We see the limitation as an unjustified discrimination against small businesses in which the stock is not publicly held. With respect to such businesses the rule denies nonrecognition of taxable gain solely upon the basis of the relative size of the corporations involved. The basic purpose of the reorganization sections has always been to defer recognition of gain on an exchange of stock where the shareholder leaves his investment in at the risk of the business. This relative-size limitation imposed by section 359 (c) introduces an altogether foreign concept into the tax law and will surely have the effect of preventing many mergers and consolidations involving small business which are generally considered desirable and beneficial in the national economy. We feel that these novel provisions should be very carefully considered in principle before they are enacted, and if they are enacted, they should not under any circumstances be applicable to any transaction completed in the year 1954. Very truly yours, Statement summary HAROLD P. MUELLER. The statement of Mr. H. P. Mueller, president of L. J. Mueller Furnace Co., Milwaukee, Wis., may be summarized briefly as follows: 1. The L. J. Mueller Furnace Co., Milwaukee, Wis., had in March 1954 almost completed a merger transaction with Worthington Corp., which had been declared tax-free under existing law in an opinion by the Commissioner of Internal Revenue. Under section 359 (c) and related sections of H. R. 8300, this transaction is not tax-free, and the transaction has been deferred and will not be consummated if the law is enacted in its present form. 2. It is unfair and inequitable to pass a law retroactive in nature which will subject to tax transactions which were in progress during the period in which the law was under consideration in Congress. The law should not be retroactive, and should not apply to any transactions consummated during the year 1954. 3. The law is unfair and discriminatory against the owners of small businesses where the stock is not publicly held, and introduces into business reorganization tax law a relative-size limitation concept which is foreign to the tax law, the implications of which should be very carefully considered before any action is finally taken along this line by the Congress. Re revision of revenue acts. Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee, The Capitol, Washington, D. C. NEW YORK, N. Y., April 16, 1954. DEAR MR. CHAIRMAN: By letter dated April 13, 1954, I asked that you committee give consideration to what I believe will be a noncontroversial creation of authority for the establishment of a common trust fund under State authority so as to make available to individual fiduciaries and small banks opportunities for pooling investments so as to obtain the protection of principal and income which such pooling makes possible. Since your committee may not have time available for me to appear before it in support of this idea, I respectfully request that you make my proposals in my letter of April 13, 1954, a part of the record of the hearings of your committee. In that way I trust there will be opportunity for the committee staff to consider the idea presented by me and to report upon it to your full committee after the hearings are finished. For the purpose of enabling your staff members to consider the matter, I am enclosing herewith three additional copies of my letter of April 13. Respectfully, Re revision of revenue acts. Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee, The Capitol, Washington, D. C. JAMES A. DELEHANTY, NEW YORK, N. Y., April 13, 1954. DEAR MR. CHAIRMAN: There is presently an opportunity for your committee to provide in the pending revision of the revenue acts for expansion of the idea of a common trust fund in an area which could be noncontroversial. By sections 169 and 170 of the Internal Revenue Code and by sections 39.169-1 to 39.169-5 of the regulations authority is given for the creation of a common trust fund to be maintained by a bank as a means of combined investment of funds held by that bank as trustee, executor, administrator, or guardian. Under existing law such a common fund is available only to the particular bank which creates it and uses it for investment of the fiduciary funds of that particular bank. In New York State the larger banks have created common trust funds under the authority of the existing Revenue Code and regulations and are operating them not only with a saving in expense to themselves but with an assurance of safety of principal and income of the funds which are so invested. Not all of the banks have created common trust funds chiefly because their trust departments are not large and the volume of business which would be available for such a common trust fund would be too small. The banks so situated have been considering over this and prior years the creation of a vehicle for pooling investments so as to enjoy the lower unit cost of such combined investment with the safety of income and principal which would result. It was ascertained that a large volume of fiduciary funds would be so invested if an appropriate vehicle were found. Because the existing revenue act limits the benefit of the common trust fund idea to the single bank which creates it for the investment of funds which it either singly or with cofiduciaries holds as fiduciary, the smaller banks were compelled to resort to the device of organizing a regulated investment company. A bill establishing such a regulated investment company under the provisions of the banking law of the State of New York has just been signed by the Governor of New York. This provides that fiduciary funds held by banks may be pooled by participating in such a regulated investment company. The most important group of fiduciaries-the individual executors, trustees, committees and guardians—are not provided for at all either in the existing common trust fund legislation or in the legislation just referred to as having been enacted in the State of New York. What is needed for their protection is authority for the creation of a general common trust fund which would enable the individual fiduciary to participate. Unless authority for the creation of such a general common trust fund is provided the individual fiduciary is left at the hazard of the economic conditions which the pooling of investments diminishes in large degree. The individual fiduciary is now left to his own devices in finding investments which are both safe and productive. He must take all the risks of business disturbances in the economy of the country when he makes any investment. Though he is the person most in need of the protection which a pool of investments would afford he has no place to go to secure the safety of the funds in his hands. If authority for a general common trust fund is provided in the revision now under consideration by your committee and a common fund authorized for investment of fiduciary funds in the charge of individuals the large number of family trusts now under the management of family members or family friends will be able to enjoy that safety of investment and that reduction in cost of administration which results from the pooling of investments. In a disturbed economic era it is common experience that no individual fiduciary handling a small fund can adequately spread his investments so as to diminish the risk both of capital and of income. The volume of property in the hands of individual trustees and other fiduciaries is in the aggregate far greater than that in the hands of banks. Since experience has shown that the common trust fund idea is a very useful one I suggest respectfully that your committee should enlarge the trust fund scope so as to permit individual fiduciaries the same opportunities for pooling investments as are now extended to banks. My interest in the problem is due to my experience in passing on the accounts of executors, trustees and guardians in the years 1933-48 while I was one of the surrogates in New York County, N. Y. During that period the country passed through a very serious industrial depression and also a period of inflation. The effects of each of these conditions upon the investments of trusts and estates were in some instances drastic in the extreme. The ill effects could have been avoided in large degree at least. had there been available a common pool into which fiduciaries generally could have put their fiduciary funds. During the latter part of my service as surrogate in New York County I was chairman of the executive committee of the Surrogates' Association of the State of New York. I have continued my membership in that executive committee and in the association despite my retirement from the office of surrogate. The association is composed of the surrogates of all the counties in the State of New York. I know that the association and its executive committee entertain the view expressed in this letter that legislation of the sort suggested would be highly useful in protecting estates and in reducing the costs of their administration. I write to ask that the subject of authorizing such a common trust fund as is here suggested be taken up by your committee during its current work in redrafting the revenue laws. I would welcome an opportunity to attend before the committee and to give it more in detail the information at my disposal which seems to me to justify this request for legislation. Very truly yours, JAMES A. DELEHANTY. STATEMENT RE H. R. 8300, SECTION 37-CRED WITH RESPECT TO BUSINESS INCOME FROM FOREIGN SOURCES; SECTION 923-APPLICATION OF ABOVE CREDIT TO INCOME FROM TRADE OR BUSINESS FROM FOREIGN SOURCES; SECTION 951-FOREIGN SOURCE INCOME WHICH MAY BE DEFERRED Gentlemen, I am general counsel for national Association of Direct Selling Companies, Winona, Minn., which association has a membership of 227 companies. A substantial number of these companies as well as a substantial number of other direct selling companies which are not members of this association, have sources of income from trade or business in foreign countries, and hence have an interest in the benefits which may come from the legislative subject matter covered in the aforementioned sections of H. R. 8300, which is now before your committee. Some of these interested companies have income from wholly owned foreign subsidiaries. Some own and operate branches in foreign countries. Others have sources of foreign income from retail sales direct to the consumer without other contact with the consumer than a salesperson taking consumer orders on the account of the United States company. Direct selling traditionally and overwhelmingly, in number of companies, is a retail operation. Typically it has the local incidents which pertain in the case of local retailing both in the United States and in the operation of the United States companies in foreign countries. I understand that the concept of this legislation is to deny benefits under the three sections which have been referred to, to United States exporters and foreign import agencies. As contrasted to this, the foreign trade and business of the United States companies in direct selling is typically to effectuate sales at retail within the scope of the United States selling company's operations. Typically direct selling is, where foreign trade and business in foreign countries is concerned, an integrated operation all the way through to the retail sale without the intervening of outside concerns such as importers, exporters, export agencies, or foreign wholesalers. I have been informed that there may be some question in the minds of the committee as to whether or not the trade or business of direct selling companies consists of sales at retail, and that because of this misconception there may be a chance for statutory interpretations which are to the contrary. Where the right to the benefits of this legislation is dependent upon its retail sales concept, there is no intention in this statement to request benefits which are not within such concept. Neither is there any request or suggestion in this statement that there be a change made in this legislation in respect to the limitations now appearing in the bill. It is respectfully suggested, however, (1) that the committee report on the bill contain mention of the fact that foreign trade or business in the direct selling field is to be considered as sales at retail where the operations are within the scope of facts set forth in this statement, or (2) that the bill be amended to define "sales at retail" in such manner as to include retail sales in direct selling which fall within the description given in this statement. Respectfully submitted. NATIONAL ASSOCIATION OF DIRECT SELLING COMPANIES, By J. M. GEORGE, General Counsel. SATTERLEE, WARFIELD & STEPHENS, Re recommendations for changes in H. R. 8300-Internal Revenue Code of 1954. Hon. EUGENE D. MILLIKIN, DEAR MR. MILLIKIN: Sections 302 and 311-Basis of redeemed stock where attribution of ownership: This section deals with the tax treatment to a stockholder of distributions in redemption of stock. If the distribution is in complete redemption of all of the stock held by a stockholder, distribution is treated as a payment in exchange for the stock with the result that the stockholder will have capital gain or capital loss. However, in determining the ownership of the stock, section 311 dealing with attribution of ownership is made applicable. If all of the stock of a particular stockholder is redeemed, such redemption will not qualify in certain cases for capital gains treatment, if under section 311 the holdings of another stockholder are attributed to the stockholder whose shares were redeemed. In such case, the redemption proceeds would be taxed as a dividend under section 301 without regard to the adjusted basis of such stock. The result is that the stockholder whose stock was redeemed has not been allowed a recovery of his investment. Some provision should be made for the tax-free recovery of the investment referred to. Since the stockholder in question owns no other shares in the corporation which made the distribution, his unrecovered cost should be attributed to the related stockholder whose ownership was attributed under section 311. For example, corporation A owns all the stock of corporation B. A and B own all the stock of corporation X. B's adjusted basis for the stock of X owned by it is $100,000. Corporation X redeems its shares owned by B and distributes in connection therewith $150,000. The shares of X owned by A are not redeemed. Under sections 302 and 311, the distribution of $150,000 to B is treated as a dividend under section 301. H. R. 8300 as it now stands is silent as to the treatment of the adjusted basis of B of $100,000. It is recommended that the bill make some provision for carrying over the $100,000 adjusted basis in the hands of corporation B to corporation A. If this is not done, a future tax might be incurred upon a distribution which is in part, at least, merely a return of capital. The same situation exists where all the stock of a certain individual is redeemed, but other shares of the same corporation are owned by members of his family. Sections 359 and 311-A majority-owned subsidiary of a publicly held corporation should also be considered as a publicly held corporation : Section 359 (a) which defines a publicly held corporation, provides that the attribution of ownership rules of section 311 are applicable. Insofar as a parent-subsidiary relationship is concerned, section 311 does not permit any attribution of ownership of the stock of the subsidiary to a stockholder of the parent corporation, except to such stockholder owning more than 50 percent of the stock of the parent (sec. 311 (b)). It is submitted that section 311 (b) is too restricted in its scope. Attribution of ownership of the stock of the subsidiary should be permitted as to all of the stockholders of the parent, irrespective of the percentage of stock owned in the parent corporation. In other words, if the parent corporation has 1,000 shareholders, the subsidiary should also be considered as having 1,000 stockholders for the purpose of determining whether the subsidiary is a publicly held corporation under section 359 (a). This recommendation would be in line with the constructive ownership rules applied for determining whether a corporation is a personal holding company. (See sec. 544 (a) (1), under which it is provided that stock owned by a corporation is considered to be owned proportionately by its stockholders.) Briefly, it should be permissible to look through to the individual shareholders of a parent corporation. Very truly yours, PAUL EDGAR Swartz. SATTERLEE, WARFIELD & STEPHENS, Re recommendations for changes in H. R. 8300, Internal Revenue Code of 1954: Section 34-Credit for dividends received from insurance companies; Section 246-Deductions from dividends received from insurance companies Hon. EUGENE D. MILLIKIN, Chairman, Senate Finance Committee, Washington, D. C. DEAR SENATOR: Under section 34 (c) (1), the credit allowed to individuals for dividends received and under 246 (a) (1), the deduction allowed to corporations of 85 percent of dividends received, is denied as to dividends received from insurance companies. It is respectfully submitted that this provision will seriously affect the entire insurance industry and place an unjust burden upon not only the insurance companies but also upon their shareholders, both corporate and individual. Specifically, this discrimination against dividends paid by insurance companies would have the following adverse effects: 1. It will depress the market value of insurance company stocks. Corporate shareholders, by reason of this penalty which would increase the effective rate on dividends from 4.5 percent or 7.8 percent to 52 percent, would be forced to sell their holdings on the market. The effect of such liquidation upon individual shareholders is evident. Not only will the individual shareholders suffer a present loss of value, but the long-term effect on the market will also be adverse because of the permanent withdrawal of corporate investors from the market. Individual shareholders, of course, will also switch from insurance company stocks to other companies. This will have a further unsettling effect on the market. 2. It will force insurance company groups to reorganize. Such groups could not possibly operate profitably if intercompany dividends are taxed at 52 percent. They would be compelled to merge or to dispose of their intercompany holdings to the detriment of their investors. For example, under the laws of the State of Ohio, a company is limited as to the lines of insurance it can write and consequently it is necessary to have separate companies to permit a group to write multiple lines of insurance. Such groups, of course, could not be merged; they would be forced to sell. Furthermore, even where State law permits a single company to write more than one line of insurance, a large number of groups of separate companies have been formed with intercompany holdings. 3. It will discourage the formation of new insurance companies. Corporate and other investors certainly cannot be expected to make investments, the income from which will be subject to the tax penalty imposed by these new provisions. 4. It will restrict the growth and expansion of existing insurance companies. Such companies, like other corporations, must look to corporate investors for a large share of their additional capital. Insurance companies, particularly the smaller companies, must have additional equity capital to support the acceptance of new business. The public's demand for insurance coverage in all types of insurance-life, fire, casuality, etc.-requires the companies to add continuously to their capital. The new provision will hamper the ability of the insurance companies to meet the increasing needs of the public. 5. It will tend to reduce dividend payments by insurance companies. Because of the removal of corporate investors as a source of new capital and the consequent depression in the market for insurance company stocks, the companies will be forced to accumulate a larger portion of their earnings and thus lower their dividend payments to stockholders. 6. It will have an adverse effect upon the tax revenue. For the reasons noted above, corporate shareholders will be compelled to dispose of their insurance company holdings, and a lesser proportion of earnings will be distributed to the remaining individual shareholders. There is no sound reason for this discrimination against the insurance industry and its shareholders. As to insurance companies other than life, the extra tax burden imposed upon their shareholders cannot be justified on the ground that such burden is an offset against income not taxed to the companies, for the companies described are subject to tax on their entire income at the regular rate of 52 percent. As to life companies, it is true that they are taxed in a different manner and at a lower rate than ordinary corporations. But this was approved by your com |