of earnings retained in the business which can be used to mitigate the effect of ensuing declines in such net income. Other reasons for the need for such an amendment to the excessprofits-tax law, should the term of that law extended, are evident. The administration in a commendable effort to police Federal expenditures has announced its intention to reduce the Federal budget for the fiscal year 1954 by many billions of dollars. In fact, it has been stated that slightly over $5 billion is to be eliminated from the Air Force budget alone. Thus, it is reasonable to expect that congressional appropriations for defense spending will be something less than was anticipated before such announcements. Recently, agreement seems to have been reached by the United Nations Command and the Communist leaders on the method of handling Korean prisoners of war who do not choose voluntary repatriation. This is said to eliminate the last major obstacle to an armistice in the Korean conflict. With such cessation of hostilities, there will inevitably come a reduction in governmental expenditures for war material. While high administration officials have stated that termination of the Korean fighting will not and should not result in a substantial overall reduction in our national defense program since we are behind schedule in supplying defense material to the NATO group, to Indochina, and to others, nevertheless the need for many items of material and equipment which are used in large quantities in the fighting of Korea will definitely lessen. An end to the combat there will result in less requirement for ammunition, both shells and bullets, for electronic and electric equipment, for oil and gasoline, for ships, planes, and weapons, and for all myriad items which, directly or indirectly, support our troops in actual combat. Such a decrease in need for combat material will surely result in the reduction or cancellation of contracts and purchase orders in the years immediately following the present one and in a marked decline of income to those many companies now supplying directly or through others the raw materials for such material or the items themselves. In such a situation, the excess-profits-tax law without the proposed amendment will work an even greater hardship. It is already taking a very substantial share of income from those companies. Yet as the law is now written the carryback provisions for unused excess-profits credits will not be available to corporate taxpayers during the years immediately following expiration of the law (which is approximately coincident with a reduction of defense spending) when through no fault of the companies their income is curtailed by a reduction or cancellation in Government purchasing. Thus, in our view, all the years involved in our present defense buildup-both those years during which the excess-profits-tax law is in effect and those years immediately following the termination of such law but in which our economy continues to gear itself at a slower rate for defense-all such years should be treated as a whole for excessprofits-tax purposes. There should be an averaging or leveling out of the excess-profits-tax burden for all those years of the defense buildup. A corporate taxpayer which has paid excess profits during the term of the present act and which after the act ends does not earn its excess-profits-tax base or credit should be able to make use of its unused excess-profits-credit carryback. In recommending the inclusion in any bill to extend the term of the excess-profits-tax law of an unused excess-profits-credit carryback for the years immediately following expiration of such tax, we are aware of the possibility of certain abuses through devices entered into for the purpose of obtaining refunds of excess-profits taxes through situations unrelated to the purpose and intent of the carryback provision. However, if, in the light of past experience with section 710 of the wartime excess-profits-tax law, additional safeguards beyond those already in the law, such as section 129 of the Internal Revenue Code, are indicated, they should by all means be added to prevent any abuse of the suggested amendment. Nor will our recommended carryback provision cause any substantial diminution in excess-profits-tax revenue to the Treasury Department. According to the best statistics available, Treasury cash collections of excess-profits taxes for the fiscal year 1946 amounted to $7.822 billion, while the carryback benefits obtained in the same fiscal year were less than $100 million. Thus, during the year of peak reconversion from war to peacetime production, the maximum loss of revenue was only about one-eightieth of the Government's income from excess-profits taxes. For these reasons, we respectfully recommend that if your committee reports out a bill to extend beyond June 30, 1953, the present excess-profits-tax law, an amendment be added to make available in the 3 years immediately following the expiration of such law a carryback of and unused excess-profits credit. Such a provision for that term of years would be in keeping with the theory of leveling tax payments over a period of years as implemented by the unused credit or net operating loss carry back and carryforward method in both the income and excess-profits-tax laws. It would also be consonant with the similar provision in section 710 (c) of the wartime excess-profits-tax law as adopted in the Revenue Act of 1945. Thank you, sir. Mr. JENKINS. I see you have enclosed with your statement an appendix. They are some suggestions for amending the law? Mr. PUTZELL. Yes, sir, Mr. Jenkins. That is a proposed amendment tailored after the language of the present law which we believe would provide for the sort of relief to taxpayers that we recommend if this law is extended. Mr. JENKINS. You wish that to be a part of your statement? Mr. PUTZELL. Yes, sir. Mr. JENKINS. It will be inserted in the record. (The appendix referred to follows:) APPENDIX PROPOSED AMENDMENT PROVIDING EXCESS-PROFITS TAX CARRYBACK RELIEF FOR YEARS IMMEDIATELY FOLLOWING TERMINATION OF PRESENT EXCESS-PROFITS-TAX LAW Section. (a) The deficit-profits adjustment for any year commencing after December 31, 1953, and ending on or before December 31, 1956, shall be the excess, if any, of the excess-profits credit for the year over the excess-profits net income for such year computed on the basis of the excess-profits credit applicable to such year and without the allowance of any deduction under section 23 (s) (relating to net operating losses). The deficit-profits adjustment for a year of less than 12 months shall be an amount which is such part of such credit determined under the preceding sentence as the number of days in that year is of the number of days in the 12 months ending with the close of that year. There shall be no deficit-profits adjustment for any year for which the taxpayer is exempt from taxation under chapter 1 of the Internal Revenue Code nor during which the taxpayer is not actively engaged in business. (b) If for any year commencing after December 31, 1953, and ending on or before December 31, 1956, the taxpayer has a deficit-profits adjustment, such deficit-profits adjustment shall be an unused excess-profits credit carryback for each of the 3 preceding taxable years. The total amount of such unused excess profits credit carrybacks from the years 1954, 1955, and 1956 available for the second preceding taxable year shall be limited to the excess thereof, if any, over the adjusted excess-profits net income for the third preceding taxable year, and the total amount of such unused excess-profits credit carrybacks from the years 1954, 1955, and 1956 available for the first preceding taxable year shall be limited to the excess thereof, if any, over the sum of the adjusted excessprofits net income for the third and second preceding taxable years. As used herein, the term "preceding taxable year" does not include any year ending prior to July 1, 1950. (c) If the Commissioner determines that any part or all of any overpayment is attributable to the inclusion in computing the unused excess-profits credit adjustment for a taxable year of any deficit-profits adjustment, no interest shall be allowed or paid with respect to such part or all (as the case may be) of the overpayment for any period before the expiration of 75 days after the end of the year in which the deficit-profits adjustment arises. (d) If and to the extent that a claim for credit or refund relates to an overpayment attributable to this section, in lieu of the 3-year period of limitation prescribed in section 322, the period shall be that period which ends with the expiration of the 15th day of the 39th month following the end of the taxable year of the deficit-profits adjustment which results in a carryback, or such 3-year period, whichever expires later. In the case of such a claim, the amount of the credit or refund may exceed the portion of the tax paid within the period prescribed in section 322, to the extent of the amount of the overpayment attributable to this section. Mr. JENKINS. Are there any questions, gentlemen? Mr. MASON. I have a question as to the amount that you state on the bottom of page 6 of your statement wherein you said— According the best statistics available, Treasury cash collections of excessprofits taxes for the fiscal year 1946 amounted to $7,822 billion. May I ask where you got that figure? Mr. PUTZELL. We got it from the Treasury Department, Mr. Mason. Mr. MASON. It runs through my mind that our excess-profits tax has never in any year brought in that amount. Mr. PUTZELL. That is what I was told just the day before yesterday. The information came from the statistical unit of the Bureau. Mr. MASON. I see. Mr. PUTZELL. In fact, both of these figures did. Mr. MASON. I wanted to get verification of that because it is not according to my general recollection. Thank you. Mr. JENKINS. Are there any other questions? Mr. UTT. Yes. Mr. JENKINS. All right, Mr. Utt. Mr. UTT. Mr. Putzell, the Monsanto Chemical Co., of course, is one of the largest, probably the largest, chemical companies in the United States, is it not? Mr. PUTZELL. Sir, we wish we were the largest, but we are not. Mr. UTT. I want to discuss for a minute this carryback provision. Under the present law, the carryback provision expires as of December 31, 1953. Mr. PUTZELL. I think it expires as of July 1, 1953, under the present law, if I am not mistaken, except for fiscal year companies. Mr. UTT. It would expire except for fiscal year companies. That is what I am getting at. The fiscal year companies it would actually carry over until July 1, 1953, would it not? Mr. PUTZELL. Depending on that fiscal year, that would probably be so. Mr. UTT. That is what I mean. It could carry into January of 1954, February, March, April, May, and June for certain fiscal payers. They could take advantage of the carryback credit on excess-profits tax? Mr. PUTZELL. I am not so sure, sir. As you speak, I keep feeling less sure about it. As I recall, section 432, which is the carryback section of the excess-profits tax law, I think it very specifically refers to taxable years. Mr. UTT. You are correct. The question I intended to ask is: If we extend it 6 months it would carry the fiscal year payers into 1954 up to July 1, giving them the entire fiscal year to carryback, and the calendar year would end on December 31 so that those payers could not get the advantage of that. Mr. PUTZELL. Yes, sir; there would be a very big difference between calendar and fiscal year taxpayers. Mr. UTT. And about a third of the reporting corporations are fiscal year payers, are they not? Mr. PUTZELL. At least a third. Mr. UTT. It is a third according to the figures. According to the statement of the Monsanto Chemical Co., in 1951, they paid $7,871,000 in excess-profits taxes. In 1952, not only did they pay no excessprofits tax, but they took a credit of $1,614,000 against the payment which they made in 1951. That is correct? Mr. PUTZELL. I remember the latter figure, Mr. Utt. I do not remember the former, but I assume it is so. Mr. UTT. So that you paid no excess-profits tax in 1952? Mr. UTT. I do not care about the reason. I am just trying to develop the fact that we have before us a speculative figure of $800 million of possible excess-tax collections during the extended period of 6 months. So far, I have been unable to find out how that $800 million has been arrived at because I cannot find any figures of the total excess-profits tax collections in 1952 less the refund, such as were paid to your company. I cannot find out how they anticipate collecting $800 million by the extension of this tax for 6 months. Mr. PUTZELL. Of course, you realize we did not get a refund, sir? Mr. UTT. You took a tax credit against your normal and your surtax, did you not? Mr. PUTZELL. That is right. You see, the way a carryback works is that if a company in the year, let us say, 1953, does not earn its base or excess-profits-tax credit, it is entitled to deduct from the excess-profits-tax taxable income of an earlier year in which it did pay taxes, the difference between its excess-profits-tax taxable income and that base, so that actually there is an adjustment there. At least,. we have not gotten any money back. Mr. MASON. You do not get any money back, but the Treasury has to give you credit for that million dollars that you otherwise would be paying which you do not have to pay because of the credit, so the Treasury is out that amount whether they hand you dollars back or not. Mr. PUTZELL. That is right. Mr. UTT. The thing to which I am getting is that these excessprofits-tax credits are piling up to such a point that it is very possible they will absorb most of this anticipated $800 million income. Would you believe that that is possible? Mr. PUTZELL. I do not know, sir. I think a lot depends on what kind of a year companies have in 1953, and whether or not there is any income subject to excess-profits taxes. From our own experience, I would say that up to now in 1953 we are subject to a very substantial excess-profits tax. Mr. UTT. According to your figures, in the first quarter in 1952, you had a liability of $441,000 for excess-profits tax. This year for the first quarter, it is $1,110,000 for the Monsanto Chemical Co. Mr. PUTZELL. The first figure was for last year, 1952? Mr. UTT. Yes, sir, and the second was for 1953, so that you are anticipating you may pay unless the next 2 or 3 quarters taper off and you do not make your base. Then, of course, that would be wiped out. Mr. PUTZELL. That is right, sir, and the point I am trying to make here is that if next year as a result of all these factors which are beyond our control, the economic, defense, and so forth, business falls off, as has been the practice in the past and as is reflected in the incometax law and in the present excess-profits law, by the very doctrine of carryback and carry forward, then it seems to us that it is unfair that a part of a defense period should be taken for tax purposes and not the whole. Mr. UTT. Are you a calendar-year payer, or a fiscal-year payer? Mr. PUTZELL. Čalendar year. Mr. UTT. So you will have this full year of 1953 for carryback if you need it? Mr. PUTZELL. Only at the 15 percent rate if the tax dies on June 30, which is, I think, the way the law provides. Mr. UTT. That is correct. Mr. PUTZELL. Everybody is subject to an annual tax, but at a 15 percent rate this year, as I understand it. Mr. UTT. I think that is all that I wanted to ask you, but I did want to put in the record 1 or 2 figures, if I may. Mr. JENKINS. Without objection, it is so ordered. Mr. UTT. I want to do this because I reported yesterday on certain corporations which did not pay any excess-profits tax, but I did not carry the full impact of it. One of those was the Standard Oil Co. of California, which I said paid no excess-profits tax. I would like to say that in 1951 they did pay $6,700,000. In 1952, not only did they pay no excess-profits tax, but they received back exactly $6,700,000 that they paid in the year before, so there was no gain whatsoever. Not only did the Treasury Department lose this $6 million excessprofits tax; they lost $12 million on the normal and surtax that the Standard Oil Co. was able to save because they were trying to avoid the excess-profits tax. In fighting a high tax, the Treasury lost far more than they would have gained if they had left the excess-profits tax off. |