EXCESS PROFITS TAX EXTENSION FRIDAY, JUNE 12, 1953 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met, pursuant to recess, at 10 a. m. in the Ways and Means hearing room, Hon. Thomas M. Jenkins, presiding. Mr. JENKINS. The committee is in session. Mr. Reed, the chairman, is away today, so we have to get along the best we can. First on the witness list today is Mr. John B. Poole, representing: the Television Broadcasters' Tax Committee, Detroit, Mich. You may give your name and your representation to the reporter, sir. STATEMENT OF JOHN B. POOLE, COUNSEL FOR TELEVISION BROADCASTERS' TAX COMMITTEE, DETROIT, MICH. Mr. POOLE. Mr. Chairman and members of the committee, my name is John B. Poole. I am a practicing lawyer in Detroit, Mich., and a stockholder and director of Storer Broadcasting Co. Our company is. the owner and licensee of four television broadcasting stations located at Detroit, Mich.; Toledo, Ohio; Atlanta, Ga.; and San Antonio, Tex. It is the owner and licensee also of 7 radio broadcasting stations located at the first 3-named cities and at Wheeling, W. Va.; Miami, Fla.; Cincinnati, Ohio; and Fairmont, W. Va. My appearance before the Committee on Ways and Means is as a member and spokesman for the Television Broadcasters' Tax Committee, a group organized by and representative of the television broadcasting industry throughout the United States. This committee and its membership are firmly opposed to extension of the excess-profits tax for any period beyond July 1, 1953. It is a bad tax and has been so characterized by Treasury Secretary Humphrey. In application, it has penalized the growth and development of new and small business enterprise, and for them it has caused the tax ceiling of 70 percent to become the effective tax rate. It has distorted the competitive relationship between members of the same industry. It has placed a premium upon base period experience and has penalized present ability to compete. It has served to arrest and impair the free exercise of normal competitive forces. It has been condemned by President Eisenhower himself as inequitable. No industry can better attest this statement than our own. In the first instance, application of the excess-profits tax to the television broadcasting industry seriously threatened its continuing existence and development. Television broadcasting was pioneered and devel oped during the base period years of 1946-49 primarily by radio broadcasters. Losses incurred by this pioneer effort in television substantially depressed the normal earnings derived by these companies from radio. In 1949, television losses actually exceeded the earnings derived from radio by those companies engaged in both activities. The industry rate of return proclaimed by the Secretary afforded no basis of relief as an alternative method of computing our excessprofits credit, even if requisite qualification existed, because the rate of return was depressed by and reflected our television loss experience. For this reason, the original excess-profits credit for most of us was about 50 percent of our normal radio income without allowance of any credit for our investment in television. So critical was our situation that a special relief amendment was included in the Revenue Act of 1951, being Internal Revenue Code, section 459 (d). Under this relief amendment, those of us who had engaged in television broadcasting prior to January 1, 1951, were permitted to reconstruct our base-period experience by eliminating the impact of television losses upon our radio or other businesses. ness. Section 459 (d) permits us to compute our average base-period net income for radio under section 435 (d) and by segregating and allocating assets between our television business, our radio business, and any other business to compute the rate of return for our radio busiA constructive average base-period net income for television is provided by multiplying the dollar amount of television assets on hand at the end of the base period by the rate of return computed for our radio business. The amount of this constructive income for television is then added to the average base-period net income for radio and other business, and the combined total is used to compute our excess-profits credit. This relief formula, if reasonably applied, is eminently fair, and the gratitude of our industry since passage of the 1951 act has been unlimited. Under regulations proposed and promulgated by the Bureau of Internal Revenue, it now appears, however, that the relief to be accorded us will fall far short of that which we had anticipated and which we believe was clearly intended by the Congress. To explain our problem, I must tell you something of the mechanics for applying section 459 (d). The rate of return developed for our radio or other business is computed by dividing radio income by the dollar amount of radio assets. The larger the amount of radio assets the smaller will be the rate of return which is ultimately applied to the dollar amount of television assets on hand at the end of the base period. In almost all cases radiobroadcasters had accumulated earnings and profits in anticipation of and reserved for the purpose of entering television. We assumed, of course, that such reserves would be regarded as clearly attributable to television and eliminated from the radio-asset column for purposes of computing the radio rate of return. On December 13, 1952, over a year after passage of the act, proposed regulations for application of section 459 (d) were published in the Federal Register. Final regulations have not even yet been issued. Under the proposed regulations, the Commission holds essentially that all assets on hand prior to the time television broadcasts began, arising out of accumulations of earnings, are attributable to the radio or other business. This means that the assets actually employed to undertake television operations, and clearly identifiable as such, must be counted as radio. assets for purposes of developing the radio rate of return. To add insult to injury, when these assets-essentially cash or its equivalent— are actually converted to television use, there must also be a corresponding percentage decrease in the average base-period net income of the radio or other business on the theory that these assets had previously been employed to produce radio or other business income. We regard this concept as wholly unreasonable and unrealistic. It cuts down the relief to which we are entitled by at least 50 percent and will leave most of us in critical financial condition. The anomaly of the whole situation is this: The prodigal radio broadcaster who failed to accumulate earnings and profits and was therefore forced to resort to equity financing or bank loans to finance television operations will have an excess-profits credit very substantially larger than this provident competitior whose income and physical facilities are identical, but who financed his television business with retained earnings. The use of either equity or borrowed capital to finance television operations is, of course, the exception, and had it not been for the retained earnings of the radio broadcasters, television broadcasting throughout the country would be. far from its present state of development. We gain the impression from our conferences with the Bureau of Internal Revenue that administrative difficulties in applying section 459 (d) compel the construction advanced in the proposed regulations. We cannot agree with such construction and submit that no such result was contemplated or intended by the Congress. It is our hope that the final regulations, yet to be issued, will abandon this construction. If this is not the case, it is respect fully submitted that the Congress should clarify existing law by an amendment to section 459 (d) (5) of the code, reading substantially as follows: For the purpose of this subsection, money, securities, and other funds shall not be regarded as attributable to a business other than television broadcasting merely because they are attributable to accumulations of earnings and profits of such other business, but, whether or not segregated from other assets and whether or not the taxpayer is yet actively engaged in the business of television broadcasting, shall be regarded as attributable to the business of television broadcasting if held or intended for use in such business. Mr. MASON. Would you mind being interrupted right there? Mr. MASON. Congress is tired of trying to clarify the laws, because downtown they put any interpretation they want to, and in this law we meant exactly what you started out saying. But their regulations just nullify the whole thing. Mr. POOLE. That is precisely our position and why we are here. Mr. MASON. For that reason, we say the only way to get rid of this rotten apple is to throw it in the scrap. Mr. POOLE. That is our industry's position precisely. We are here not only to condemn the act and present our position as being firmly opposed to any extension of the act, but we must come back again, after having received a relief amendment, to ask for clarification so we can apply if for the relief that this Congress, I am sure, intended to give us. Mr. MASON. Thank you, sir. I am sorry to have interrupted you.. Mr. POOLE. I am very happy to be interrupted at any time. 35078-53- 41 It should be noted that section 459 (d) is an equitable relief provision, and in no sense provides an exemption to the television broadcasting business from excess-profits tax, and if this provision is to give consistent relief to the individual members of this industry it must be construed or amended as indicated. We have still another critical problem under 459 (d); an inequity of major importance to certain television broadcasters. The problem is technical and is somewhat difficult to explain. As you are aware, when merger, consolidation, or similar transactions occur, a new or consolidated excess-profits credit may be computed for the acquiring or resultant corporation. Provisions of the Excess Profits Tax Act relating to such transactions are set forth in part II of the act. To anticipate the problems of merger, and so forth, paragraph (6) of section 459 (d) provides that the Secretary shall prescrioe regulations for the application of part II covering transactions of this sort which occurred prior to January 1, 1951. The Bureau has construed the presence of the January 1, 1951, date as precluding the joint application of part II and section 459 (d) to cases where a merger, consolidation, or other reorganization has taken place thereafter. Final regulations on this subject were promulgated last week, on June 4, 1953. Under these regulations an acquiring corporation entitled to compute its credit under 459 (d) which becomes a party to a part II transaction after January 1, 1951, must compute its credit under 459 (d) or under part II, but not both. This means it cannot use a 459 (d) credit and also inherit from a component corporation the credit to which the component was entitled. Conversely, when a corporation entitled to 459 (d) relief is a component corporation its credit cannot be inherited by the acquiring corporation. Avoiding further technical complexities in the application of 459 (d), the result is this: If two radio-television corporations, each of which is entitled to compute its credit under 459 (d), should merge or consolidate after January 1, 1951, as some of them did, only the credit of the acquiring corporation would exist and be preserved. The credit of the component corporation would be extinguished and eliminated. Thus, in the case of two television companies, each having identical credits, only one-half of the combined credit is available after merger or consolidation. We cannot conceive how a result so unreasonable and illogical could have been intended by the Congress under 459 (d). Here, also, our only relief would appear to be by clarifying amendment. To this end, we have prepared an amendment to subsection (6) of section 459 (d) to clarify this point. The proposed amendment reads as follows: (6) APPLICATION OF PART II.—The Secretary shall prescribe regulations for the application of part II for the purpose of this subsection in the case of an acquiring corporation or a component corporation in a transaction described in section 461 (a). Where such transaction occurred after December 31, 1950, the computation required by section 462 (b) shall be made without reference to income, deductions, losses, or other items attributable to the television broadcasting business, and to the average base period net income so determined shall be added the amount previously computed under paragraph (2) (B) of this subsection in the case of any party to such transaction. This, in summary, is the history of our experience as an industry under the excess-profits-tax law. We most earnestly request your consideration for adoption of these proposed clarifying amendments with retroactive effect, whether or not the excess-profits tax expires on July 1, 1953. Without amendatory relief, the television industry will be most grievously penalized, notwithstanding the clear intent of the Congress to accord equality of treatment as between members of our own industry, and also to place us in a position of parity with all other business groups through the enactment of section 459 (d). No doubt some of the inequities visited upon us under the excessprofits tax have their counterpart in other industries. In any event, our own experience compels our conviction and view as an industry that no justification can exist for extension of the tax for any period beyond July 1, 1953. Mr. JENKINS. Are there any questions? We thank you very much, sir. I might state that with reference to your last proposed amendment in your statement here, if you have any idea that you want us to take some action on that, I will say that that is a little out of our sphere. You probably had better see your own Congressman and have him introduce a bill embodying this amendment. Mr. POOLE. I understand, sir. You wanted to have this before you as embodying our views as to what may be necessary. We will do everything we can to carry it out. Mr. JENKINS. I see Representative Clardy is here. We are very glad to have you with us, sir, and you may proceed with whatever statement you wish to make. STATEMENT OF HON. KIT CLARDY, A REPRESENTATIVE TO CONGRESS FROM THE STATE OF MICHIGAN Mr. CLARDY. I shall only take a very few moments because I have a bill of my own before another committee that I must appear on very shortly. Furthermore, I think that from what I have observed and from what I have read, that everything has been said on this bill that could possibly be said. I would just want to add the weight of my own opposition, if I have any weight, to that of those who have appeared before this committee and make a few remarks to explain why that is so. . Ever since the first enactment of the Excess-Profits Tax Act, I have been a consistent opponent of it because I know it was conceived in the minds of Marxists and that it had no justification whatever in our form of economy. I realize that it struck at the I realize that it struck at the very heart-the very route of our system-because it skins off the money that would be required to create new jobs, and so I have been campaigning long before I ran for Congress against this kind of an enactment. To me, when a thing is wrong in principle, I cannot be for it under any circumstance, at any time, and I have not changed my mind one whit over the years. Reading all of the argumens that are made on the other side by men of good faith-men who believe earnestly, I am sure, in what they say I am minded that their arguments boil down to two points. One is purely political: That it would be bad judgment on the part of any Member of this Congress to vote against the proposed extension for fear he might not come back to Congress unless simultaneously you extend relief to the little taxpayers. |