1765 the interest is nent. The int-the interest, out any discreg in the nature anagement may e realization of ation and, as has now, it was evi; kind, and so we a reference to these t was to reach what inder the nomencla, spuriously denomi oad industry, and we 1 be cut to fit the evil k and reach this great are outstanding in the illion, carrying annual llion. onfidently look forward Section 275 should be rejudging anything here, h it, the staff has told me is some kind of an inequity y that, Mr. Chairman, betly clear, and the injustice corrected in that regard, is in our important railroad voting privilege? vilege. No voice in manageof an equity security. It is a listinction between these bonds y character I did you say? n between thees bonds and the a the case of these bonds, in varyable in the event of the realization ese bonds outstanding in the railpart and parcel of reorganization he last 15 years in railroad reorganInterstate Commerce Commisssion that you can feel reasonably comhere are many slips between the cup you may have something. THE INTERNAL REVENUE CODE OF 1954 THURSDAY, APRIL 22, 1954 UNITED STATES SENATE, The committee met, pursuant to recess, in room 312, Senate Office Building, at 10 a. m., Senator Eugene D. Millikin (chairman) presiding. Present: Senators Millikin, Butler, Williams, Flanders, and Frear. Also present: Senator Smathers. The CHAIRMAN. The meeting will come to order. Mr. Thomas L. Preston. Good morning, Mr. Preston. Make yourself comfortable and identify yourself to the reporter. STATEMENT OF THOMAS L. PRESTON, GENERAL SOLICITOR, ASSOCIATION OF AMERICAN RAILROADS Mr. PRESTON. Thank you, sir. Mr. Chairman and members of the committee, my name is Thomas L. Preston. I am general solicitor of the Association of American Railroads, with headquarters at Washington, D. C. I should say for the record that the Association of American Railroads is a voluntary, nonprofit organization of railroads which operate more than 95 percent of the road mileage of the United States and realize in excess of 95 percent of the total gross revenues of all the railroads of the country. Now, Mr. Chairman, I have before me a prepared statement, which I shall find it impossible to follow in full and literally within the time limitation that is necessarily imposed in these hearings, and that statement refers to a number of supporting statements dealing with particular topics of special interest to the railroads. If I may, I should like to ask that at the conclusion of my brief oral observations this covering statement, together with the supporting statements, be incorporated in full in the record. The CHAIRMAN. We will be very glad to have the material for the record. Mr. PRESTON. The reporter has been furnished with a full set of these. I may say, Mr. Chairman, that those statements have been most painstakingly prepared by those in our industry who we think are best qualified to deal with the several subjects covered, and we do earnestly invite their careful consideration by the members of the committee and the staff, in connection with H. R. 8300. Now I should like to say at the outset that we in the railroad in dustry are certainly not wanting in a full appreciation of the trem ous effort and study which has gone into the preparation of H. R. 8300. The very proportions of the bill testify to the efforts and the concentration which must have been devoted to that subject and, indeed, the matter was before the Ways and Means Committee through extended hearings in the course of last summer. I would point out that in the course of those hearings there were indicated in advance a number of topics-I believe 40 in numberas to which testimony might be adduced, the indication being that those topics would, in all likelihood, be considered in connection with the revision bill. And, as to those topics which we were particularly concerned with, we then had our say. However, upon the release of H. R. 8300, as reported by the Ways and Means Committee and passed by the House, we found that many provisions of urgent concern to the railroads are included in that bill as to which there was no forewarning whatever and with respect to which we had no opportunity in advance to express ourselves. So, at the outset, if I may, I should like to refer to certain of those provisions which may perhaps be appropriately referred to as surprise provisions in this bill. The CHAIRMAN. What is that? Mr. PRESTON. Surplus provisions in this bill, of particular concern to the railroads. First among them I would take up, if I may, the impact upon the railroad industry of section 275 of H. R. 8300 which, read in conjunction with section 312 of the bill, would have the effect of preventing the deduction for tax purposes of interest upon the familiar security known as the income or contingent interest bond. This is a matter of the most urgent importance to us, and we are convinced that the result cannot have been intended. These bonds, as I shall undertake to show in as few words as I may, represent true indebtedness and partake in no sense of the character of an equity interest in the property. Yet, by legislative mandate H. R. 8300, for tax purposes, would convert these purely debt obligations into equity obligations and deprive the taxpayer of the deduction for interest paid thereon. The CHAIRMAN. Just a minute, please. What was the theory of the committee on that? Mr. SMITH. Senator, we have had this problem come up and there was no intention, where it was a true debt, to disallow the interest deduction, and it has affected the railroads and we are looking into it. Mr. PRESTON. I might say, Mr. Chairman, that this matter has been taken up already with Mr. Stam and the gentlemen of his staff. I am confident that they have a complete grasp of the problem which confronts the railroads in connection with it. These so-called income bonds may be briefly described in this way: They represent a fixed obligation to pay a sum certain in money on a fixed date. In that respect, they have no relation to anything in the nature of an equity security. Interest payable upon those obligations is in varying degree contingent upon the realization of earnings available for the payment of the interest. In many instances, the interest on those bonds, even though not earned, becomes fully payable as an absolute obligation upon the maturity of the bond. In many instances, a large portion of the interest is payable irrespective INTE CODE OF 1954 IL 22, 1954 TED STATES SENATE, , in room 312, Senate Office ne to order. Mr. Thomas L. N. GENERAL SOLICITOR, nittee, my name is Thomas ciation of American Rail- record. who we think are Covered, and we do -- he members $300. of the 230 railroad in- 1763 not prejudging anything here, o with it, the staff has told me here is some kind of an inequity you say that, Mr. Chairman, beindantly clear, and the injustice if uncorrected in that regard, is rly so in our important railroad ve no voting privilege? g privilege. No voice in managestics of an equity security. It is a nly distinction between these bonds dinary character bond did you say? nction between thees bonds and the nat in the case of these bonds, in vary› payable in the event of the realization id. of these bonds outstanding in the raild as part and parcel of reorganization of the last 15 years in railroad reorgani the Interstate Commerce Commisssion hink that you can feel reasonably comThere are many slips between the cup ɔut you may have something. |