helped considerably in bringing new machinery into our plants which greatly improved our efficiency. This modernization of obsolete plant and equipment was much needed in view of the increasing competition from textile products imported from abroad. However, the investment credit did not last long enough to permit completion of much needed modernization programs. We still have a considerable way to go in order to be better able to compete with low-cost foreign imports. In this connection, one of the problems that is beginning to plague our industry is the application of the reserve ratio test contained in the Depreciation Guidelines of the Treasury Department.

The reserve ratio test is extremely complicated and it is very difficult to apply. We find that there is no uniformity with respect to its application in various parts of the country and no taxpayer knows just where he stands with respect to his depreciation allowance. It is, of course, very important that taxpayers in our industry be able to plan on definite depreciation deductions in order that they can know what they can spend for new machinery. We think the answer to this problem is indicated by § 705 of the bill dealing with depreciation on railroad rolling stock. The bill specifies a set period of years over which such rolling stock can be depreciated by the railroad industry. The Guideline rate of the railroad industry is 14 and the bill reduces this period to 7 years.

We are not necessarily asking that our Guideline Life of 12 to 14 years be reduced to 7 years, but we are asking that we be allowed to count on the 12-14 year life with accelerated methods of depreciation. We do not want our depreciation to be subject to repeated adjustments through the use of the reserve ratio test. We ask Congress by legislation to allow taxpayers to use the guideline lives of their industry as a matter of right. Under this recommendation, the reserve ratio test of Revenue Procedure 62-21, and the various administrative procedures for adjusting lives if the test is not met, would be dropped, except for the case of taxpayers who use depreciation lives which are shorter than the applicable guideline life.

CONCLUSION

This concludes our written statement. I wish to thank the Committee for giving ATMI an opportunity to be heard.

The CHAIRMAN. Next we will hear from Mr. James B. Irvine, Jr., who is president of the Association for Advanced Life Underwriting. Mr. Irvine, you have a good salesman in Baton Rouge, La., a classmate of mine in college, who called me to direct my attention to the fact that you were going to be here today. He wanted me to ask about something or other. I cannot recall what it was. We will just have to count on you to tell it.

STATEMENT OF JAMES B. IRVINE, JR., PRESIDENT, ASSOCIATION FOR ADVANCED LIFE UNDERWRITING;

GERALD H. SHERMAN, COUNSEL

Mr. IRVINE. Thank you, sir. I am delighted.

ACCOMPANIED BY

Mr. Chairman, we very much appreciate the opportunity to appear here today. My name is James B. Irvine, Jr. I am a charter life underwriter from Chattanooga, Tenn., and appear before you today as president of the Association for Advanced Life Underwriting (AALU).

I am accompanied by Gerald H. Sherman, our counsel.

AALU is an organization of more than 500 of the United States leading life insurance agencies including your friend, sir, who because of the large

The CHAIRMAN. That is Bob Bowlus that I am thinking of. You know him?

Mr. IRVINE. Bob Bowlus. Yes, indeed.

The CHAIRMAN. A pretty good salesman. He made me buy a lot more than I should have bought I think.

Mr. IRVINE. The members of AALU because of the large amounts of insurance with which they are concerned, tend to utilize the more complex income planning arrangements. AALU's larger parent organization, the National Association of Life Underwriters (NALU), will be appearing before you today to present its views on a number of current tax reform proposals. We fully support the position set forth in the NALU testimony.

Now, our testimony today will focus solely on the subject of deferred compensation, section 331 of H.R. 13270, and its close relative restricted property, section 321.

Section 331 as passed by the House attempts to remove the possibility of shifting income to taxable years after retirement when the marginal tax bracket is expected to be lower-a shifting of income that heretofore has been available to employees who are in a position to bargain for a deferred compensation average amount.

Now, we believe that the Ways and Means Committee has overstated the case for its suggested change and that such a change will be detrimental to the public policies of encouraging retirement programs and reducing current inflation. Assuming however that the section 331 proposal can find support in its broad application, we would like to direct the committee's attention to a number of considerations that were inadvisably treated. Perhaps the major ommision of section 331 is its failure to contain a definition of the term "deferred compensation."

The mere fact that income is received in retirement years should not be conclusive on the question of whether it qualifies as deferred compensation as contemplated by section 331. This is because employers often insist that a certain portion of compensation be paid only in retirement years. This income is deferred at the employer's pleasure, not the employees. Such deferral of compensation is not "bargained for" in the words of the Ways and Means Committee report.

We, therefore, recommend to the committee that deferred compensation should be defined so as not to penalize involuntarily deferred income.

Section 331 was not promulgated to impede supplementary pension benefit plans that are designed for middle-income employees. Rather it was intended to eliminate jumbo transfers of compensation by high bracket executives to their lower bracket retirement years. A totally ontarget satisfaction of this purpose was, in our opinion, not achieved.

For example, there seems little purpose in legislating tax strictures on disability benefits which are often a part of deferred compensation arrangements. The receipt of disability benefits never represents a deliberate attempt to manipulate the graduated tax rate structure.

The disability benefit reasoning is similarly applicable to death benefits, or at least that portion of death benefits which exceeds the funded or putatively funded amount. Although the language of the House-passed bill seems to encompass death benefits within its scope, the Ways and Means Committee Report speaks solely in terms of retirement benefit. We again here suggest that the statutory language be amended to limit the provisions of the bill to deferred compensation which is received as retirement income by the employee who

earned it. Death benefits, for widows and orphans, as well as disability benefits, should be removed from the legislation's coverage. We can appreciate the tax equity of excluding an annual amount of deferred compensation from the reach of section 331. However, we strongly suggest that the $10,000 annual amount is inadequate to the task.

We have recommended to the committee in our written statement a number of possible alternative approaches. A reasonable increase in the $10,000 annual exclusion would not constitute an interference with the bill's purpose of eliminating tax motivated deferral of compensation.

In concluding our remarks directed solely to the section 331 treatment of deferred compensation, we would urge the committee to continue to seek a mechanically more simple means of solving the tax rate manipulation problem. There will be a substantial number of deferred compensation recipients who will have to deal with what. to them will simply be nonintelligible computations.

"The failure to define "deferred compensation" or "deferred compensation arrangement" leads us back to a dependence on existing law which itself constitutes a thicket of conflicting rules, the application of any one of which is difficult to determine.

The Ways and Means Committee seemed to recognize this situation in promulgating a special new provision for so-called restricted property arrangements.

Having faced the issue that restricted property arrangements are merely another form of deferred compensation, the House failed to reach the logical conclusion that similar tax rules should apply to both situations. As the bill now stands taxpayers can still pick and choose, free of relative economic considerations, from among similar arrangements in order to reach the tax result which is more beneficial.

Furthermore, the bill does not provide us with clear guidance in the situation of funded deferred compensation which does not quite fit into the restricted property category.

To eliminate these close and not totally relevant distinctions between the tax treatments of various types of deferred compensation, we would urge the committee to apply to restricted property arrangements whatever rules it finally decides upon for deferred compensation.

For some reason, not fully articulated in the Ways and Means Committee report, H.R. 13270 imposed substantially more onerous tax consequences to the holdings of nonforfeitable property, that is, restricted property, than it does to the holding of a nonforfeitable promise, that is deferred compensation. Such a forfeiture standard is essentially immaterial if we are faced with a situation in which the employee cannot in any significant way realize upon his nonforfeitable rights. If he cannot transfer the property, his possession of it is simply not worthy of taxing. Drawing fine distinctions between restricted property and deferred compensation bears no consequential relationship to tax equity.

If we start with the assumption that the rules respecting deferred compensation as decided upon by this committee are equitable, why not bring those rules to all forms of deferred compensation including restricted property.

We would suggest further additions to the legislation. The bill refers to restricted property while the Ways and Means Committee

report speaks primarily of restricted stock. It should be made amply clear that the restricted property provisions encompass all manner of property and not merely stock.

There are many forms of property including the insurance policies with which members of my organization concern themselves on a daily basis. We ask this committee to eliminate any inference that would support an unduly limited definition of the term "property."

In addition, the legislation should further clarify that funded deferred compensation plans are to be treated no differently than unfunded plans. This is, of course, simply an a priori conclusion. from the premise that restricted property should be treated under normal rules applicable to deferred compensation.

And lastly, we urge that employers should be permitted a deduction at the same time and in the same amount as the employee's income must be recognized.

Mr. Chairman, we appreciate very much the opportunity to appear here today and make our views known, and we hope that we have been of some assistance to the committee.

The CHAIRMAN. Thank you, sir, for a good statement. It seems to me that if we would try to work out somehow in the legislation that the average person making a substantial amount of money, when he is paid 50 percent, could settle for that unless he makes a great deal beyond that, if we could stop all this foolishness of people trying to fiddle and change and go into businesses for which they are not eminently qualified, all that sort of thing, all this deferral and changing and shifting; in other words, if a person was going to pay about 50 percent and I am talking of a person making a substantial income and those are the people who can afford to buy a big life insurance policy from you—there would be very little incentive for people to try to defer their income for 10 years or 15 years or something of that sort because in all probability they would still be paying 50 percent whether they did eventually receive the income. That kind of thing it would seem to me might have some merit.

In any event, what you said about deferred income at least to a considerable degree had the support of the Secretary of the Treasury. Are you aware of that?

Mr. ÏRVINE. Yes, sir. We would make one clarification, Mr. Chairman, in that we would not disagree strongly with the statements that you just made. For the most part, however, they apply to the largeincome man as opposed to the large number of middle-income people for whom we are making a plea here today.

There are many deferred compensation arrangements that are employer oriented as opposed to being employee oriented. As such they do not represent deferred compensation along the lines that apply to the big taxpayer.

The CHAIRMAN. Well, we got both me and you on your 10 minutes. How about Senator Anderson.

Senator Williams?

Senator WILLIAMS. No questions.

The CHAIRMAN. Thank you very much, sir.

Mr. IRVINE. Thank you, sir.

(Mr. Irvine, Jr.'s prepared statement follows:)

STATEMENT OF JAMES B. IRVINE, JR., C.L.U., ON BEHALF OF ASSOCIATION FOR ADVANCED LIFE UNDERWRITING

My name is James B. Irvine, Jr. I am a Chartered Life Underwriter from Chattanooga, Tennessee, and appear before you today as President of the Association for Advanced Life Underwriting (AALU). I am accompanied by Leonard L. Silverstein and Gerald H. Sherman, our counsel.

AALU is an organization of more than 500 of the leading life insurance agents in the United States. By the designation "leading life insurance agents," we mean agents who, because of the large amounts of insurance with which they are concerned, tend to utilize the more complex and sophisticated financial planning arrangements.

AALU's larger parent organization, the National Association of Life Underwriters (NALU), a 100,000 member group of life insurance agents, will be appearing before you today to present its views on a number of the current tax reform proposals-those to which we will specifically refrain from speaking. Our failure to join NALU in a detailed consideration of such proposals does not indicate our disinterest in them, but rather it reflects our deference to the Committee's request that duplication of testimony be kept to a minimum and, if possible, eliminated. We would like, however, to assure the Committee that we fully support and commend to the Committee, the positions set forth in the NALU testimony.

Our testimony will focus solely on the subject of deferred compensation (section 331 of H.R. 13270) and its close relative, restricted property (section 321). We in the life insurance industry devote our entire working lives to assisting others to provide adequate financial protection for themselves and their families after their normal working lives have been concluded, whether by death, disability, or old age retirement. In a sense, then, our entire focus is on the provision of deferred compensation in one form or another. At the very least, the establishment of deferred compensation arrangements constitutes a major activity of the life insurance industry. We, therefore, are greatly interested in the manner in which deferred compensation is subjected to our taxing system. A. Deferred compensation (§ 331)

Section 331 of H.R. 13270, as passed by the House and submitted to this Committee for consideration, attempts to remove "the possibility of shifting income to taxable years after retirement when the major tax bracket is expected to be lower" a shifting of income that has heretofore been "available to employees who are in a position to bargain for deferred compensation arrangements."1 We believe that the Ways and Means Committee has overstated the case for its suggested change in the treatment of deferred compensation. Further, such a change will be detrimental to the imporant public policy of encouraging economically secure retirement programs. However, we can sympathize with the attempt (as a function of tax equity), to limit the possibilities for the otherwise economically fruitless activity of shifting income between years in order to minimize the effect of our graduated income tax rate structure.

Assuming, then, that the section 331 deferred compensation proposal of H.R. 13270, as submitted to this Committee, can find support in its broad application, we would like to direct the Committee's attention to a number of considerations that were either overlooked or inadequately treated in the current legislative draft.

1. DEFINITIONAL PROBLEMS

Perhaps the major omission of section 331 is its failure to contain a definition of the term, "deferred compensation." Neither the Bill nor the Committee Report gives any guidance as to when compensation is deemed to be deferred.

The mere fact that income is received in retirement years (the kind of compensation which seems to have been in the minds of the drafters) should not be conclusive on the question of whether it qualifies as compensation of a deferred kind for purposes of the legislation. Employers often insist that compensation be paid in retirement years so that employees will have little difficulty in maintaining reasonable standards of living during those years. In this way the employer is protected from having to make difficult decisions respecting which employees should receive the benefit of ad hoc assistance during retirement. In effect, the employer relieves itself of a pastoral function for which it is normally ill suited.

1 H.R. Rept. No. 91-418 (Part 1), 91st Cong., 1st Sess. 90 (1969).