In this case, however, the Treasury has attempted to reduce public participation to a sham. At a press conference on January 11, 1971, the multi-billion dollar change in depreciation policy was presented as an accomplished fact. It was only after my attorneys brought suit to enjoin this hastily unlawful action that the Treasury conceded the tentative nature of the proposed changes. The Treasury announced that public hearings would be held and full account would be taken of public views.

Once the likelihood of a lawsuit was diminished, Treasury officials indicated that the public would not be permitted more than pro forma participation in the rulemaking process. Assistant Secretary Edwin S. Cohen explained to the New York Times' tax correspondent that the possibility of any basic changes in the planned regulations was "remote." He added: "We don't anticipate changing our mind. As a very practical matter, a businessman can rely on this going into effect, in its broad outline." *

Similar signs of an inflexible bureaucratic attitude came on March 12, 1971, when anonymous Treasury officials reiterated their reluctance to be affected in their basic decision."

In short, the executive branch has determined to make a multi-billion dollar tax expenditure. This decision was made in collaboration with numerous representatives of favored businesses, but with no participation of our elected representatives and with as little public participation as the Treasury could possibly manage.

Senator Ervin, the proposed Treasury action is an unlawful and immense encroachment on the Congressional power of the purse. I would appreciate your Subcommittee's consideration of this multi-billion dollar example of executive branch violations of both statutory and constitutional restraints. Only an active Congress stands between the American people and further such excesses of executive power. Sincerely,

Exhibit

RALPH NADER.

HARVARD LAW SCHOOL, Cambridge, Mass., March 18, 1971.

THE TREASURY'S NEW DEPRECIATION PROPOSALS

Section 167 of the Internal Revenue Code of 1954 provides that a taxpayer may deduct from his income a "reasonable allowance" for the exhaustion, wear and tear, and obsolescence of his capital assets. On March 13, 1971, the Treasury formally proposed a new regulation that would embody sweeping changes in the administration of this section. Although the Treasury has introduced comprehensive revisions in the administration of this provision in the past, the most notable change being in 1962, these reforms have always remained within the broad contours of the depreciation sections. The new changes proposed by the Treasury should not be mistaken for a similar reform in the administration of the depreciation provisions. The innovation is much more drastic than any undertaken in the past, and marks a basic change in the philosophy of tax depreciation.

The Treasury's proposed Asset Depreciation Range (ADR) system cannot accurately be characterized as depreciation reform. It is a conceptually distinct system of capital cost recovery unrelated to depreciation accounting as it has traditionally been known to businessmen and accountants, as it has been understood by the courts, by Congress, by the Treasury (in the past), and, indeed, as it is commonly understood by the layman.

The ADR system abandons the effort to spread depreciation allowances over an asset's useful life, fails to account for an asset's salvage value in estimating annual deductions, and makes no pretense of making an accurate calculation of a "reasonable allowance" which would approximate actual exhaustion, wear and tear, and obsolescence, as the Internal Revenue Code requires.

The Treasury's proposed introduction of capital cost recovery by administrative action is not authorized by the Internal Revenue Code. It would confer benefits on taxpayers in a manner fundamentally inconsistent with accepted notions of tax equity and would be costly in terms of revenues lost.

4 "Hearing Assured on Depreciation", New York Times, January 26, 1971, p. 16. A copy of the complete article is enclosed for your consideration.

Treasury Widens Depreciation Plan to Cover Utilities". Wall Street Journal, March 15, 1971, p. 3. A copy of the complete article is enclosed for your consideration.

Most importantly, it would initiate a change in fundamental policy which, though couched in terms of an exercise of administrative discretion, is essentially "legislative" in character. Both prudence and tradition-indeed, the Constitution itself-require that such decisions be made in the Congress, not in the executive branch.

By the Treasury's own estimates, the ADR system will result in subsidies to businesses of nearly $3 billion next year, and nearly $5 billion by 1976. This figure is comparable to the amount President Nixon proposes to distribute to the states under his general revenue sharing proposals, twice as much as the amount suggested for the Environmental Protection Agency in fiscal 1972, and 30 times the 1972 budget for our overburdened Federal judiciary. This tax largesse roughly corresponds to a 10% to 12% cut in total revenues from corporate income taxes, or a drop of five or six percentage points in corporate income tax rates. Yet the ADR system is introduced one year after Congress, in passing the Tax Reform Act, refused to reduce corporate income tax rates by two percentage points.

The proposed system is designed to create a new incentive to investment in the capital goods industry. Yet it follows one year after Congress, in the Tax Reform Act, repealed the investment credit-a tax incentive intended to accomplish exactly the same purpose and involving a similar annual subsidy to business-on the grounds that capital spending had become excessive and inflationary, and that special tax incentives were no longer needed.

That the Treasury has moved into the broad policy-making realm normally reserved to congressional prerogatives is made clear by the fact that the President's Task Force on Business Taxation, whose recommendations for depreciation reform are essentially similar to the structure of the ADR system, unanimously agreed that its proposals would require legislative change. Indeed, the policy changes adopted in the proposed regulation are so fundamentally inconsistent with accepted notions of depreciation accounting that the authority of the Treasury to take such a sweeping step without additional congressional action could only be inferred from a statute that contained the most explicit grants of discretion and authority to the Treasury to take such action. No such authority exists anywhere in the Internal Revenue Code.

The adoption of the ADR system by administrative action clearly exceeds the authority conferred on the Treasury in the Internal Revenue Code.

The Treasury has issued its proposed regulation under section 167 (b) of the Internal Revenue Code, 26 U.S.C. §167 (hereafter cited as the "Code"), which empowers it to make rules governing the calculation of depreciation allowances under the accelerated methods introduced in that section in 1954, and under section 7895, which authorizes it to make "all needful rules and regulations necessary for the enforcement" of the Code. The discretion conferred by both of these sections is limited by the provisions themselves. In addition, sections 446, 451 and 461 of the Code-giving the Treasury the responsibility for promulgating rules and regulations governing accounting methods to insure that a taxpayer's return will "clearly reflect income"-are at variance with the proposed regulation, which will distort the income accounting for all but a small portion of taxpayers electing the system. From this fabric of limited discretionary authority—in light of the fact that depreciation has traditionally been conceived as a part of the calculation of taxable income-it is difficult to infer a general power in the Treasury to define "allowances" for depreciation in a way that will produce revenue losses grossly out of proportion to the administrative gains, distort taxpayer returns, and sanction methods of capital cost recovery at variance with long-accepted notions of depreciation accounting. Section 167 (a) provides that every taxpayer be allowed a "reasonable allowance" for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or for the production of income. This provision has been in force, in more or less comparable form, since 1913, yet it was not until 1954 that Congress explicitly granted the Treasury even limited authority to promulgate rules and regulations under the section. (Until that time the Treasury had promulgated interpretative regulations barely embellishing the language of the statute.) That specific grant of rulemaking authority, contained in section 167 (b) with the new accelerated methods of depreciation, granted to the Treasury limited discretion to issue rules and regulations governing depreciation calculated under those methods, and explicitly added the caveat that no part of the new provision should be construed to alter the mean

ing of the basic grant of a "reasonable allowance" contained in 167 (a). It was not until 1956 that the Treasury even promulgated a regulation which attempted to define, for the first time in the regulations, such concepts familiar in all depreciation accounting as "useful life" and "salvage value". These regulations again closely followed the language of the statute and the interpretation of the section in the courts. Treasury's authority-now as then-must be defined with reference to the meaning of the term "reasonable allowance" as it has been used in the courts and in administrative practice for the last six decades. Normally, the determination of reasonableness has turned on all the facts and circumstances in each taxpayer's own business. The Treasury's discretion to promulgate rules and regulations under 167 (b) obviously does not give it the authority to permit whatever allowance it deems to be desirable. Nor should the "facts and circumstances" surrounding each taxpayer's individual depreciation calculation be read to permit the Treasury to alter depreciation methods at will to meet economic or political exigencies. If the limitations contained in section 167 are to retain any force at all, they must be read in the context of the section's history and application over the past six decades.

Similarly, section 7805, which confers on the Treasury the power to promulgate all "needful rules and regulations", was intended to insure the Treasury's authority to issue interpretative rules where none were explicitly authorized, to adapt the statutory language to administrative needs, and to fill gaps unintentionally left vacant by the draftsmen in the enactment of its provisions. Obviously, such a power does not contemplate an authority to initiate pathbreaking changes in policy inconsistent with a long period of statutory interpretation, administrative practice, and generally accepted accounting principles. Just as obviously, such a power cannot be intended to confer authority inconsistent with those provided elsewhere in the statute. Indeed, where a general congressional grant of rulemaking power-such as that found in section 7805, but common in much federal legislation-clashes with a more explicit congressional grant of authority appearing in the context of a substantive statutory provision, the most basic canons of statutory construction would call for the more specific provision to prevail. In fact, this rule of thumb is explicitly incorporated into the first clause of section 7805. Perhaps most obviously of all, if such a general provision confers any extra measure of discretion on the Treasury to adapt the Code to the needs of administration, that discretion must be limited to innovations that justify themselves in administrative gains, when weighed against their costs in terms of revenue losses. Not even the Treasury has claimed that the increased efficiency of administration is worth a purchase price of $5 billion a year, or $40 billion in a decade.

Besides the explicit grant of authority contained in the depreciation provision itself (section 167) and in the general grant of authority to issue "all needful rules" (section 7805), the next most relevant provisions of the Code are the general accounting provisions, section 446, 451, and 461. These provisions give the Treasury authority to promulgate methods of accounting for tax purposes, and to limit the years to which taxpayers may allocate items of income and claim deductions. They place on the Treasury the responsibility to adopt accounting methods that will insure a taxpayer's return will "clearly reflect income" for the purpose of protecting the public purse from taxpayers who might juggle accounting methods to defer or eliminate their tax liability. To accomplish these ends, it is a prime responsibility of the Treasury to perfect income tax accounting and to promote tax neutrality and equity among taxpayers.

Yet, in apparent disregard of this statutory obligation, the Treasury has proposed, in the ADR system, a method of depreciation accounting that will distort taxpayers' income tax returns, create inequities among similarly situated taxpayers, and deplete the public purse. As an accounting concept, depreciation has always been regarded as integral to the accurate estimation of taxable income. But under the ADR system, taxpayers will be permitted to claim deductions for depreciation that has not occurred, spread those deductions over a period that does not correspond to an assets' actual usefulness to the taxpayer, and write off an asset's entire value long before it is retired from the taxpayer's business. For everyone but the taxpayer whose depreciation happens, by chance, to equal deductions under the ADR system, these new methods will grossly distort the calculation of net taxable income. It is therefore clear that the Treasury's actions are fundamentally inconsistent with its responsibility under these sections to assure equitable, accurate methods of calculating a tax base which "clearly reflects income".

II

The proposed system of capital cost recovery is inconsistent with the ac curate estimation of depreciation of an asset over its actual useful life, as required by section 167 of the Internal Revenue Code.

Depreciation has always been regarded as an accounting concept; allowing a tax deduction for exhaustion, wear and tear, and obsolescence was considered a natural step in the estimation of taxable income in the first excise tax of 1909, 36 Stat. 112, § 38, and in the first income tax act, both for individuals and corporations, in 1913, 38 Stat. 167, 172. Under this standard conception the depreciation begins when the asset is put into service. It ends when it is removed from use. The allowance is to be spread over the entire period of the asset's use by each individual taxpayer in a manner calculated to reflect accurately the effects of wear and tear of an asset in operation and of economie and technological obsolescence. This notion is embedded firmly in the Regulations, see, e.g., Reg. section 1.167(a)-1, (a), (b), but the general notion has been established and reiterated several times in the Supreme Court.

"Congress intended by the depreciation allowance not to make taxpayers a profit thereby, but merely to protect them from a loss. The concept is *** an accounting one ***

"It is the primary purpose of depreciation accounting to further the integrity of periodic income statements by making a meaningful allocation of the cost entailed in the use . . . of the asset to the period to which it contributes." United States v. Massey Motors, Inc., 364 U.S. 92, 102, 104 (1960); see Detroit Edison Company v. Commissioner, 319 U.S. 98, 101-02 (1943); United States v. Ludey, 274 U.S. 295, 301 (1927) (Brandeis, J.).

Equally clear from the statutory history of section 167 and longstanding administrative practice is that annual depreciation deductions must be spread over the asset's "useful life" in the taxpayer's business. Although the term "useful life" has never been defined in the statute, its meaning has been firmly established. The Excise Tax Act of 1909, 36 Stat. 112, § 38, provided a depreciation allowance which was interpreted in a Treasury regulation to permit deductions for exhaustion, wear and tear, and obsolescence arising "out of the uses to which the property is put." Reg. 31, Art. 4. The first income tax in the Revenue Act of 1913 retained this emphasis; individual taxpayers were permitted to take allowances for "wear and tear of property arising out of its use or employment in the business." Act of October 3, 1913, 38 Stat. 167 (italics added). Although the italicized language was amended by section 214 (a) (8) of the Revenue Act of 1918, 40 Stat. 1067, to read "used in the trade or business," the Treasury regulations adopted contemporaneously and in effect until 1941, retained the original emphasis on depreciation over the period the asset was actually used by the taxpayer, and adopted the present terminology: "The proper allowance .. [must be] in accordance with a consistent plan . for the useful life of the property in the business." Treas. Reg. 45. Art. 161. The present regulation, which was adopted in 1956, elaborates this conception more clearly than any previous regulation. Under the regulation, useful life is

"not necessarily the useful life inherent in the asset, but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income."

Reg. $1.167(a)--1(b). The regulation, which curiously the Treasury does not now propose to eliminate, goes on to elaborate lists of factors to be considered which would vary from taxpayer to taxpayer in the calculation of useful life. Under the elementary canons of statutory construction, the fact that the Treasury's regulation reflected the original statutory language, were promulgated contemporaneously with enactments of the early revenue acts, and have continued virtually unchanged for over six decades, together fix this conception of useful life in the Internal Revenue Code as surely as if the term had been expressly defined in the statute. See E. Griswold. A Summary of the Regulations Problem, 54 Harv. L. Rev. 398, 401 (1941). Moreover, the fact that Congress has reenacted the statute in the light of this interpretation lends added strength to this interpretation, see Cammarano v. United States, 358 U.S. 498 (1959), and the fact that Congress has used the term "useful life" in virtually every general “depreciation" section of the Code confirms it. Wherever the term is used in the statute, the availability of substantial tax benefits turns

on its meaning. For example, accelerated depreciation only applies to assets with useful lives of three or more years. Section 167 (c). Additional first year depreciation for small businesses is available only for assets with useful lives of six years or more. Section 179 (d) (1) (C). While it was in effect, the investment credit could not be used for property with a useful life of less than four years, could only partly be used for property with a useful life of from four to eight years, and was only fully available for property with a useful life of more than eight years. See 26 U.S.C. §§38, 46 (1964, 1969 Supp.) (repealed).

From time to time, Congress has provided rapid amortization over fixed five-year periods in place of regular depreciation for defense emergency facilities (section 168), grain storage facilities (former section 169, now expired), pollution control facilities (present section 169), and other specified capital investments. The Committee Reports accompanying these special provisions make clear that the five-year period was intended to permit more rapid cost recovery for an asset than depreciation over its useful life would allow. See H.R. Rep. No. 2894, 76th Cong., 3rd Sess. 16. It would be inconsistent with the purposes of these provisions to assume that the tax subsidies which they confer were conditioned on a definition of useful life that could be varied by the Treasury at will.

The meaning of useful lives for the purposes of depreciation accounting under section 167 has been illuminated by the Supreme Court in Massey Motors, Inc. v. United States, 364 U.S. 92 (1960). In that case, the taxpayer, a retail car dealer, held cars for demonstration and leasing purposes for periods of several years. However, the taxpayer estimated a useful life for these automobiles spanning their entire economic life. Not surprisingly, the Supreme Court upheld the determination of the Commissioner of Internal Revenue that the useful life of the asset must be calculated over the period of use by the taxpayer, not over its abstract physical or economic life. Until the Treasury proposed the ADR system, which would effectively substitute abstract, standard tax lives for the taxpayer's own assets' useful lives, one would have thought that, after Massey, the question of whether depreciation had to be taken over the asset's actual useful life had been laid to rest.

The asset depreciation ranges, when used without the reserve ratio test, or some other test bringing the actual useful life of an asset into conformity with a standard guideline life, represent an abandonment of useful life depreciation. Capital cost recovery under the ADR system will not reflect exhaustion, wear and tear, and obsolescence of each taxpayer's assets. Unlike depreciation, capital cost recovery under the ADR system is not an income accounting concept. Because the taxpayer need not show the asset lives he elects under the ADR system are in any way related to the actual useful lives of his assets-a demonstration that the reserve ratio test was designed to make possible the rate of recovery of his capital costs will be unrelated to the wear, tear and obsolescence of his own assets.

The ADR system also deviates from traditional depreciation accounting in another important respect. In contrast to present practice, the Treasury's proposal would ignore salvage value in calculating the annual allowance. The general rule under traditional depreciation accounting methods requires that the annual rate of depreciation be applied to the difference between the original cost of an asset and its estimated salvage value. Variations in this rule have been justified in the past only where they were contemplated in the statute itself, as for example, where depreciation is calculated according to the double declining balance method under section 167(b), or where extra first-year depreciation is calculated against an asset's original cost, without considering salvage, under section 179. The Supreme Court has restated the general rule in numerous contexts as an integral part of the system of depreciation established by section 167. See, e.g., Massey Motors, Inc. v. United States, 364 U.S. 92, 93. 104 (1960). Indeed, the elimination of salvage value from the calculation of annual allowances tends to introduce the same kinds of distortions in income tax accounting, and confer the same kinds of tax benefits on the taxpayer as does the substitution of ADR lives for useful lives. Finally, the Treasury's proposed ADR system will distribute its benefits among taxpayers arbitrarily, unfairly, and in a manner inconsistent with the basic notions of tax equity and neutrality that are reflected in the present system of depreciation.

By shortening the period over which capital expenditures can be recovered, the ADR system would confer unwarranted benefits on taxpayers whose assets have the longest actual lives, and who are making the smallest contribution