However, the taxpayer should be permitted a new election when changing circumstances demand a defferent aggregation. Among the changes which would permit a reconsideration of the properties included within a particular aggregate are the following: (a) Where additional properties are acquired or previously owned properties are disposed of which could reasonably affect the makeup of the aggregate. (b) Where properties which had not yet reached the production stage at the time of election were included in an aggregate but where, after reaching the production stage, additional fact become established which indicate that such property should not reasonably constitute part of such aggregate; or if not previously included in an aggregate that such property should be included in an aggregate. (c) Other material changes in the circumstances which might dictate a different aggregation of properties than was indicated at the time that the original election was made. If the taxpayer is permitted to make the same aggregation both for cost and percentage depletion purposes the provisions relating to allocation of depletion allowances included under section 614 (b) (4) and the last sentence of section 613 (a) appear to be superfluous. 2. PERCENTAGE DEPLETION OF WASTE PILES Section 613 (c) (3) and section 381 (c) should be clarified to state the right of an acquiring corporation to take percentage depletion upon the extraction of ores or minerals from the waste or residue of prior mining in the case of a taxfree reorganization. Similar clarification is needed with respect to extension and renewal of leases where both the deposit of the waste or residue and the extraction do not occur within the period covered by one lease instrument. 3. DEPRECIATION We understand that it was the intent to allow mining companies the right to also use the methods of depreciation provided under section 167. We request that subsection (h) be revised to clearly state that mining companies will be allowed to determine depreciation under the methods provided in section 167 as well as those contained in section 611. 4. ADVANCE MINIMUM ROYALTIES No reference is made to H. R. 8300 to advance minimum royalties. Under regulation 118, section 39.23 (m)-10, the taxpayer is bound by an election in the first taxable year ending on or after December 31, 1939, in which such amounts are paid or accrued as to the treatment of minimum royalties in subsequent years. National security demands sufficient reserves of iron ore to insure an adequate supply of raw materials. If we are to maintain full capacity steel production in the event of emergency, this requires the maintenance of large reserves of iron ore which in turn means material increases in the payment of advance mineral royalties. The taxpayer therefor should be permitted an election with respect to advance minimum royalties which will permit the taxpayer to deduct such costs for any mineral property in the year paid or accrued or to defer the deduction to the year in which the mineral product in respect to which the advanced royalties were paid is sold. We recommend that a taxpayer be permitted to make a new election with respect to advance minimum royalties for each mineral property in which he owns interest during the taxable year 1954. For properties acquired after January 1, 1954, election should be made in the tax return filed for the year of acquisition. 5. EXPLORATION EXPENDITURES We have recommended in the past and feel strongly that both the present revenue law and H. R. 8300 do not give adequate recognition to the cost of present day exploration. Most easily discovered mineral deposits-especially those of iron ore-have been found and from now on the expenses of exploration will greatly exceed those of the past. If the necessary reserves of iron ore are to be maintained, exploration must be encouraged. Section 615 allows as a deduction only $75,000 a year for years for each taxpayer. This amount does not begin to cover cost of iron-ore explorations for deep underground mines or large deposits of low-grade iron ore. Previous statements before the Ways and Means Committee have emphasized the importance of encouraging iron-ore exploration and we feel that the maintenance of adequate iron-ore reserves has enough national significance that we should bring the matter to your attention. We therefore urge the removal of the $75,000 annual and the 4-year limitation, in order to permit expenditures incurred in prospecting to be deducted as an expense either in the year incurred or at the taxpayer's election, deferred and written off against resulting ore, or deducted when there is no reasonable expectation of resulting production. Respectfully submitted. Re H. R. 8300 FRANKLIN G. PARDEE, President. To the Chairman and Members of the Committee on Finance, APRIL 19, 1954. GENTLEMEN: The undersigned respectfully submit herewith our views on the tax on corporations improperly accumulating surplus, and ask that this statement be included in the record of hearings by your committee. Sections 531 to 536 of H. R. 8300 levy a tax on corporations improperly accumulating surplus. There sections correspond to section 102 of existing law. The tax is a penalty tax levied upon all the undistributed earnings for a taxable year if the corporation was formed or availed of to avoid income tax on its shareholders by permitting earnings and profits to accumulate instead of being paid out in dividends. Several amendments are incorporated in the new bill in order to minimize the inherent threat of this tax where funds are accumulated for legitimate business purposes, to exempt publicly held companies and small corporations. The amendments are generally helpful. but they do not remove all of the inequities of section 102. Publicly held corporations The bill exempts a publicly held corporation from this tax. A publicly held corporation is defined as one whose outstanding stock is held by more than 1,500 persons with not more than 10 percent of the total voting power or total value of all outstanding stock owned by any one individual. For the purpose of the 10-percent test, stock owned by an individual's relatives, partners, etc., will be attributed to the individual. In order to obtain the exemption, proof must be submitted in accordance with regulations to be issued. The purpose of this provision is to exempt corporations which could not be used by a limited group to avoid tax by nonpayment of dividends. It seems doubtful, however, whether many widely held companies will be able to obtain the necessary information to satisfy the 10-percent test. If a corporation's shares are traded in actively, there may be a large number registered in the names of brokers. Similarly, many shares are held in custody accounts by banks and brokerage houses and registered in the name of the custodian. As a general rule the custodian will not disclose the name of the owner in such cases. Accordingly, a corporation whose shares are widely held may be unable to prove the identity of the owners of more than 10 percent of its stock. Since it is the directors who determine a corporation's dividend policy, there would seem to be adequate protection if the 10-percent test were applied only to directors. A corporation can obtain the facts from its directors as to their stock ownership. If further protection is needed to prevent the use of dummy directors by a closely held company, it is suggested that 25 percent ownership by stockholders other than directors would be an adequate test. All undistributed earnings are taxed The penalty nature of the tax is emphasized by its imposition on an all-ornothing basis. A corporation must show that every dollar of undistributed earnIngs was accumulated for a legitimate business purpose. If it fails, the entire amount is subject to the tax, even though the major portion may not be subject to any question. As a result the tax may equal a penalty of nearly 100 percent of the part of the accumulated earnings found to be unreasonable. It would seem more equitable to allow a deduction for that part of the accumulation found to be necessary for business reasons. Burden of proof The bill shifts the burden of proof to the Secretary or his delegate if the taxpayer has filed a statement of the grounds (together with facts sufficient to apprise the Secretary of the basis thereof) on which the taxpayer relies to show that earnings were not accumulated beyond the reasonable needs of the business. The burden of proof is shifted only with respect to the grounds set forth in the statement. This is an entirely proper procedural change in the case of a penalty tax. The burden of proof has been on the Government in cases where a fraud penalty is asserted ever since the Revenue Act of 1928. Burden of proof-effective date The bill provides that the new rule shall apply only to cases involving taxable years beginning after December 31, 1953, where a notice of deficiency is mailed more than 90 days after the date of enactment of the title. This is an unwarranted restriction since the change affects only procedure, not substantive law. Perpetuating the existing rule in cases involving prior years, whether now pending or initiated in the future, may produce results which the Ways and Means Committee found undesirable in several instances. The new rule should be made effective in every case where no trial before the Tax Court has been held before enactment of the bill. There is precedent for such treatment in the effective date provided by the Revenue Act of 1928 for shifting the burden of proof in fraud cases to the Commissioner (Revenue Act of 1928, sec. 601, amending sec. 907 (a) of the Revenue Act of 1924). Prior to the enactment of the Revenue Act of 1928, the burden of proof in all cases before the Board of Tax Appeals (except in respect of new matter pleaded by the Commissioner) was upon the taxpayer. (See Louis Ginsburg, 13 B. T. A. 417.) The 1928 act changed this rule by providing: "In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner." [Emphasis supplied.] Your committee stated: "This change will affect proceedings in which hearings are held (by the Board of Tax Appeals) after the date of the enactment of the new act, even though the petition was filed prior thereto." (Report of Senate Finance Committee (70th Cong., 1st sess., S. Rept. 960) p. 38.) The reasons given in the report of the Ways and Means Committee for shifting the burden of proof in cases involving the accumulated-earnings tax emphasize the desirability of applying the new procedure to pending cases. The committee found indications that deficiencies have been asserted in many cases which were not adequately screened or analyzed. Taxpayers have been put to substantial expense and effort in proving their cases. Complaints by taxpayers that this tax is used as a threat by revenue agents to induce settlements on other issues appear to have a connection with the imposition of the burden of proof on the taxpayer. Finally, the report stated: "It also appears probable that many small taxpayers may have yielded to a proposed deficiency because of the expense and difficulty of litigating their case under the present rules" (p. 52). Many cases may be pending in which imposition of the burden of proof on the taxpayer will produce such results. Despite the best efforts of the Commissioner, new cases will probably arise for years prior to 1954 in which taxpayers are penalized because of this procedural handicap. It seems indefensible to refuse this relief in pending cases, unless it would create administrative problems. It is worthy of note, however, that no such problems prevented immediate application of the same procedural change in 1928 as to fraud cases. No administrative problems should be encountered by shifting the burden of proof in cases heard by the Tax Court after the bill is enacted. In cases where no deficiency notice has been issued, the Commissioner would merely be required to follow the new procedure. If a deficiency notice has already been issued, the taxpayer could be permitted to include the statement referred to in section 534 (c) of the bill in its original petition to the Tax Court, or by amendment thereto if the original petition has already been filed. If the case has been adequately considered before the deficiency notice was issued, the Government should already have sufficient facts to assume the burden of proof, or have no difficulty in obtaining the necessary additional information from the taxpayer's statement. Subsidiary corporations It is not clear under the new provisions whether a subsidiary (as defined in sec. -336 (h) of the new bill) would be considered liable for the tax because its retention of earnings avoided the income tax with respect to its corporate shareholder. To eliminate this uncertainty the phrase "with respect to its shareholders or the shareholders of any other corporation" in section 532 (a) should be amended to read: "with respect to its individual shareholders or the individual shareholders of any other corporation." Respectfully submitted. Senator EUGENE D. MILLIKIN, Chairman, Finance Committee, VINCENT H. MALONEY, Attorney at Law, New York, N. Y. THOMAS J. GREEN, C. P. A., New York, N. Y. LANCASTER, PA., April 19, 1954. Senate Office Building, Washington, D. C. DEAR SENATOR MILLIKIN: From June 1918 to June 1920 I was a field auditor in the Construction Division of the United States Army. From July 1920 to October 1940 I was an internal revenue agent, Field Auditor Division, Philadelphia, Pa., and from November 1940 to the present time I have been practicing as a certified public accountant and Federal and State tax consultant, with a Pennsylvania State certificate, at Lancaster, Pa. I have a very lucrative accounting and tax clientele. On several occasions, I have taken the privilege of making tax suggestions when new laws and changes in the Federal tax laws have been under consideration by Congress. Because of my above-mentioned occupations, I believe that I have acquired some knowledge and experience that might be helpful to you lawmakers. Since you are now considering the House bill and changes in the Federal tax laws, I wish to submit the enclosed suggestions for your careful consideration for what they are worth to you and your committee members. I sincerely hope that the suggestions might be of some benefit to you in connection with the final writing of the changes to the Federal tax laws. I will be glad to be of any service to you and your committee at any time. PAUL L. MILTENBERGER, Certified Public Accountant. SUGGESTIONS SUBMITTED BY PAUL L. MILTENBERGER, C. P. A. OF PENNSYLVANIA, LANCASTER, PA. Federal tax laws should provide for the following: 1. Written receipts for all cash expenditures for everything bought; all services rendered by any person or persons and for every other kind of cash expenditure to be given by the seller to the purchaser and the party rendering the services to the party receiving the services; and to the party paying by the party receiving for all other cash expenditures. Why?-Cash expenditures for merchandise and other things bought and for services rendered are so great, and are the principal means of evasion of Federal income taxes, that no deduction for cash expenditures should be allowed without a proper receipt for the expenditure. Likewise, cash sales under the counter without receipt for same gives the seller the cash which is generally not accounted for as income, and the cost of the sales are deducted generally as an expense because same are most always paid by check to evidence the deductibility of costs, and the seller then gets a double benefit for tax purposes. Sales are not reported as income, and costs are deducted as an expense. Such transactions occur every day, especially in the large cities like New York, Chicago, and practically every other place. Many persons have regular employment where social security and withholding taxes are collected by the employer, and then the persons work on other employment where no taxes are collected and reported because the employee and employer do not account for same. The latter and exemptions claimed which taxpayers are not entitled to are principal tax evasions by individuals. 2. Personal exemptions for Federal income tax of $600 for each person should not be increased as a general increase for all taxpayers. However, if it becomes necessary to make some kind of compromise, I would suggest that taxpayers having a tax liability of $40 or less be given an additional deduction for the Federal income tax of the tax liability due which would be the equivalent of giving the taxpayer 20 percent on $100 or 20 percent on any taxable amount of income under $100; if the personal tax liability is $80 or less, they should be given a credit against their tax liability of the $40 and any additional amount of the extra $40 or less that the lawmakers would see fit to give such taxpayers. This, in effect, would give the low-income taxpayer the benefit of the equivalent of the additional $100 or $200 exemption in accordance with the tax liability and would not apply to higher income taxpayers where the Federal income tax liability exceeds the $80. This provision would eliminate tax liabilities to a very large percentage of low-income taxpayers, and would overcome the argument of not giving anything to the taxpayers with low incomes. 3. Double taxation: The House bill provided for relief from double taxation on cash dividends received by persons owning stocks in corporations from which they receive the dividend during any taxable year. The House provisions do give some relief in regards to the double taxation. It is suggested that corporations be allowed to convert preference stocks used and outstanding into some form of convertible debentures on an equal par value exchange of preference stock for debenture bonds with the same rate of interest as was paid in cash dividends on the preference stock. This conversion feature should be a nontaxable exchange to the preference stockholder who would receive the debenture bonds or other form of indebtedness at the time of the exchange, and any tax liability should be deferred on account of the exchange until the debenture bonds were sold at which time a capital gain or loss would be determined. The debenture bonds should be given the right to be converted into common stock of the corporations at different times at different rates of exchange for same. No gain or loss should be recognized at the time of exchange of the debenture bonds into the common stock of the corporation until such time as the stockholder would sell the common stock and establish a capital gain or loss. The corporation, by having the debenture bonds with a fixed rate of interest instead of preference stock with a fixed rate of dividend, would get a deduction of the interest for Federal income-tax purposes, and the recipient of the interest by a debenture bondholder would pay the Federal income tax on same, thus relieving the double taxation feature that is now in existence on cash dividends received from preference stock. It would appear that if such provisions were put in the law the debenture bonds could be treated on the statements of the corporations as part of their capital investments which would impair the financial status of the corporation for credit purposes. The relief of the double taxation on cash dividends received on common stocks would then be a help to persons holding same, and provisions could apply even to exchange of common stock for debenture bonds or other form of indebtedness without incurring any Federal income-tax liability at the time of the exchange. The application of the relief of double taxation to the individual persons owning this stock instead of some form of relief to the corporation paying out the cash dividends is not very workable. It would seem that it would be much better to provide for the relief on the part of the corporation instead of on the part of the individuals. This has been a very debatable question for a number of years, and any relief given to the corporations or the individuals receiving dividends is very acceptable 4. Taxation of present nontaxable trusts, foundations, cooperatives, and all other exempt organizations: It is suggested that all present nontaxable organizations be taxed at a fixed rate of Federal income tax on all income received by them in order to relieve the staggering taxation at the present time on other taxpayers. The amount of wealth owned by foundations, trusts, and all other allowable nontaxable organizations has become so enormous, and the income from the wealth held by these nontaxable organizations has become so great that it seems advisable to tax at least the income of these nontaxable organizations at some rate of taxation because they are getting the same protection on their wealth as other taxpayers. Hence, it does not seem fair to burden the other taxpayers with the full amount of the responsibility and allow the nontaxable organizations to go tax free. As an example. the Hershey Estates at Hershey. Pa., created by Milton Hershey about 1917 or 1918 was one of the first nontaxable organizations set up in the United States. The purpose of the creation of the Hershey Estate is very commendable because of the good which comes from same to the orphan boys who are taken care of through the creation of the estate. Mr. Hershey turned over about 80 percent of the common stock of the Hershey Chocolate Co., which |