(b) The 10-year provision of section 309 and the 20-percent requirement of section 359 should be modified.

(c) The dividend provision of section 312 would seem to indicate abandonment of the long-established rule (see regulation 118, section 39.115 (a)-1 (d)) that dividends should be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands. This rule is applicable to stockholders on the accrual basis as well as to those on the cash basis. We believe it should be continued. The optional right might be given to account for dividends either as of the date when stock becomes "ex dividend" on the exchange, or on the dividend declaration date. However, the legally sound and long-established rule of accounting for dividends when their amount is unqualifiedly made available to the stockholders should not be changed. (e) Advance declarations and tax payments by corporation, sections 6016, 6074, 6154, 6655

We strongly urge that the provisions for advance declarations and tax payments by corporation should not be enacted. It will be exceedingly difficult for many corporations to form any reliable advance estimates of their taxable income for the year, and very many corporations will find it a serious drain on their finances. Some corporations, well established and well financed, could probably stand the burden without too great difficulty, but to those less favorably placed, particularly in a time of receding income, the financial drain would be serious. Many of our mining companies in particular have had to reduce the scale of their operations and would find it especially difficult to make the advance payments.

(f) Deduction for charitable contributions, section 170

It is often difficult for corporations to know what may prove to be the amount of the 5-percent allowance for charitable contributions. Corporation incomes, particularly those of mining companies, will fluctuate. Special demands

for charitable contributions may come from time to time. Provision should be included so that if contributions by a corporation in any year prove to be in excess of the 5 percent of income allowable, the excess may be carried forward as a deduction in succeeding years within the limitations applicable to the allowance in each of such years.

(g) Ordinary treatment processes, coal, section 613 (c) (4) (A)

The rule in the Black Mountain Corp. case (21 T. C. No. 83) that oil treatment of coal does not qualify as a "further treatment process in mining" should be reversed in the law. The oil treatment is an improvement in providing a salable product.

(h) Silver bullion tax, section 4891-4897

This tax is included as subchapter F of chapter 39. The occasion for this tax has long since passed. It yields only a few thousand dollars a year in revenue, and is definitely a nuisance tax which should be repealed.

The CHAIRMAN. Thank you very much, Mr. Fernald. It has been good to have you here.

Mr. Palmer, have you heard the statement just made by Mr. Fernald?

Mr. PALMER. Yes, sir.

The CHAIRMAN. Do you have any differences of opinion with it? Mr. PALMER. No, sir.

Senator GEORGE. Mr. Chairman, before the next witness proceeds may I make 1 or 2 requests; I am making them now because I have to leave here and I want to make them, at this time.

The CHAIRMAN. Proceed, Senator George.

Senator GEORGE. Mr. Chairman, first I would like to submit for the record a letter from Mr. Malon C. Courts, of Courts & Co., Atlanta, Ga., urging the adoption of provisions permitting certain unincorporated business enterprises to elect to be taxed in every respect as corporations, with accompanying amendment.

The CHAIRMAN. It will be made a part of the record as you desire.

DEAR SENATOR GEORGE: I am writing to urge the adoption in the 1954 Internal Revenue Code of provisions permitting certain unincorporated business enterprises to elect to be taxed in every respect as corporations.

Such a provision was endorsed by President Eisenhower in his budget message in January. He associated it with a recommendation that certain corporations with a small number of active stockholders be given the right to elect to be taxed as partnerships.

I understand that the 1954 code as recommended to the Ways and Means Committee by the Treasury contained provisions carrying out the President's recommendations but that these were dropped as the result of a 13-12 vote of the members of the Ways and Means Committee. Mr. Sidney Camp has strongly urged the adoption of these provisions. Mr. Reed of New York introduced a bill accomplishing this result for proprietorships or partnerships on May 22, 1951, which was numbered H. R. 4214.

Our business, that is the business of Courts & Co., well illustrates the justice supporting a bill of this sort. Ours is a business where capital is a substantial income producing element and growth is dependent upon the accumulation of capital. A similarly situated business in the manufacturing field would undoubtedly have been incorporated in order to secure the privileges of accumulating needed capital free of individual surtax rates. Our position is such, however, that we are prevented by customs of the trade and rules of the cotton exchanges from incorporating. We must operate as a partnership in order to satisfy the cotton exchanges. The burden of high individual surtaxes is making it increasingly difficult for us to attract or retain capital that we need for expansion. Most business partnerships or proprietorships if pressed by high surtax rates can incorporate and, as you know, many such businesses are incorporated. There are businesses, like our own, which must be operated in a partnership form in order to provide to creditors and to customers the individual responsibility of the partners. It is this type of business which would secure relief from the proposed bill and I am confident that it would result in a very nominal loss of

revenue.

I want to make it clear that our opinion is that if the advantages are given it is only fair and proper that the disadvantages follow. This should be true with both portions of the provisions recommended by the Treasury. The problems of adapting the corporate tax to a partnership should be no different from the familiar problem of adapting the corporate tax provisions to associations and other unincorporated groups now taxed as corporations. The only language in the 1939 code providing for the taxing of associations as corporations is found in section 3797 (a) (3) reading: "The term 'corporation' includes associations, joint-stock companies, and insurance companies." The details have been handled by regulations and rulings.

I understand that some objections have been made based upon the technical difficulties of adapting such provisions to the new code. I have discussed these provisions with counsel here and am setting forth on the attached sheet some recommendations on the drafting of the bill. Our primary suggestion is that both portions of the bill should state generalities, and the detailed application of the provisions should be left to regulations prescribed by the Secretary.

I would like to telephone you in the early part of the week to discuss this. Because of the interest they have shown in this proposal, I am sending copies of this letter to Messrs. Reed, Camp, Stam, and Dan Troop Smith.

I trust you have recovered from your recent illness and look forward to seeing

you soon.

With highest personal regards.

Sincerely yours,

MALON C. COURTS.

COMMENTS REGARDING PART II OF PROPOSED SUBCHAPTER R, ELECTION OF CORPORA TIONS AND PARTNERSHIPS AS TO TAXABLE STATUS

PART II-ALTERNATIVE TAXABLE STATUS OF CERTAIN PROPRIETORSHIPS AND

PARTNERSHIPS

(1) Section 1341 (b) (2): This provision seems designed to prevent the break ing up of a single business into several electing partnerships with substantially the same interests in order to secure more than one surtax exemption. The limitations of this subsection as drawn seem much too strict and would penalize all partners where a single partner had an interest in an entirely unrelated partnership which itself endeavored to elect the alternative taxable status. This provision does not seem to be needed in view of the fact that section 1731 of the proposed Internal Revenue Code of 1954, corresponding to section 15 (c) of the 1939 code, would be made applicable and would prevent the breaking up of partnerships without a business purpose just as it prevents the breaking up of corporations without a business purpose.

(2) The proposed section 1341 (c) makes the corporate provisions in general applicable, except to the extent otherwise provided. It would seem wise within this provision to prescribe that the corporate provisions shall be made applicable as prescribed under regulations issued by the Secretary or his delegate. H. R 4214 introduced by Mr. Reed on May 22, 1951, 82d Congress, 1st session, incorpo rates this suggestion for handling the matter.

(3) The proposed section 1341 (d) provides that the partners or proprietors of the unincorporated enterprise are not to be considered employees for the purpose of section 501 (e) relating to employees' pension trusts, etc. There may be reasons not apparent to us which support this provision. However, we see no reason why our business, if it elects to be taxed as a corporation, should not have all of the corporate benefits, along with all of the restrictions imposed on corporations and their stockholders, and we would suggest that this exception be excluded, unless there are strong reasons to the contrary.

(4) Reconsideration should be given to the statement of constructive ownership set forth in section 1341 (g). The ownership of a partnership interest is to be determined in accordance with the rules of constructive ownership of stock as set forth in such section 267 (c). Section 267 (c) (3) provides that an individual owning any stock in a corporation shall be considered as owning the stock owned directly or indirectly by or for his partner. Under this every partner would be deemed to own 100 percent of the partnership. A saving clause could be inserted in section 1341 (g) excluding the applicability of section 267 (c) (3). (5) It is possible that some of the other detailed provisions of this subchapter R could better be covered by regulations and rulings.

Senator GEORGE. I would like to have from Mr. Stam and his staff a tabulation showing the exact effect of the expiration of the last individual tax increase on the individual taxpayer. Of course, I know in a general way that it was a reduction across the board, but I would like to have tables inserted showing the breakdown.

(The tables referred to follow :)

Estimated distribution of the individual income-tax returns, adjusted gross
income and tax liability under the Revenue Act of 1951 and after the Jan. 1,
1954 termination date

[Money amounts in millions]

Comparison of the individual income-tax liabilities under the law in effect prior to the enactment of the Revenue Act of 1951, under the Revenue Act of 1951 and under the present law for 1954

I would also like to make a request of the Treasury that the exact number, if now known, and if not, the approximate number of returns for fiscal year 1953, of last year, be inserted in the record, and the actual number of returns percentagewise of the number of taxpayers.