In order to alleviate this hardship, we suggest the following: (1) Corporations should be permitted to credit the amounts withheld not only against the amount of installment payments to be made with respect to their liability for the current year, but should also be allowed to credit such amounts against the amounts withheld from employees for income and social security tax purposes. Such offset is suggested by Secretary Dillon with respect to overwithholding made with respect to tax-exempt organizations to alleviate their hardship. It is equally appropriate with respect to corporations. (2) Provision should be made for quarterly refunds with respect to any amounts withheld which are not used as a credit as suggested in (1) above. This provision should further require that the refunds be made within 60 days after the claim is filed. A provision for quarterly refunds is presently contemplated for individuals and tax-exempt organizations, but not taxable corporations. (3) In cases where consolidated returns are filed, the members of the consolidated group should be permitted to shift the credit for taxes withheld among the various members of the group so as to be used in the manner suggested in (1) above to further avoid unnecessary hardships. The President's recommendation now proposes that intercompany dividends of a consolidated group be excluded from the withholding requirements. CHAD F. CALHOUN, Vice President. Hon. WILBUR MILLS, Chairman, House Ways and Means Committee, NEW YORK, N.Y., May 11, 1961. Request following read into record at tax bill hearing: If withholding tax is enacted widows dependent on dividends and retired persons on small incomes will suffer needless hardship. Many cannot afford to wait for refunds. Protest enactment due to double taxation. If enacted recommend exemption on oddlots. Strongly object elimination tax credit on dividends for small share owners so long as stock optioneering is allowed, creating a tax elite. WILMA SOSs, President, Federation of Women Shareholders in American Business, Inc. Hon. WILBUR D. MILLS, MISSISSIPPI BANKERS ASSOCIATION, Jackson, Miss., June 2, 1961. Chairman, House Ways and Means Committee DEAR MR. MILLS: That you may know the sentiment of the Mississippi banking fraternity as to the proposal to withhold for income tax on interest, dividends and like payments, I am enclosing herewith a copy of a resolution adopted on May 24, 1961, by the membership of the Mississippi Bankers Association in official convention. Sincerely yours, LEIGH WATKINS, Jr., Secretary. MISSISSIPPI BANKERS ASSOCIATION RESOLUTION RELATING TO WITHHOLDING OF TAX ON INTEREST AND DIVIDENDS There is a distinct and serious threat that the Congress will impose the withholding of taxes on interest and dividends. The President's tax message contained a recommendation for such withholding. This withholding provision would impose a burdensome duty upon elderly persons, minors, and others who do not now make any income tax returns, and would be highly discriminatory to these groups. Their lack of understanding of the refund provisions would mean that millions of dollars of refunds to which they are legally entitled might never be received, and even if received, would lose the important benefit of the compounding of interest upon these withheld funds which could be tied up for as long as 15 months. You are all familiar with the cooperative educational program which was undertaken in 1959 and 1960 by banks and other institutional payers of interest and dividends at the request of Treasury to inform individual taxpayers of their responsibility to report interest and dividends on their tax returns. The Treasury Department under the former administration was opposed to withholding of taxes on interest and dividends because of the serious refund problem it would create. They were hopeful that through the cooperative effort and by strengthening their enforcement procedures the gap in the unreported dividends and interest could be substantially closed and that withholding could be forestalled. According to a sample survey by the Treasury of 1959 individual income tax returns, it was estimated that the unreported dividend gap had been closed by more than 50 percent and the gap in unreported interest by slightly less than 50 percent. The failure of some individuals to report all of their taxable income, including dividends and taxable interest income, on their Federal tax returns cannot be excused, and we condemn any attempts to evade tax responsibility. The Federal Government, however, has indicated that such failure in many instances is a result of misunderstandings on the part of the public. Consequently, banks across the country have cooperated with the Government in widespread campaigns to explain that interest and dividends are taxable income. These campaigns, as noted above, have resulted in broad improvements. We have also been informed that the Internal Revenue Service is proceeding with plans for an automatic data processing system which could effectively detect omissions of dividends and interest income on tax returns. It was expected that such conversion would be started this year and be completed in all internal revenue districts within 4 or 5 years. The use of automatic data processing will greatly facilitate the matching of information returns with the regular income tax returns and thus enable the Treasury to easily determine which taxpayers are failing to report dividends or interest and to take appropriate action: Now, therefore, be it Resolved, That this association, formally convened in its annual convention, record with each member of the U.S. Senate and the House of Representatives from the State of Mississippi, the association's opposition to legislation proposed which would impose upon its members the burdensome duty of withholding of taxes on interest and dividends. The foregoing is a true and correct copy of a resolution adopted by the Mississippi Bankers Association on Wednesday, May 24, 1961, in official convention assembled. Given under my hand and the seal of the association this 2d day of June 1961. [SEAL] LEIGH WATKINS, Jr., Secretary. Re tax proposals of President Kennedy. Chairman, Ways and Means Committee, MAY 10, 1961. DEAR SIR: Since I know of the great demands on the available time of your committee in connection with the present hearings, I have refrained from requesting a personal appearance before you and, in lieu thereof, request that this letter be entered in the record. The American Stock Exchange is a national securities exchange composed of 499 regular and over 400 associate members. These members do business for the public in more than 2,800 offices located in about every State of Union. This exchange wishes to express its opposition to the proposals of the President to abolish the present $50 dividend exclusion and 4 percent tax credit and to impose a 20 percent withholding tax on dividends. We firmly believe that everyone who participates in the great benefits granted to those who are citizens of this country should bear his fair share of the necessary costs of Government. None of us should oppose any fair and equitable tax levied upon us to pay these costs, nor should we oppose any reasonable, fair, and equitable method of collection of such tax. But the tax imposed on dividends received by a shareholder, first assessed as part of the tax structure in 1936, is a classic example of unfair, inequitable taxation. It is a double tax on one type of earnings. The shareholder is taxed not only on the net income of the corporation of which he is a part owner, but also when part of the balance of that net income is distributed to him as a dividend. No other form of individual income, whether it be rents, royalties or interest is subject to such a dual assessment. In 1954, the Congress in recognition of the inequity inherent in this tax, afforded a small measure of relief by allowing the shareholder the present deduction of $50 and the 4 percent tax credit. Even with this concession, the highest existing tax rates are on corporate profits paid out as dividends. Taking the corporate and personal tax together, there is a 62.6 percent effective rate of tax for a person in the $4,000 to $6,000 tax bracket, and the top rate goes up to 93.8 percent. It is interesting to note that other nations are far more liberal in crediting to shareholders the taxes paid by corporations. In Canada a 20 percent credit is given, and in the United Kingdom shareholders who receive dividends are credited with the 384 percent standard tax rate already paid by the corporation. The proposal by the President would not only remove the nominal relief from double taxation now granted by the Congress but also accentuate the inequity by requiring that dividends be subject to a withholding tax of 20 percent. If adopted across the board such a withholding tax will have an immediate and serious inequitable impact upon thousands of aged and retired persons with low incomes who, because of available exemptions and generally applicable deductions, are not required to pay a tax. It would affect, in comparable fashion, pension trusts and nonprofit institutions which have no taxable income. These persons will be in the unenviable position of having to pay 20 percent of their dividend income to the Government, with the further burden of having later to request restitution of what would amount to an interest-free loan. In the meantime, pending restitution, they would be deprived of the amount of the tax together with any earnings that might accrue thereon. Moreover, such an acrossthe-board withholding tax presents immediate and extremely serious problems of administration for the paying corporations, banks, brokerage houses and the Government itself. If the Congress were intentionally to seek for a means of destroying the incentive of investors to place their funds in equities, it could hardly adopt a better or more effective means for accomplishing that purpose than to accept these tax policies recommended by the administration. We strongly urge that the committee reject these proposals. EDWARD T. MCCORMICK, President. STATEMENT ON BEHALF OF THE UNITED STATES INDEPENDENT TELEPHONE ASSOCIATION BY MR. CLYDE MCFARLIN OPPOSITION TO WITHHOLDING TAX ON CORPORATE DIVIDENDS My name is Clyde McFarlin and I am president of the Montezuma Mutual Telephone Co., of Montezuma, Iowa. This statement is on behalf of the United States Independent Telephone Association, the national trade organization representing the independent telephone companies of the country. There are 3,300 such companies which serve 10,705 cities, towns and rural communities. These companies are those which are not affiliated with the Bell System. Independent companies are responsible for rendering telephone service in more than one-half of the geographical area of the United States, and their telephones total approximately 11,500,000. We oppose the President's recommendation that a 20-percent withholding tax on corporate dividends be imposed. It would unfairly increase our business tax burden. Business and industry would be called upon to do the paperwork and assume additional expenditures for accounting. Such a proposal would make even more unfair the present burden of double taxation imposed on corporate business whereby the security owner is taxed on earnings of a business already taxed. The very expense of collecting taxes on dividends to small shareholders would offset, to a large extent, the amount of tax revenue received. It would perpetuate and emphasize the practice of the Federal Government of making business an involuntary tax collector of somebody else's taxes. This is e pecially burdensome and unfair in the case of small independent telephone companies with limited resources for taking care of their own business operations. It would add to the cost of an essential public service without any corre sponding benefit received by either the telephone companies or their subscribers. STATEMENT OF KAISER INDUSTRIES CORP., WASHINGTON, D.C., REGARDING WITHHOLDING OF DIVIDENDS AND INTEREST PAYABLE TO TAX-EXEMPT ORGANIZATIONS The proposal to withhold income taxes with respect to dividends and interest paid to tax-exempt organizations imposes undue burdens on the tax-exempt organizations and upon the Internal Revenue Service, and we do not believe are justified in order to simplify withholding procedures. We, therefore, suggest that provisions should be made for the filing of a statement with a payer advising of the tax-exempt organization's status for income tax purposes and pursuant to such statement the payer should be relieved of the responsibility to withhold the tax. The proposal presently contains three exemp tions from withholding. They are foreign corporations, foreign partnerships, and nonresident aliens. The addition of a fourth exemption providing for proper mechanics of notification would not unduly burden payers. Secretary Dillon's explanation of the proposal recognizes the inequity of withholding from tax-exempt organizations. He suggests that this inequity is alleviated by permitting a credit of the tax withheld against payments which would otherwise be required with respect to employees' income taxes withheld and social security taxes. Whereas, schools, hospitals, research organizations, etc., may be able to take advantage of this credit, there are many tax-exempt organizations which could not do so. In these instances, it is suggested that quarterly refunds could be applied for, but even with provision for quarterly refunds on an accelerated basis, the tax-exempt organizations would be unjustly deprived of the use of a portion of their funds for some period of time. We do not believe that simplicity can be used as a justification for failing to provide an additional exemption when measured against the burden of filing claims for refund the withholding imposes upon the taxpayer, the burden of processing such claims imposed upon the Internal Revenue Service, and the undue deprivation of funds imposed upon the exempt organizations. We earnestly solicit your consideration of this proposal. CHAD F. CALHOUN, Vice President. Hon. WILBUR MILLS, THE AMERICAN BANKERS ASSOCIATION, Chairman, House Ways and Means Committee, MY DEAR MR. CHAIRMAN: This letter will give you the views of the American Bankers Association on the request of the President for a taxpayer account numbering system. We would be happy, of course, to develop any of these points further or to answer any questions which you, your committee, or staff members may have. With the background of experience of our association in assisting banks to convert their operations to the use of automatic data processing equipment, we are fully conscious of the problems of the Internal Revenue Service and the Treasury Department. As a result of this experience, we are in accord with the conclusion that taxpayer account numbering may be essential to the most effective use of automatic data processing equipment for taxpayers. We do have serious concern, however, with a number of the details of the proposal as it has been presented to the committee in the President's message and the statement and the detailed explanation made by Secretary Dillon. Our first problem arises from the proposal that social security numbers be used for taxpayer identification purposes. We are inclined to believe that the ease of being able to expand upon the use of an existing Government numbering system has tended to obscure the importance of other essential considerations. We doubt that the social security number will best serve the Treasury's needs in making the most effective use of its new equipment. Any numbering system to be most effective should be designed for the particular purpose for which it is needed and for the particular equipment on which it is to be used. Secondly, we believe that the social security numbering system might cause grave dislocations in the existing use of automatic data processing equipment by banks, dividend payers, and other business concerns. Any numbering system used on a computer should provide for a check digit in the number for self-checking purposes-to make certain that the correct number is always being used in each transaction. To explain, whenever an identi fication number is copied from one source to another, there is always the possibility of making an error in copying. Thus, if the Internal Revenue Service were to assign numbers to taxpayers and reference to taxpayers would be by number selection alone, there would always be considerable danger of incorrect reference. Where a computer is used, these risks can be overcome to a great extent by providing for a check digit as a supplement to the basic identification number assigned to the taxpayer. Such a check digit may be determined in various ways, but it is usually done by applying a mathematical formula to the digits of the identification number which results in a self-checking identification number. Then when a number is introduced into the machine, the computer instantaneously performs the mathematical computation and shows whether the correct number is being used. Most banks and business concerns incorporate such a check digit in their numbering systems to minimize errors. With the great volume of transactions to be handled for tax purposes, any possibility of added protection against careless or even intentional errors would be most important. However, the social security numbering system contains no such check digit presumably because their system was adopted before the use of computers for this purpose was possible. The other subject which should be considered in connection with the number to be used is its compatability with automatic data processing equipment now in use. We believe that the Treasury will make a careful study of the various possible numbering systems with a view to causing the minimum of dislocation in automatic data programing, if the social security number is not specified in the law. It has been suggested that such a study should have in mind the possibility of eventually being able to use one number for multiple purposes. In selecting numbering systems for the numbering of banks' customers some banks have used what is known as an alpha-numeric system and others have used a straight numeric system. Then there are various modifications of both of these basic systems. The number of digits involved in any system is dependent on the size of the bank and the number of accounts involved. We are also advised that many stock transfer agents use an alpha-numeric system, which is inconsistent with the social security numbering system. We earnestly recommend that the Treasury Department, the Social Security Administration, and technicians from business, banking, and equipment manufacturers combine efforts to develop a numbering system which would be best suited for the taxpayer numbering system and for the equipment to be used. The second general area of our concern is with respect to timing. The proposal presented to the committee suggests that account numbers for information returns would be required for 1963 and thereafter. This timing appears to be unrealistic. We estimate that a minimum period of 5 years would be required before it would be possible to use an account number on a substantial proportion of dividend and interest information returns. Even with the most intense educational efforts by the Treasury and with the full cooperation of payers of dividends and interest, it will be most difficult to obtain the account numbers from multitudes of individual receivers of dividends and interest for whom an information return must be filed. Every experience of dividend-paying agents reports a high percentage of shareholders who fail to respond to letters even though it may be to their financial advantage to do so. In the field of trust administration, there would be many difficulties in obtaining and using account numbers in connection with various fiduciary activities. Included in these situations would be the use of street names, nominee accounts, and obtaining numbers in the case of beneficiaries of all trusts, particularly pension trusts. Moreover, even if account numbers of the payers were received, there would be delay in adapting existing equipment used by business concerns to the new requirement. Since it would not be possible to include an additional nine-digit number in the great majority of cases where automatic equipment is now in use. compliance with the Treasury program would require the use of additional space on whatever storage medium is used-tape, drum, disk or cards. The time which would be consumed and the expense which would be involved are readily apparent. Banks acting as stock transfer agents and dividend payers would have a particularly difficult time in adapting their equipment to include an additional number. The foregoing discussion of the time required to put into effect a new taxpayer numbering system applicable to information returns on dividends and interest |