr. ENDERS. We respectfully recommend that section 459 (d) of the Internal Revenue Code be amended to include, in addition to television broadcasting companies, "other taxpayers, such as advertising agencies, also engaged in the business of television broadcasting." The reasons for this recommendation, as set forth in the aforementioned letter of February 17, are summarized herewith.

Advertising agencies, such as Young & Rubicam, Inc., are not television broadcasting companies. Nevertheless, they are vitally engaged in the television broadcasting business; they perform the same varied functions as the broadcasting stations and networks, with the single exception of transmitting the electronic signal.

To illustrate this point, there is set forth in the attached exhibit a comparison of the number of personnel of Young & Rubicam, Inc., devoted to specific television-broadcasting responsibilities with corresponding numbers of large broadcasting networks and greatly exceeds those of individual stations.

(The exhibit referred to follows:)

Comparative personnel of Young & Rubicam, Inc., and television broadcasting

Mr. ENDERS. It should be noted that the mechanical function of television broadcasting-that is, the transmission of the electronic signal-was researched, developed, and perfected long before the base period years 1946-49. In addition, the major expense incurred by broadcasting companies, in relation to this part of their function, is represented by investment in physical plant and equipment.

Such expense, therefore, can be charged off only on a depreciation basis; it cannot, in its entirety, be allocated to any one or small number of years. Costs in relation to the trasmission of the electronic signal, therefore, could not have had too serious an effect on the base-period losses of such companies.

Having built their physical plant, it was necessary for the broadcasting companies to build as large an audience as possible; they had to compete with other broadcasting companies for listeners, and this competition took the form of determining and producing a constantly more attractive entertainment. For only if they had an audience could they remain in business, and their rates were determined by the size of that audience.

To acquire that audience required the building of programs and television personalities, and it was this that caused the tremendous expenditure of money from what would otherwise have been profits from radio and other operations. You have heard of the astronomical salaries paid to certain television stars; you are, perhaps, not so familiar with the much larger totals expended in research and development of programs that lived for but a short time, of the failure of personnel, of the day-to-day mounting costs involving sets, props, production and talent that did not pay out, of the literally hundreds of shows that closed before they opened. It was here that the television-broadcasting business lost so much money during the base years. The advertising agencies were right in the middle of it. We, right alongside the broadcasting companies, pioneered this phase of television. We invested large sums in research, personnel, and programs,

for it was important that our clients have as large a circulation for their advertising messages as we could provide. Our objective here was exactly the same as that of the broadcasting companies.

Our failures far outnumbered our successes. But we were learning all the time, and subsequently those things we learned-the cost of which resulted in greatly reducing the profits from our other operations during the base period-paid off during the excess-profits-tax

years.

Today we have more television personnel, higher television payroll and overhead, and bigger television billing than a great majority of the broadcasting companies operating. During the base period our losses, attributable directly to television, were much greater than the majority of broadcasting companies, and today our television profits are undoubtedly higher.

Furthermore, many of the stations commenced television operations only in the latter part of, or after, the base period and few realized any profits therefrom in the excess-profits-tax years. Young & Rubicam, on the other hand, was actively engaged in television prior to the base period and earned substantial profits therefrom after such period.

Denying relief under section 459 (d) to advertising agencies having television losses in the base period imposes the double penalty of subjecting their normal earnings from other sources to excess-profits tax and affording no excess-profits credit against current television profits. Such agencies suffer from discrimination which favors the broadcasting companies as well as other competing advertising agencies which were not engaged in television activities during the base period.

The need for equity and relief is very great in individual cases. Nevertheless, we estimate that aggregate loss of revenue to the Federal Treasury from this recommendation would not exceed $2 million.

The television-broadcasting companies are certainly entitled to the relief provided them under section 459 (d). In developing their business they incurred substantial abnormal losses during the base period. The advertising agencies, side by side with the broadcasters, also incurred substantial losses during the base period from the same basic economic conditions of the television industry which prompted enactment of the relief provisions of section 459 (d).

Accordingly, we feel that such agencies should not be denied the benefits of this section solely because they do not transmit the electronic signal and that the law should be amended to correct this inequity.

This inequity extends over a period of 31⁄2 years. We believe that whether the law is extended or permitted to expire, it should be rettroactively amended to correct such gross inequities as I have here mentioned.

The CHAIRMAN. Thank you very much for your appearance.

The next witness is Mr. C. R. Evenson, president of the Michigan Wheel Co., Grand Rapids, Mich.

STATEMENT OF C. R. EVENSON, PRESIDENT, MICHIGAN WHEEL CO., GRAND RAPIDS, MICH.

Mr. EVENSON. My name is Charles R. Evenson, and I am president of the Michigan Wheel Co., Grand Rapids, Mich.

This corporation was originally organized in 1903 for the manufacture of marine propellers and allied equipment. We have, at present, approximately 190 employees. Our business volume in 1952 was $212 million.

Having been in continuous operation, our company has had the advantage of most or all benefits provided under the excess-profits-tax law and consequently we have not suffered as severely as new business organized during the past 7 years or so. In spite of our being in a favorable position under this tax law we still have (1) experienced an abrupt stoppage of any growth or progress; and (2), are facing now a capital squeeze that alarms us.

In my telegram, Monday of this week, to your chairman, Mr. Reed, offering to testify here, I emphasized that we did not have and could not have ready much special information, charts, data, et cetera, and that our story would be a simple one showing the effects of the excess-profits tax in our own business.

In the first place, we, with many others, object strenuously to the misleading name of this tax. Our 3 tax-base years of 1946, 1947, and 1948, show a profit average of $137,000; whereas, in 1952 our total credit before excess-profits tax begins, is $127,000, or $10,000 less than in the base period even though $140,000 more was invested in the business to produce these profits.

The average yearly sales in 1946-47 were $1 million compared to $2,500,000 in 1952. This simple illustration alone should demonstrate the unjustness and destructiveness of this tax. The very name excess-profits tax by itself casts a reflection, entirely unearned and unwarranted, upon any business in the excess-profits bracket.

This increased sales volume has required very substantial increases in working capital. The following is an analysis of these needs in the three excess-profits-tax years 1950, 1951, and 1952:

Increase in working capital__.
Increase in fixed assets, net-.

Total increased capital necessary-

$150,000

32,000

182,000

This increased capital was supplied only partially by retained earnings of $130,000 in those years. The deficiency of $52,000 was supplied by bank borrowings.

And here is the pathetic part of the situation: The company's sales volume in 1952 was the highest in its history. The company's profits before taxes was the highest also, and yet because of the drain of excess-profits taxes, bank borrowings were necessary for the first time in 7 years.

In this 3-year period of excess-profits taxes, the average annual dividends paid ownership were $23,333 on an average invested capital of $480,000, or less than 5 percent. We contend that dividends have been modest, to say the least, and have not been the source of working capital and complications.

No excess of cash was retained in working capital since the conventional 2 to 1 current ratio has been barely maintained and a long term bank loan was necessary.

Besides all of this, in order to handle the additional volume of business in 1952, it was necessary to obtain additional facilities. This would normally be acquired and owned, but the inadequate capital picture forced us to rent the additional facilities instead.

And what does this all add up to?

One, we cannot expand our business because we cannot finance it with excess-profits taxes taking such a big bite of earnings. We cannot borrow more money because excess profits taxes leaves earnings so small that a loan is not attractive to the banks. After all, borrowings must be repaid either from earnings after taxes or from liquidation of assets. We cannot get more risk capital because dividends must be modest to maintain a decent working capital picture.

Two, with excess profits taxes we have little prospect of providing any further employment to our community. We made the above analysis of our situation under excess profits taxes last fall when we considered expanding our operations to produce an additional sales volume of $1 million. Our estimated profits before taxes on this volume was $80,000 which would all be in the excess profits bracket. Of this, we would be allowed to retain $14,400. We would need an additional $100,000 to finance accounts receivable and another $100,000 to finance inventories.

We could not raise the $200,000 when all it produces was $14,400 per year plus some $5,400 additional excess-tax credit or $20,000 (75 percent of 12 percent of $200,000 equals $18,000; 30 percent of $18,000 equals $5,400). As a result, additional employment was denied some 40 or 50 people.

Not only have we been stopped in the field of new business expansion, but we have been forced this year to take steps toward discouragement of our regular business. Despite this, our business has continued to grow, further complicating our financial situation now and for the future. More business requires financing larger inventories, larger accounts receivable, and bigger facilities.

This discouragement of business growth is a sad commentary on traditional American business and economics. This cash squeeze we see as inevitable and will have to be met by us this fall or early winter.

As we see it, at that time we will have the following choices to make:

One, to obtain additional risk capital. The severity of the problem of obtaining this capital in a small business is well known.

Two, to conserve cash for the winter and early 1954 requirement, and to discontinue building of stocks in our slack season. This means unemployment for many of our people and leaves us at the start of the 1954 season with inadequate stocks for our trade or customers. This violates our entire concept of business, our responsibility to employees and community and would be the first step in the decline of an otherwise efficient and aggressive business.

Three, this leaves one other alternative; namely, that of selling our business-a condition, I understand, faced by a number of others. This has been seriously considered.