siderably higher than the market yield prior to announcement-how much above depending upon the size of the offering. On the other hand, if the amount offered were limited to avoid market impact, then a cash financing becomes relatively more "costly" in the broader context of a lesser achievement in attaining a better debt structure. Also, it is more "costly" from a broader economic standpoint, particularly during any recession when interest rates are low, to turn to cash offerings or refundings at maturity which absorb new savings that otherwise could contribute to economic recovery.

E. CONCLUDING COMMENT

51. The advance refunding technique offers much promise in terms of the achievement of a better maturity structure of the marketable public debt and the retention of the present long-term holders as investors in Government securities. It is not a panacea for all the problems of debt management under all circumstances, since it is chiefly applicable when large outstanding issues are selling at substantial discounts and in a market in which there is willingness on the part of investors to extend the maturity. It is clearly the best method of bringing about significant debt lengthening, so essential in the light of the unbalanced debt structure, and at the same time retaining intermediate and long-term investors in Government securities. It would accomplish this with a minimum of adverse market and economic effects. Alternatively, the Treasury could offer long-term bonds for cash or in exchange for maturing issues of Government securities. While both of these other techniques may be useful under certain circumstances, advance refunding has great promise at the present time as a way of implementing sound debt management policy as an integral part of Federal financial responsibility.

Taxation Developments

EXHIBIT 23. Letter from Under Secretary of the Treasury Scribner, December 18, 1959, to the Chairman of the House Ways and Means Committee at the conclusion of the panel discussions on tax revision

DEAR MR. CHAIRMAN: The panel discussions on tax revision concluded this afternoon by the Committee on Ways and Means after five weeks of hearings cover practically every area of Federal income taxation. They make a major contribution to our understanding of the operation of the income taxes, their strength and weakness, their potential for the future.

The three volumes of papers submitted in advance by tax experts from all parts of the country, together with the panel discussions, including the experts' responses to the committee members' searching questions, comprise a large storehouse of valuable information on the diverse aspects of the income taxes. Many thoughtful suggestions were developed.

The Treasury, and the taxpayers of the Nation, are indebted to these students of taxation. We want especially to express appreciation to you and to the members of the committee who devoted so generously of the short respite between congressional sessions to the important undertaking.

As you know, we in the Treasury have worked closely with the committee in preparation for the hearings and have followed with keen interest the panel discussions. The majority of witnesses appears to be agreed that the climate for economic growth would be improved if tax rates were reduced.

Most of the experts also appear to agree that this must be accomplished without sacrificing revenues required for responsible financing of government and to provide needed debt retirement in prosperous times.

The consensus on how this is to be accomplished is less apparent. Some experts believe that several provisions of present law give undue advantage to particular groups or activities, others are just as convinced that these provisions are essential to tax fairness and to promote desirable economic or social objectives.

The Treasury looks forward to cooperating with the committees of Congress and their staffs in analyzing the testimony and developing sound and attainable legislative proposals to improve the tax laws. We concur in your view that this analysis by the staffs will necessarily take time. In the meanwhile, prudence counsels that we avoid piecemeal tax relief amendments which may well jeopardize future opportunity for general tax reduction so ardently desired by all.

Sincerely,

FRED C. SCRIBNER, Jr., Acting Secretary of the Treasury.

EXHIBIT 24.-Statement by Under Secretary of the Treasury Scribner, March 2, 1960, before the House Ways and Means Committee on the tax treatment of gain from the sale of depreciable property

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: I appreciate this opportunity to appear before your committee to present the Treasury's views on H.R. 10491 and H.R. 10492, "To provide for the treatment of gain from the sale or exchange of tangible personal property used in the trade or business."

In his recent budget message, submitted to the Congress on January 18, the President recommended that consideration be given to an amendment to the Internal Revenue Code which would treat the gain from the sale of depreciable personal property as ordinary income to the extent of the depreciation deduction previously taken on the property. On February 12, the Secretary of the Treasury sent identical letters to the Vice President and the Speaker of the House on this subject, enclosing a draft of proposed legislation to carry out the President's recommendation. This proposal has since been embodied in the two similar bills introduced, respectively, by the chairman and by Congressman Mason, which are now before your committee.

This proposal would guard against unfair tax advantage by those who depreciate property overrapidly. It would be of major assistance in the sound administration of the depreciation provisions of the Code. It would eliminate a vexing source of dispute and disagreement between revenue agents and taxpayers. From the standpoint of economic growth it is important that depreciation practices do not place unnecessary impediments in the way of capital investment, replacement, or modernization. We believe that this legislative recommendation is an important one for the fairness of the tax system and for effective administration.

As stated by Secretary Anderson in his recent letters to the Vice President and the Speaker of the House:

"Under existing law, gain realized by a taxpayer upon the sale of depreciable personal property used in business is taxable as long-term capital gain even though part of all of the gain may be attributable to depreciation allowances which have been taken as ordinary deductions. This has hampered the sound administration of the depreciation laws because through the medium of the depreciation deduction ordinary income may be converted into capital gain. Accordingly, agents of the Internal Revenue Service have been zealous in insisting upon full proof that depreciation rates and salvage values claimed by a taxpayer can be substantiated by expert opinion or actual experience.

"Informed opinion often differs as to the period of time over which an item of machinery or other depreciable property may reasonably be expected to be useful to the taxpayer in his trade or business. The necessity of establishing a salvage value for an item of personal property also causes innumerable problems for industry and the Internal Revenue Service.

"The proposed statutory change which would require that gains from sale of depreciable personal property be treated as ordinary income, to the extent of depreciation previously claimed, would make it possible for agents of the Internal Revenue Service to accept more readily taxpayer judgments and taxpayer practices with respect to depreciation rates and salvage value. In short, if enacted the proposed legislation, by eliminating the opportunity which now exists of converting ordinary income into capital gains, would contribute to the sound administration of the depreciation laws."

The present rule, which permits net gains from sale of depreciable personal property to be considered as capital gain while net losses are deductible as ordinary losses, was adopted in 1942. Prior to 1942, the depreciable property used in a trade or business had been excluded from the definition of a capital asset, so that both gains and losses from the disposition of such property were treated as ordinary gain or loss items. Considered alone, this provision was advantageous to taxpayers in the event of loss but was disadvantageous in the event of gain. However, during the depression years of the 1930's, sales of depreciable property at a gain were relatively infrequent.

With the advent of the World War II period, sales involving gain became increasingly frequent. Sales of used machinery, ships, and other business properties as a result of wartime demands often resulted in substantial gains. At the same time, the increase in involuntary conversions during the war, chiefly shipping losses and condemnation of property for military purposes, presented the problem of the tax treatment of involuntary conversions resulting in taxable gain where the proceeds were not reinvested. The enactment of section 117(j), now section 1231, was in large part a wartime relief measure.

The proposed amendment would not indiscriminately reverse the existing rule that net gains from sales of depreciable property are treated as capital gain.It would not affect intangibles, such as patents, copyrights, or trademarks. Nor would it apply to real estate. Moreover, it would treat as ordinary gain only that portion of the gain on machinery and equipment which reflects depreciation previously taken. Let me illustrate with a few examples the way in which the proposal would operate. Assume that an item of property costing $1,000 and having an estimated service life of 10 years is depreciated under the doubledeclining balance method for three years and then resold. The annual depreciation allowances on such property would be $200, $160, and $128 in the three years respectively, or a cumulative total of $488 depreciation. The remaining tax basis of the property is therefore $512. If the property were sold for $700, the entire gain of $188 would be taxable as ordinary income under the proposal. However, if the property were sold for $1,200, or a net gain of $688, $488 of the gain would be treated as ordinary income. The remaining $200 or the portion of the gain in excess of the depreciation previously taken would be treated the same as under present law. That is, the $200 gain in excess of depreciation previously taken would be aggregated with gains and losses from similar transactions and if the result was a net gain it would be taxed as a capital gain. If the overall result was a net loss it would be deducted as an ordinary loss. The proposed rule treating gain on sale of depreciable personal property as ordinary income to the extent of the depreciation deduction previously taken, has a precedent in the special rule under section 1238, relating to gain from the sale of property which has been subject to the accelerated amortization deduction for emergency facilities. Both under present law and under the previous accelerated amortization program in World War II, the portion of the gain on sale of emergency facilities, representing the excess of accelerated amortization over normal depreciation, has been taxed as ordinary gain. The necessity of such a rule to prevent obvious abuse has generally been recognized.

At this point I believe a general review of recent developments in the field of depreciation might be helpful. Substantial progress was made in the depreciation reforms introduced under the Internal Revenue Code of 1954. The doubledeclining balance and the sum of the years-digits methods provided by the 1954 legislation concentrated deductions in the early years of service life and resulted in a timing of allowances more in accord with the actual pattern of loss of economic usefulness. As compared with the older, more rigid straight-line approach, the new liberalized methods permit the tax-free recovery of about half the cost of an asset during one-third of the service life and about two-thirds of the cost over the first half of the life. These more liberal depreciation methods have made a significant contribution in encouraging modernization and expansion of productive capacity, with resulting economic growth, increased production, and a stronger economy.

An additional first-year depreciation allowance of 20 percent on the first $10,000 of expenditures for new or used equipment was provided by the Small Business Tax Revision Act of 1958. Designed to be of particular assistance to small business, the first-year allowance is equally available to all business concerns and farmers, subject to the prescribed dollar limitation.

In the field of administrative policies, the Treasury has continued its efforts towards a realistic application of the statute. Since the issuance of Revenue Rulings 90 and 91 in 1953, it has been the policy of the Internal Revenue Service not to disturb depreciation deductions unless there is a clear and convincing basis for change. It was specifically recognized that in many of our industries today technological improvements and rapid economic changes have magnified the importance of obsolescence in determining depreciation rates. In Revenue Ruling 91, revenue agents were instructed in determining depreciation rates to consider carefully evidence presented by taxpayers with respect to obsolescence. As part of our continuing review of obsolescence and service life questions, careful consideration has been given to possible revision of Bulletin "F". The latest edition of this bulletin, which outlines suggested service lives for the guidance of taxpayers, appeared in 1942. We have tentatively concluded that the reissuance of Bulletin "F" would not serve a useful purpose at this time. On a straight engineering basis and in terms of past historical experience, which excludes prospective technological developments, it seems erroneous to assume that a restudy of average lives would result in many reductions apart from the obsolescence factor. On the other hand, many taxpayers have, on the basis of their own experience and of evidence submitted to revenue agents, satisfactorily established for themselves shorter lives than a revised Bulletin "F" might suggest.

Under the circumstances, a reissuance of a revised bulletin might lead to misunderstanding, overemphasis on suggested schedules, and even more prolonged disputes whether the Bulletin "F" life, some prospective estimated life, or other measure should control the depreciation period in any particular situation.

Mindful of the critical importance of the depreciation provisions to business and investors at this time and of the opportunities for constructive reform in this vital area, the Treasury, after completing and analyzing the results of a "pretest" survey, has undertaken a survey to obtain additional general statistical information on current practices and present opinions on depreciation. This survey is being conducted in cooperation with the Small Business Administration to insure coverage of both large and small firms. In connection with this survey a questionnaire is being circulated among some 6,000 businesses which provide a cross section of American industry with respect to depreciation problems and practices.

In our letter of transmittal to those covered by this survey, we note the great importance of the treatment of depreciation for business and for the expansion of job opportunities and of the economy generally. We are confident that the businesses included in this survey will recognize that it is essential to have a sound factual basis in order to improve the administration of depreciation or to change the statutory provisions in this area as urged by many business groups.

A number of business and professional organizations were consulted in the planning and developing of the survey. The great majority of these organizations indicated their support for such a study. We believe that the information and the more up-to-date understanding which we hope to obtain through the survey will furnish guidance in case of further administrative or legislative change. Certain tentative conclusions may be drawn from the limited and fragmentary data already obtained from the pretest survey covering 26 companies. One of the principal findings was the diversity in depreciation practices, rates, and attitudes among these corporations. Outside certain special situations, the pretest survey showed that the great bulk of all new property installations by these taxpayers since 1954 was being depreciated under the new liberalized methods. Comparison of the service lives and depreciation rates used by the large companies with Bulletin "F" disclosed some service lives longer and a number of others substantially shorter than Bulletin "F" standards.

Again, I wish to reemphasize that unrestricted capital gain treatment of the profit on the sale of depreciable assets is a troublesome barrier to sound administration of depreciation allowances. Many of the problems and controversies in the application of the depreciation provisions have centered around the estimate of service life of equipment, including the obsolescence factor which injects such a high degree of uncertainty into the determination of useful life.

In attempting to estimate the average life of a piece of equipment, it is possible for experts in the field to make reasonable estimates although there is inevitably a substantial margin of error. We frequently hear the contention that meticulousness on the part of the revenue agents on the question of service life is misplaced, since depreciation after all is merely a matter of timing allowances. It is not true that the rate of depreciation is merely a matter of timing if an overdepreciated property may be sold subject to capital gain rates so as to afford the taxpayer an unintended advantage by juxtaposing ordinary tax rates and the reduced rates on capital gains with respect to the same item of income. Consequently, so long as capital gain treatment applies to the entire profit on resale of depreciable equipment, the administrators of our tax laws are required to be meticulous if they are to be faithful to the clear intent of the statute in providing a reasonable allowance for capital recovery.

The practice of charging off an item of equipment over a relatively short period of time, and at the end of the charge-off period disposing of the item at a relatively substantial gain, has grown up in many sections of industry. Some taxpayers, ignoring salvage value and claiming to rely on section 1231 of the Code, have reported this gain as a long-term capital gain. The problems created by this practice are serious. They transcend the artificial tax savings sought by some taxpayers since they have unfortunate effects on the approach to the determination of service lives, depreciation rates, and estimated salvage values for taxpayers generally.

Treasury regulations based on the long-standing principle that an asset may not be depreciated below salvage value have had some success in checking distortions of the depreciation allowance in specialized areas chiefly involving property with very short service lives. But such regulations, which have been challenged in the courts, do not adequately resolve the more general issues in

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volving the relationship between depreciation and resale of equipment at capital gain rates.

The suggested change in the treatment of gain on the sale of depreciable property would facilitate sound administration of the present depreciation rules. As previously stated it would work against unfair tax advantage by those who depreciate property overrapidly. Before we undertake any long-range consideration of getting more flexibility into the depreciation schedules, either administratively or by statute, this step should be taken first. The proposal is in keeping with suggestions received from a number of witnesses in the course of the panel discussions on tax revision which your committee conducted last November and December.

The recommended legislation would be an important step in the direction of both fairness and simplification. It would eliminate friction between the Service and taxpayers in areas where reasonable men may differ and where the resolution of differences would be possible except for the extraneous factor of capital gain treatment.

The restriction of capital gain treatment would check some existing sources of revenue loss and prevent possible permanent revenue losses in the depreciation area. The resulting simplification of administration should result in economies and better utilization of the Internal Revenue Service staff in the application of the tax laws.

In conclusion, I would like to emphasize the need for the proposed legislation and the important benefits which it may produce within the existing general system of depreciation. Within the present framework we believe that the proposed legislation will encourage a fairer and simpler administration of the existing law, reduce controversy and abuse, and thereby encourage the growth of our industrial resources.

The staff of the Treasury will be available to work cooperatively with the staff of your committee in furnishing whatever information and technical assistance the committee may require in exploring all aspects of this important piece of legislation.

EXHIBIT 25.—Letter from Under Secretary of the Treasury Scribner, March 21, 1960, to the chairmen and ranking minority members of the Senate Finance Committee and the House Ways and Means Committee setting forth steps taken by the Internal Revenue Service and the payers of dividends and interest to secure more complete reporting of dividend and interest income by taxpayers

For your information, I enclose herewith an interim report setting forth steps taken by the Revenue Service and the payers of dividends and interest to secure a more complete reporting by taxpayers of dividends and interest received or credited.

In the current program most helpful cooperation has been received from many corporations and individuals paying interest and dividends.

More than 75 million special notices have been mailed in the last several weeks to recipients of dividends and interest. These distributions have been supplemented by a coordinated information campaign using newspapers, magazines, radio, and television. These educational programs are producing most helpful results.

Several enforcement actions have also been taken by the Service, as reported on page 6 of the enclosure.

A new and expanding matching program-matching 1099's against the returns of individual taxpayers-is now being carried out in each of the 61 revenue districts throughout the country.

The Justice Department is also giving special attention to dividend and interest cases. More than 200 such cases are now in various stages of investigation or prosecution. There are more than a score of cases in which indictments or convictions have already been obtained. Fourteen recent convictions in such cases resulted in the imposition of sentences of imprisonment and fines ranging up to $20 thousand.

We will keep you informed of further developments in the continuing programs in this area;

Sincerely yours,

FRED C. SCRIBNER, Jr., Under Secretary of the Treasury.