"SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS. "(a) REQUIREMENTS APPLICABLE TO REAL ESTATE INVESTMENT TRUSTS.-The provisions of this Part shall not be applicable to a real estate investment trust unless

“(1) it distributes to its stockholders or holders of beneficial interests not less than 90 per centum of its net income for the taxable year computed without regard to net long term and net short term gains, and

"(2) the real estate investment trust complies for such year with regulations prescribed by the secretary or his delegate for the purpose of ascertaining the actual ownership of the shares or certificates of beneficial interest of such trust.

"(b) METHOD OF TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND HOLDERS OF SHARES OR CERTIFICATES OF BENEFICIAL INTEREST.

"(1) IMPOSITION OF NORMAL TAX AND SURTAX ON REAL ESTATE INVESTMENT TRUSTS. There is hereby imposed for each taxable year upon the real estate investment trust taxable income of every real estate investment trust a normal tax and surtax computed as provided in section 11, as though the real estate investment trust taxable income were the taxable income referred to in section 11. For the purposes of computing the normal tax under section 11, the taxable income and the dividends paid deduction of such real estate investment trust for the taxable year (computed without regard to capital gains dividends) shall be reduced by the deduction provided by section 242 (relating to partially tax-exempt interest).

"(2) REAL ESTATE TRUST TAXABLE INCOME.-The real estate investment trust taxable income shall be the taxable income of the real estate investment trust adjusted as follows:

"(A) There shall be excluded the excess, if any, of the net long-term capital gain over the net short-term loss.

"(B) The deductions for corporations provided in Part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.

"(C) A deduction shall be allowed for the dividends (other than capital gains dividends) paid during the taxable year computed in accordance with the rules provided in section 562.

"(D) The taxable income shall be computed without regard to section 443 (b) (relating to computation of tax on change of annual accounting period).

"(3) CAPITAL GAINS.—

"(A) Imposition of Tax.-There is hereby imposed for each taxable year in the case of every real estate investment trust a tax of 25 percent of the excess, if any, of the net long-term capital gain over the sum of"(i) the net short-term capital loss, and

"(ii) the amount of capital gain dividends paid during the year. For purposes of this subparagraph, the amount of dividends paid shall be computed under the rules provided in section 562.

"(B) Treatment of Capital Gain Dividends by Shareholders.-A capital gain dividend shall be treated by the shareholders or holders of beneficial interests as a gain from the sale or exchange of a capital asset held for more than 6 months.

"(C) Definition of Capital Gain Dividend.-A capital gain dividend means any dividend, or part thereof, which is designated by the real estate investment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time prior to the expiration of 30 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gains dividends paid after the close of the taxable year described in section 859) is greater than the excess of the net long-term capital gain over the net short-term capital loss of the taxable year, the portion of each distribution which shall be a capital-gain dividend shall be only that proportion of the amount so designated which such excess of the net long-term capital gain over the net short-term capital loss bears to the aggregate amount so designated.

"(c) EARNINGS AND PROFITS.-The earnings and profits of a real estate investment trust for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year.

"SEC. 858. LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM REAL ESTATE INVESTMENT TRUST.

"(a) CAPITAL GAIN DIVIDEND.-For purposes of section 34 (a) (relating to credit for dividends received by individuals), section 116 (relating to an exclusion for dividends received by individuals), and section 243 (relating to deductions for dividends received by corporations), a capital gain dividend (as defined in section 857 (b) (3)) received from a real estate investment trust shall not be considered as a dividend.

"(b) OTHER DIVIDENDS.—

"(1) GENERAL RULE.-In the case of a dividend received from a real estate investment trust (other than a dividend to which subsection (a) applies)

"(A) if such real estate investment trust meets the requirements of section 856 for the taxable year during which it paid such dividend; and "(B) the aggregate dividends received by such trust during such taxable year are less than 75 percent of its gross income. then, in computing the credit under section 34 (a), the exclusion under section 116, and the deduction under section 243, there shall be taken into account only that portion of the dividend which bears the same ratio to the amount of such dividend as the aggregate dividends received by such trust during such taxable year bears to its gross income for such taxable year. "(2) NOTICE TO SHAREHOLDERS.-A real estate investment trust to which paragraph (1) is applicable for any taxable year shall, in a written notice to shareholders or holders of beneficial interests mailed not later than 30 days after the close of the taxable year, designate the portion of dividends paid by the real estate investment trust during such taxable year which may be taken into account under paragraph (1) for purposes of the credit under section 34, the exclusion under section 116, and the deduction under section 243.

“(3) DEFINITIONS.—For purposes of the subsection—

"(A) gross income does not include gain from the sale or other disposition of stock, securities or real estate, and

"(B) the term 'aggregate dividends received' includes dividends only to the extent that such amounts would be taken into account as a dividend under paragraph (1).

"SEC. 859. DIVIDENDS PAID BY REAL ESTATE INVESTMENT TRUST AFTER CLOSE OF TAXABLE YEAR.

"(a) GENERAL RULE.-For purposes of this chapter, if a real estate investment trust

"(1) declares a dividend prior to the time prescribed by law for the filing of its return for a taxable year (including the period of any extension of time granted for filing such return), and

"(2) distributes the amount of such dividend to shareholders or holders of beneficial interests in the 12-month period following the close of such taxable year and not later than the date of the first regular dividend payment made after such declaration,

the amount so declared and distributed shall, to the extent the trust elects in such return in accordance with regulations prescribed by the Secretary or his delegate, be considered as having been paid during such taxable year, except as provided in subsections (b) and (c).

“(b) RECEIPT BY SHAREHOLDER.-Amounts to which subsection (a) is applicable shall be treated as received by the shareholder or holder of beneficial interest in the taxable year in which the distribution is made.

"(c) NOTICE TO SHAREHOLDERS.-In the case of amounts to which subsection (a) is applicable, any notice to shareholders or holders of beneficial interests required under this subchapter with respect to such amounts shall be made not later than 30 days after the close of the taxable year in which the distribution is made."

The CHAIRMAN. Mr. Avent.

STATEMENT OF I. M. AVENT, ATTORNEY, INDEPENDENT NATURAL GAS ASSOCIATION

The CHAIRMAN. Identify yourself to the reporter, please, and make yourself comfortable.

Mr. AVENT. Mr. Chairman, and gentlemen, my name is Ira M. Avent, of Shreveport, La. I am an attorney and member of the tax committee of the Independent Natural Gas Association.

The CHAIRMAN. Speak a little louder, if possible. We have a little noise in here. Let the group be in order, please.

Mr. AVENT. I appear today in behalf of the Independent Natural Gas Association of America, whose membership consists of oil and gas producers, both corporate and individual, as well as companies engaged in the transmission and distribution of natural gas. Senator MALONE. Could the witness talk a little louder?

The CHAIRMAN. If you could talk a little louder, it would be much appreciated.

Mr. AVENT. A statement has been filed with the clerk of the committee, setting forth the suggestions and comments of this association with respect to treatment of various items in H. R. 8300, Internal Revenue Code of 1954.

The CHAIRMAN. The audience will be in order, please.

Mr. AVENT. It would be appreciated if that statement could be incorporated in the record.

The CHAIRMAN. Incorporate it, please. (The statement referred to follows:)

STATEMENT OF INDEPENDENT NATURAL GAS ASSOCIATION OF AMERICA, RE PROVISIONS OF THE INTERNAL REVENUE CODE OF 1954, H. R. 8300

The Independent Natural Gas Association of America submitted to the House Ways and Means Committee several suggestions as to changes in the Internal Revenue Code that it believed would be helpful to the Government and to the taxpayer. For your ready reference copies of data on some of the topics presented to such committee are attached hereto as appendix A. A brief outline of the treatment in H. R. 8300 of the topics on which suggestions were made, is submitted in the following pages with our further comments thereon. Your attention is respectfully directed to such comments, to the new subject-matter submitted herein under the caption "General and New Matters," and particularly to the suggestion regarding the effective date of the proposed code.

Topic 4, deductions of charitable contributions, interest, taxes, and casualty losses

Our recommendations under this topic were primarily that stamp taxes bond and stock issues should be allowed as deductions as taxes paid in the ye in which stamps were purchased and affixed. The memorandum submitted) this association may be found on page 170 of the published hearings of Committee on Ways and Means of the House of Representatives, 83d Congr 1st session and on page 1 of appendix A attached.

We find no provision in H. R. 8300 that permits a deduction of this expens taxes. For the reasons expressed in our previous presentation as above refer to, it is urged that further consideration be given to this question and that relief requested be granted.

Topic 22, capital gains and losses (H. R. 8300, sec. 165)

It was our recommendation that the Internal Revenue Code be amended so in the case of a corporation, the net long-term capital losses incurred as a of investments in a corporation entered into for business purposes, sho allowed as a deduction. The present law provides that this loss will be all only as an offset against capital gains except where the corporation owning securities holds 95 percent or more of the stock of the company on which loss was incurred. Our presentation on this question may be found on 1195 of the published hearings of the House Ways and Means Committee a page 2 of appendix A attached.

We find in H. R. 8300, section 165 (g) (3) (A) that the stock ownership subsidiary where the loss is allowed as an ordinary loss, is reduced from percent to 80 percent.

For the reasons stated in our previous memorandum above referred urge the stock ownership limitation be eliminated entirely and that wher are incurred in investments incidental to the principal business, then suc should be allowed as an ordinary loss without regard to whether or investing company was in control of the company in which the invest made.

Topic 24, the net operating loss (H. R. 8300, sec. 172)

It was the recommendation of this association that the net operat carryover should be the tax loss incurred. Our memorandum on this may be found at page 1238 of the published hearings of the House W Means Committee and page 3 of appendix A attached.

Partial relief in this loss carryover situation has been provided for 8300, section 172; however, it is urged that the full tax loss be carried o out adjustment to either the year of loss or the year to which the lossi Topic 26, consolidated returns and intercorporate dividends

e 1

It was our recommendation that the present 2 percent surtax penalty consolidated returns be removed and the tax on intercorporate dividends be eliminated. Our memorandum on this topic may be found at pa published hearings of the House Ways and Means Committee a appendix A attached.

ad

The Ways and Means Committee first agreed in principle to bo ommendations and tentatively approved amendments to the coc e vided that the 2-percent surtax penalty and the tax on intercorpoate would be eliminated, a part each year, over the next 3-year period.

After these provisions were tentatively approved by the House Means Committee they were recalled and reconsidered, and the pr proval was rescinded. H. R. 8300 as passed by the House, therefore have any provision in it allowing the equitable relief requested and recognized. It is, therefore, again urged that further consideratio this topic and the unjust penalty on consolidations and the duplicati

on intercorporate dividends be removed.

sing

the

Carply fo

Topic 33, the determination of taxable income-inclusions and exclusi

8300, sec. 248)

The La

It was the recommendation of this association under the above she a corporation be permitted to amortize the expenses incurred in it tion or reorganization and in the issuance of its capital stock either zation or thereafter. Our memorandum on this may be found on pa the published hearings of the House Ways and Means Committee and of appendix A attached.

H. R. 8300, section 248, provides that certain organization expenditures incint to the creation of the corporation, subsequent to January 1, 1954, may be ortized over a period of 5 years.

The report of the House Ways and Means Committee reflects that the amounts be amortized do not include the expenses of issuing shares of stock incurred er in the creation or reorganization of a corporation.

It is urged that the definition of organization expenses be broadened to inle the cost of issuing stock and also to include all other organization and ganization expenses, including stock issuance stamp taxes if such expenses not otherwise allowed as a deduction for the year in which they were ined.

is further urged that the provision of allowing organization expenses as a ction be extended to companies who have previously incurred such expenses who have not heretofore been permitted to take such expenses as deductions st taxable income. The limiting of this deduction to new companies can be considered as discrimination against the older companies.

Tal and new matters

artial and incomplete review of H. R. 8300 discloses many items which, in pinion, should be corrected. Some of these are as follows:

ion 11, tax imposed.

bion 461, general rules for taxable year of deduction.

Com ion 481, adjustments required by changes in method of accounting.

ko

duce

ve rel

1 the

whethe

the

net

um ot

ion 1341, computation of tax where taxpayer restores substantial amount ader claim of right.

on 6016, declarations of estimated income tax by corporations.

on 6074, time for filing declarations of estimated income tax by corpora

on 6154, installment payments of estimated income tax by corporations. on 6655, failure by a corporation to pay estimated income tax. on 7851, applicability of revenue laws.

branda are attached hereto on these last numbered sections which briefly the objections thereto.

data are submitted after only a very incomplete review of H. R. 8300, Revenue Code of 1954 and since it will be impossible to properly review within the time allowed for its consideration we earnestly urge that the

How law be made applicable as outlined in our memorandum under section

ovided: carn

plicability of revenue laws-hereto attached.

SECTION 11. TAX IMPOSED

the R. 8300 it is proposed to increase the tax on corporate earnings in $25,000 from 47 percent as exists in the present code to 52 percent,

X pen to be effective for taxable years beginning after March 31, 1954.

-divid at pa

tee a

deal has been said for and against the increase in tax rates from 47 52 percent (54 percent for a corporation filing a consolidated return) Nation is in a peacetime economy.

ot our purpose to repeat here the many arguments which have been to be against such an extremely high tax rate. We must, however, point

e cod

he increase in the tax rate as set out in section 11, H. R. 8300, results

orporessive and undue burden on businesses in general and that we hereby

-iod. How

the

ur objections to such increase.

SECTION 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION

eretion above referred to provides for the accrual of real property taxes of dar, using the accrual method of accounting, over the definite period of Herahich the real property tax applies, and further provides that such rule plicaapply for a taxable year which began before January 1, 1954.

nay be many cases of a taxpayer who has followed the accepted excl accruing real property taxes for taxable periods covered by the 1939 who has taken deductions for real property taxes for the last taxable ler the provisions of the 1939 code. Should these taxes, accrued after 1953, and prior to January 1, 1954, have been ratably distributed,

ove

in i

on F

ithe mount undistributed at January 1, 1954, will not be allowable as a in 1954 under the provisions of H. R. 8300. The taxpayer would thus uction for taxes to which he is entitled. In order to prevent this inis suggested that for the first taxable year, a taxpayer, in existence for

e an