In connection with H.R. 10383, the proposed "District of Columbia Professional Corporation Act", you requested a listing of other jurisdictions which impose a tax on unincorporated businesses in a manner analogous to that of the District of Columbia. A review of the statutes of other jurisdictions confirms the statement made at the hearing that the State and City of New York are the only other jurisdictions with analogous laws. While the State of New York exempts professions in similar manner as existing District law, the Unincorporated Business Tax Law of New York City was amended in 1971 and made specifically applicable to professional organizations, effective June of 1971. I hope that these comments will be useful to your Subcommittee in the further consideration of S. 2204 and H.R. 10383.

Sincerely yours,

GRAHAM W. WATT, Assistant to the Commissioner.

Getting back to the problem of waste disposal, and I know from experience in my own State how serious the problem can be if cities. and municipalities have these problems.

The District of Columbia now has authority to enter into 5-year contracts for the disposal of solid wastes.

Mr. ROBINSON. That is correct.

Senator STEVENSON. How are these wastes disposed of under the contract?

Mr. ROBINSON. Mr. Freeze, who is with the Department of Environmental Services, was here a short while ago but I believe he has now

gone.

The District, of course, is faced with the problem of disposing of wastes. Either this year or last year the District Government was before this committee to request the transfer of land in Prince William County, Va., in order to meet this problem and it involved the transfer of various parcels of land between the two jurisdictions in order that a land fill be used in that State to meet the problem.

Among some of the proposals are the use of mines in Appalachia to dump and transfer the material, the use of barges to dispose of the materials, and the use of railroads to transport it away from the District.

As you know, the District facilities for disposal of solid waste are rather limited, and it is believed that a 20-year contract, at least 20 years, would be necessary in order

Senator STEVENSON. You mentioned mines? Does that include strip mines?

Mr. ROBINSON. That is under consideration.

Railroads and truck facilities are being utilized under the 5-year authority for this purpose. However, it is not meeting the increased demands.

Senator STEVENSON. I asked the question partly as a matter of curiosity. We are experimenting in Illinois with the use of such waste to reclaim strip mines, and with some success.

All sorts of problems are raised and there is a serious cost problem at the moment-partly the cost of transportation. You seem to offer a very interesting potential for reclaiming the lands which have been ravaged which at the moment in my State are now deprived of any real use or any productivity and taken off the tax rolls and are wasted and at a time, of course, when the potential public uses for these lands are mounting very rapidly.

We hope the possibility of using wastes in cooperation with other jurisdictions to claim strip mine lands might be explored by the District.

On the question of volunteers, certainly on its face it sounds reasonable, but what do you do about the employee who volunteers his services to the District of Columbia in his free time?

Does he get compensated twice?

Mr. ROBINSON. I don't think so, Mr. Chairman. In fact, I am quite certain that volunteer duty on the part of an employee would not be subject to compensation.

I might also point out in connection with this title of the bill that it is not intended to replace positions authorized by law. These socalled volunteers would be filling positions or performing activities for which there are no classified positions.

They would not be in replacement of positions either authorized by law or filled by District employees.

Senator STEVENSON. Are you also testifying on H.R. 10383?
Mr. ROBINSON. Yes, sir.

Senator STEVENSON. Why don't we proceed to that bill?

STATEMENT OF WILLIAM A. ROBINSON, ASSISTANT CORPORATION COUNSEL; ACCOMPANIED BY WALTER THOMPSON, ASSISTANT DIRECTOR FOR TAX ADMINISTRATION, DEPARTMENT OF FINANCE AND REVENUE, ON H.R. 10383

Mr. ROBINSON. We are pleased to appear to present the views of the Commissioner of the District of Columbia on H.R. 10383, the proposed "District of Columbia Professional Corporation Act," as passed by the House of Representatives on October 12, 1971.

H.R. 10383 authorizes individuals rendering professional services in the District which, under existing law, custom, or standards of professional conduct may not be rendered through a corporate structure, including services performed by certified public accountants, attorneys, architects, physicians, dentists, optometrists, podiatrists, and engineers, to join in the formation of a corporation.

Among the desirable features of the bill are provisions which made applicable the District of Columbia Business Corporation Act to any professional corporation organized under authority of the bill to retain the applicability of existing licensing requirements for individuals rendering professional services through a corporation; and continue the personal liability of an incorporator for his negligent or wrongful acts and the confidential relationship between a professional and his client or patient.

The Commissioner favors generally the objectives of H.R. 10383 and believes that its enactment would provide a worthwhile addition to existing law. Although the provisions of enabling statutes in the States vary in detail, it is to be noted that the District of Columbia is the sole remaining jurisdiction which is without a law permitting the formation of professional corporations.

Section 21 of H.R. 10383 amends the second sentence of section 1 of title VIII of the District of Columbia Income and Franchise Tax Act of 1947 so as to remove from the taxation provisions applicable to

unincorporated businesses "any trade, business, or profession which can be incorporated only under the District of Columbia Professional Corporation Act."

The Commissioner is opposed to the enactment of section 21 of H.R. 10383. Under present law, any trade or business which by law, custom, or ethics cannot be incorporated is exempt from payment of the unincorporated franchise tax.

Since H.R. 10383 would permit these businesses and professions to incorporate, it would logically follow that the exemption from the unincorporated business tax should be eliminated and that henceforth all businesses which did not choose to incorporate would be subject to taxation. However, section 21 of the bill would amend the exemption language of title VIII of the Income and Franchise Tax Act of 1947 to include any trade, business, or profession which can be incorporated only under the proposed bill.

Thus, despite the fact that the original basis for the exemption would no longer exist, the exemption would be retained.

The Commissioner does not believe that the retention of this exemption can be justified when the sole reason for the exemption, in the first place, is removed by the terms of the bill, nor can he discern any reason why presently exempt businesses and professions which utilize the District of Columbia as a source of income should not be liable to pay the unincorporated business tax as all other unincorporated businesses are required. Accordingly, the Commissioner recommends that section 21 of H.R. 10383 be eliminated.

The Commissioner also suggests the deletion of subsection (d) of section 2 of the bill since no functions are assigned to the District of Columbia Council by the bill nor does the term "Council" appear in any other section of H.R. 10383.

Subject to these recommended changes, the Commissioner favors the enactment of H.R. 10383.

Senator STEVENSON. Do you know if the associations of professionals the bar association, the medical association and the otherssupport this legislation? Have you had any objections from such associations representing the affected professions?

Mr. ROBINSON. It is my understanding that most, if not all, of the professions support H.R. 10383 as passed by the House and as it is now before the committee.

Senator STEVENSON. Do you know of any reason for excluding psychologists?

Mr. ROBINSON. I do not believe, Mr. Chairman, that they are excluded.

I believe that any business or profession which either by law or custom cannot be incorporated under existing practices or law would be included.

I don't believe they were mentioned in the list of professions which I just read off, but that was not an all-inclusive list.

It was simply an example of the type of professions which would be affected by the terms of the bill. The psychology bill was passed by the Congress only last year and perhaps inadvertently that profession was omitted.

69-108 0-71-10

Senator STEVENSON. Do you know what the practice is in other States? Do they remove the franchise tax exemption for the incorporated associations of professionals?

Mr. ROBINSON. I am not familiar with the details of the taxing provisions in the other States, Mr. Chairman. The unincorporated franchise tax act which applies to the District could perhaps be unique and not be a feature of the taxing provision of other States.

This is Mr. Walter Thompson of the Department of Finance and Revenue of the District of Columbia government. He may be able to shed a little light on the taxing provisions in other jurisdictions.

Mr. THOMPSON. I can only comment on New York State. It is my understanding that New York State has repealed the exemptions applicable to professions.

Senator STEVENSON. They repealed the exemptions but they are subject to the taxation?

Mr. THOMPSON. Yes, sir.

Senator STEVENSON. I don't offhand see what the rationale would be for exempting them from franchise taxation. I was a little curious about the practice in other jurisdictions.

Mr. THOMPSON. There are very few States that have an unincorporated business tax as such. If you would like, I could furnish a résumé of those States which do have an unincorporated business tax.1 Senator STEVENSON. That would be very helpful.

Senator STEVENSON. Thank you very much, Mr. Robinson and Mr. Thompson.

Our next witnesses are Mr. William Corey and Mr. Roger Middlekauff of the District of Columbia Bar Association; Mr. Cornelius R. Milstead, chairman of the legislative committee of the Washington Chapter of AIA; Dr. Henry J. Heim, president of the District of Columbia Dental Society, and Mr. Marvin Korengold, president of the Medical Society of the District of Columbia, all here to testify on H.R. 10383.

Thank you, gentlemen, for appearing here this morning.

STATEMENTS OF WILLIAM S. COREY AND ROGER D. MIDDLEKAUFF, DISTRICT OF COLUMBIA BAR ASSOCIATION; CORNELIUS R. MILSTEAD, CHAIRMAN, LEGISLATIVE COMMITTEE, WASHINGTON METROPOLITAN CHAPTER OF AMERICAN INSTITUTE OF ARCHITECTS; DR. HENRY J. HEIM, PRESIDENT, DISTRICT OF COLUMBIA DENTAL SOCIETY; AND DR. MARVIN C. KORENGOLD, PRESIDENT, MEDICAL SOCIETY OF THE DISTRICT OF COLUMBIA, ON H.R. 10383 Mr. MIDDLEKAUFF. Thank you, Mr. Chairman.

I am appearing here with Mr. Corey on behalf of the District of Columbia Bar Association. With your permission we would like to address ourselves to the statement of the bar association and then ask each other member of the panel to introduce himself to present his brief

statement.

1 The information may be found in a letter from Graham Watt, assistant to the Commissioner of the District of Columbia to Senator Stevenson, dated November 5, 1971, which appears on p. 137.

Senator STEVENSON. That is fine.

You may proceed.

Mr. MIDDLEKAUFF. Also, with your permission, I would like to have our written statement incorporated into the transcript, with Mr. Corey providing a brief synopsis of our prepared statement.

Senator STEVENSON. It will be entered.

(The prepared statement of the Bar Association of the District of Columbia follows:)

PREPARED STATEMENT ON BEHALF OF THE BAR ASSOCIATION OF THE DISTRICT OF COLUMBIA BY ROGER D. MIDDLEKAUFF AND WILLIAM S. COREY, ON H.R. 10383

Mr. Chairman: My name is Roger D. Middlekauff, and I am a practicing attorney in the District of Columbia and Chairman of the Subcommittee on Corporations and Business Organizations of the District of Columbia Bar Association. William S. Corey, Chairman of the Tax Committee of the Bar Association and I were designated by the Bar Association to testify on its behalf before you this morning regarding H.R. 10383, the proposed District of Columbia Professional Corporation Act.

In this statement we will first review the advantages which accrue to a professional having available to him the authority to incorporate. Then, we will review the highlights of the proposed act and the tax considerations with respect to incorporation of professionals. In this regard, we would like to mention that the proposed Act is the work of many of the District's outstanding attorneys, who drew upon the best provisions of similar acts in the other states, and submitted it to the House District Commitee for its consideration. We are all beneficiaries of the extraordinary efforts of those many esteemed attorneys who volunteered their energies and talents. Mr. Corey and myself are privileged to be chosen to appear on behalf of the Bar Association to submit to you these comments.

I. ADVANTAGES OF A CORPORATE STRUCTURE

Professionals are now authorized to incorporate in every state of these United States. Through the encouragement of the doctors, dentists, lawyers, architects, accountants, engineers and other professionals, all the 50 state legislative bodies adopted legislation authorizing their incorporation. Prior to this authorization, professionals had to resort to partnerships as their vehicles of combination. In a number of respects, partnerships, as compared to corporations, are ungainly and complicated.

Several basic attributes of professional corporations give them value over a partnership structure.* A corporation has a greater degree of centralization of management. A corporation limits the liability of a stockholder when an officer of the corporation properly acts within the authority given him by the Board of Directors. (However, in a professional corporation the professional still bears the responsibility for his own malpractice.) A professional corporation has perpetual existence; whereas, a partnership comes to an end upon the death of any partner. Finally, a professional corporation has greater flexibility with respect to transfer of interest than does a partnership.

As a general matter, the laws regarding corporations are much more clearly defined than as to the partnerships. The guidelines for corporate activities, responsibilities, and relationships are well-known. Partnership agreements by necessity become long and cumbersome because the partners are unable to resort to the large body of statutory and case law which define the corporate concept. I would like to emphasize that the proposed Act does not require professionals to incorporate. It simply provides them with the opportunity to incorporate and defines the structure which results from that incorporation. We believe that professionals should be given the privilege now accorded all businessmen, the right to incorporate.

*These attributes are elaborated further in "Factors That Go Into Decision of Whether To Operate as a Professional Corporation" G. E. Ray, The Journal of Taxation, 130-32 (March 1971).