having permanent establishments abroad, from any tax credit or election to defer income from foreign sources.

No mention is made of important foreign investment and business activities such as agriculture, lumbering, marine and pipeline transportation and construction. House Report No. 1337 states at page A255:

"The recital in section 923 of 'factory, mine, oil or gas well, public-utility facility, or retail establishment' is not meant to be exhaustive. 'Other places of business' may include, for example, the operation of a bank or an air transporation business ***"

This seeming clarification in the report is not sufficient to dispel the doubts and confusion among businessmen. A clear, general comprehensive definition of a "trade or business" could be achieved by providing that taxpayers must maintain bona fide "permanent establishments" abroad from which business activities must emanate. Such establishments should properly hire full-time employees within the foreign country with general authority to negotiate contracts or otherwise carry on active business.

The exclusion from the term "trade or business" of offices or agents to import or facilitate the importation of goods abroad is, as now worded in sections 923 (b) (1) (B) and 951 (b) (1) (B) of the bill, entirely appropriate to make certain that fringe exporters do not participate in the tax incentives which should be extended only to those willing to take added risks of doing business abroad.

In addition to the difficulties of defining "trade or business" under sections 923 (b) and 951 (b), the percentage requirement tests in sections 923 (a) (3) and 951 (a) establish narrow and discriminatory limitations on the types of foreign income which may qualify for the lower tax rate.

Where subsidiaries are engaged within one foreign country in some of the covered activities as well as activities in a noncovered category which may well be an integrated part of the business, it might be difficult or impossible to meet the 90 percent gross income test of section 923 (a) (3) (A) (ii) and section 951 (a) (2). The carrying on of covered and noncovered activities by one foreign subsidiary in several foreign countries might require a separation of the business so as to qualify for foreign income credits and the election to defer branch income from foreign sources. Such a division would be wholly artificial and contrary to sound business policies.

The chamber has consistently recommended that necessarily special tax treatment of foreign business income should not be given to income only from particular business activities. It has advocated granting tax incentives for foreign investments so that all foreign business income is treated fairly and reasonably. Section 923 (a) (3) (B) was apparently intended to prevent the benefit of the tax credit in section 37 from being applied to portfolio investment. It requires that a domestic corporation, either alone or in association with not more than three other domestic corporations, own more than 50 percent of the voting stock of the foreign corporation declaring the dividend before such dividend can be deemed to be business income from foreign sources. In many situations, local conditions govern the ownership of local corporations, and it may not be possible to acquire a majority ownership. The committee may wish to lower the 50 percent requirement to distinguish between portfolio and business investments perhaps by lowering the ownership requirements to 10 percent of voting stock, similar to the provisions of section 902.

SECTIONS 951-958-DEFERRED INCOME FROM SOURCES WITHIN FOREIGN COUNTRIES

Under section 923 (a) (1) of the bill, the 14-point credit provided in section 37 with respect to taxable income of a foreign branch seems not to apply unless the corporation elects to report the branch income on a deferred basis. No incentive, therefore, is given to corporations receiving foreign branch income unless the domestic corporation elects to have such branch treated as a separate entity for tax purposes.

The objective of the Ways and Means Committee in requiring the election under section 951 may have been uniform accounting treatment of income from sources within foreign countries so that a domestic corporation could either: (1) Elect to defer the tax on income from foreign branches, or (2) make the election but withdraw the income and pay taxes currently. The difficulties of treating all

1 The term "permanent establishments" has already been defined and employed in more than a dozen tax treaties between the United States and other foreign countries.

foreign branches as separate and distinct entities apart from the corporation, however, include the adoption of new and uncertain accounting procedures, separate books and records, recognition of gain or loss between home offices and branch offices, and other unnecessary limitations. These will serve to discourage companies which, for sound accounting purposes, wish to continue paying United States taxes on foreign branch income as it is earned, rather than when it is withdrawn. Unless these accounting provisions are compiled with, companies cannot receive the 14-point credit under the bill.

The 14-point credit should be applicable to all foreign income and should be separated and distinguished from the matter of electing to defer income from sources within foreign countries. A domestic corporation with a foreign branch should not be denied the tax credit in section 37 simply because it does not report foreign income on a deferred basis, but discharges its United States income-tax obligation currently. This places an unfair burden on many taxpayers if future corporate tax rates are higher when the foreign income is received.

SECTION 1201-1241-CAPITAL GAINS AND LOSSES

The Ways and Means Committee report at page 82 notes that the treatment of capital gains and losses is not basically changed in the bill. The chamber fully realizes that budgetary problems and the need for continuing high revenue may have influenced the committee's decision not to change the tax rates on capital gains at this time, but we urge the problem be carefully reconsidered by this committee to encourage transactions and create new revenues and investments.

Eventual elimination of the tax upon capital gains has been a constant chamber recommendation. The rates applicable to capital gains should be reduced persistently. As long as a capital-gains tax exists, offset of losses and gains should be continued, but excess losses should be allowed against other income with the resulting tax reduction reasonably limited.

The capital-gains tax operates as a serious deterrent to the investment of capital in the equities of business enterprises. It also tends to reduce steadily the funds of risk capital available for new businesses, because the tax comes out of these funds. The tax lessens the stability and liquidity of markets, and seriously deters companies from undertaking new capital issues essential for the expansion of established businesses. The tax creates frozen positions in securities and real estate, thereby restricting business activity and the taxable income normally resulting from such activity.

SECTION 1223-HOLDING PERIOD OF PROPERTY

A technical correction should be made in the bill to insure uniformity of treatment for taxable events after the effective date of H. R. 8300 arising from disposition of stock received in a tax-free spin-off.

In 1951 Congress amended section 112 of the Internal Revenue Code so as to add subsection (b) (11) thereof, which permits the tax-free distribution of stock of a corporation a party to a reorganization even though no stock of the old corporation is surrendered in connection with the distribution. This is the so-called spin-off amendment. At the same time, Congress amended section 113 to add subsection (a) (23), relating to the basis for determining gain or loss upon a sale or exchange of stock received in a spin-off. This subsection provides that where stock is received on a tax-free spin-off, the basis of the old stock is to be divided between the old stock and the new stock received in proportion to their respective market values.

Under section 117 relating to capital gains and losses the general scheme of the statute is that property which is held for more than 6 months is entitled to treatment as a long-term capital gain when determining the tax effect of gains realized on sales. Furthermore, the general approach of section 117 (h) is that where property is received in connection with a tax-free transaction the holding period of the property received is determined by tacking the holding period of the old asset on to the holding period of the new asset. Despite this general approach, and apparently through an oversight, Congress did not amend section 117 in 1951 so as to provide specifically that stock received on a spin-off should take over the holding period of the original stock which formed the basis for the distribution.

In 1926, the Commissioner held in I. T. 2259, V-1 Cumulative Bulletin 18, that there should be "tacking" on holding periods for stock received in a tax-free spin-off under section 203 (c 2004 act, although the language of article

1651 of regulations 65, in language similar to section 117 (h) (1) of the 1939 code, provided for tacking only in tax-free "exchanges." The Commissioner then felt that the "principle" of tacking was equally applicable even in the absence of a technical exchange. It is understood that the Commissioner has taken the position under the 1951 act that section 117 (h) (1) does not apply to stock received on a spin-off because the stock received on a spin-off was not technically "received on an exchange."

The general inequity of this result is recognized by section 1223 (5) of H. R. 8300 which provides that in determining the period for which the taxpayer has held stock received on a distribution, if the basis of such stock or rights is determined under the tax-free reorganization provisions of H. R. 8300, then the holding period of the stock in the distributing corporation is included in determining the holding period of the stock received on the distribution. This provision will correct the oversight in 1951 as to future spin-offs. However, it is believed that this provision should apply to all taxable events occurring after the effective date of the 1954 code, and it is not clear that this would be the case. Possibly it is intended that, under section 1223 (9) of the 1954 code, section 1223 (5) should be read as referring to basis under section 113 (a) (23) of the 1939 code. If so, this should be made clear that the provision is "applicable"; otherwise, section 1223 (5), by referring to section 307 (a) and (b), may be applied only to stock acquired after December 31, 1953.

This limitation is proper under section 307 which is a basis provision and should be applicable only to property acquired under the 1954 Act. However, section 1223 characterizes assets for purpose of determining gain or loss and should also be applicable to all taxable events taking place under the 1954 act. In this connection, it should be noted that in general H. R. 8300 is applicable to taxable years beginning after December 31, 1953. (See section 7851, H. R. 8300.) It is not proposed to change this effective date in any way.

An illustration of this problem would be a situation in which the X company distributed stock to the Y company in a tax-free spin-off in December 1953. In January 1954 a stockholder of the X company (probably through an oversight) sold the stock of the Y company received on the spin-off. The tax liability of this stockholder for the calendar year 1954 will be determined under the new Internal Revenue Code but some question may arise as to whether the holding period of the stock of the Y company is computed merely by the lapse of time from December 1953 to January 1954, or whether the stockholder should add to this period of time the period of time for which he held the stock of the X company. Section 1223 (5) of H. R. 8300 indicates a broad intention to permit him to add the period during which he held the stock of the X company in determining the holding period of the stock of the Y company. However, unless there is clarification, this intent may be ineffective.

The following specific amendment would clarify the applicability of these provisions and make clear that the 1954 code is applicable to all taxable events after the effective date:

Section 1223 (5):

"(5) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution if the basis of such stock or rights is determined under section 307 (a) or (b), or so much of subsection (d) as does not relate to stock received in lieu of interest or money, or under section 113 (a) (23) of the Internal Revenue Code of 1939, there shall (under regulations prescribed by the Secretary or his delegate) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution."

To make the 1954 code properly applicable to all taxable events occurring after its effective date either

(1) Section 1223 (9) should clearly provide that section 1223 (5) relates to basis established under section 113 (a) (23) of the 1939 code as well as to basis established under section 307 of the 1954 code. This can be done by amendment to section 1223 (9) or by example in the legislative history showing the intent of section 1223 (9); or,

(2) Section 1223 (5) should be amended as set forth above.

SECTION 1514-CONSOLIDATED RETURNS

Section 1514 of the bill retains the rule of section 141 (c). Internal Revenue Code 1939, and imposes a 2-percent penalty on corporations filing consolidated

returns.

Economic and legal considerations require that many businesses be operated through affiliated groups of corporations. There is no logical reason for taxing these businesses at a higher rate than those which are conducted by a single corporation. Closely affiliated companies clearly should be allowed the privilege of filing consolidated returns without the payment of this inequitable penalty.

SECTIONS 2001-2504-ESTATE AND GIFT TAXES

The new bill incorporates several of the chamber's recommendations to the I House Ways and Means Committee, including the abandonment of the "paymentof-premiums" test on proceeds of life insurance on a decedent.

A new limitation was added to the estate tax provisions at section 2032 which should be substantially amended or abandoned. It revised section 811 (j) of the Internal Revenue Code of 1939 to provide that the executor may elect to value - the gross estate as of 1 year after the decedent's death only if the aggregate value of the gross estate had declined to 66% percent, or less, of the value at the time of death.

House Report No. 1337, at page 90, justified the limitation on the grounds that: (1) the optional valuation provision was enacted during the early 1930's because by the time estate taxes were paid, property values had dropped substantially and sometimes the proceeds of sale would not pay the estate tax due;

(2) the optional valuation date tends to retard the distribution of assets included in the gross estate; and

(3) the existing provision frequently requires the valuation of property as of two dates, whether or not an estate tax is paid.

These reasons do not justify the action taken in section 2032 of the bill to restrict the option taxpayers presently have under existing law. The proposed restrictions will make the optional valuation procedure unavailable to taxpayers I suffering substantial declines in property values. A net estate may completely vanish without the optional valuation provision becoming available in the following example:

Despite the disappearance of the entire net estate by the optional valuation date, the estate would be liable under the bill to an estate tax of approximately $65,000.

Section 2032 also creates differences of estate tax on estates of substantially similar value. For example, if 2 gross estates are each valued at $1 million at the date of the decedents' deaths, and each had deductions of $200,000, the results may be as follows:

(a) The estate declining in value $350,000 (more than one-third) will reduce the estate tax thereon by approximately $125,000;

(b) The estate declining in value only $325,000 (less than one-third) will not reduce the amount of estate tax due on the net estate of $800,000.

The chamber recommends that the optional valuation procedure under section 811 (j) of the existing law be preserved.

SECTION 6016-DECLARATION OF ESTIMATED TAX AND TAX PAYMENT SCHEDULE FOR

CORPORATIONS

The new proposed system for advance payments of corporate income tax should be rejected by the Senate Finance Committee as a discriminatory measure against 10 percent of the Nation's corporations. If enacted, it will impose new obligations on the corporations to estimate their full year's taxable income and obtain cash to pay the tax during the year. It will have an adverse effect on the economy which may outweigh many of the business incentive provisions of the bill.

Under the proposal, in several years corporations will be required to pay half the tax before the end of the year. Corporations have already been forced to raise additional capital to accelerate their tax payments under the Revenue Act of 1950. Payments once due in quarterly installments after the end of the taxable year have already been advanced under the so-called Mills plans so that they will become payable in 1955 in two installments within the first 6 months following the end of the taxable year. The new bill will further accelerate these corporate tax payments on an arbitrary form of "pay-as-you-go basis," except that it contains no forgiveness feature similar to the provisions of the Current Tax Payment Act of 1943.

The bill will require corporations to file declarations of estimated tax and make advance tax payments if the tax liability "can reasonably be expected to exceed $50,000." By 1959 a corporation on a calendar-year basis will be required to pay 50 percent of its estimated tax before the end of the year, and 50 percent in the following 6 months. This means additional working capital, equal to one-half the corporation's annual Federal income-tax liability, must be raised for tax payments. Such permanent capital requirements will have adverse effects on business expansion, capital expenditures, inventory planning, and dividend declarations.

Many of the beneficial business provisions of the bill may be compromised if the advance payment plan is enacted. The new provisions to liberalize depreciation allowances and grant optional treatment of research and development expenditures, for example, may be of limited use if corporations must use working capital to meet estimated advance tax payments instead of investing the funds in expansion, research, and development.

If one of the principal purposes of section 6016 is to even the flow of tax receipts into the Treasury, it might be advisable to decelerate the payments under the Revenue Act of 1950, thereby eliminating the uneven flow of corporate tax receipts.

SECTION 6416-CREDITS OR REFUNDS ON CERTAIN TAXES ON SALES AND SERVICES

Under section 6416 of the bill it appears that credits or refunds in the case of price readjustments and certain other cases covered by subsection (b) may not be made unless the person who paid the tax complies with subsection (a). This requires that he establish:

"(1) That he has not included the tax in the price of the article or service with respect to which it was imposed or has not collected the amount of the tax from the vendee; or

"(2) Has repaid the amount of the tax to the purchaser (in case of retailers' taxes) or to the ultimate purchaser (in the case of manufacturers' taxes and the tax on diesel fuel) of the article or service or, in any case within subsection (b) (2), has repaid or has agreed to repay the amount of the tax to the ultimate vendor of the article; or

"(3) Has filed with the Secretary or his delegate the written consent of such purchaser, ultimate purchaser, or ultimate vendor, as the case may be, to the allowance of the credit or refund or has obtained the written consent of such ultimate vendor thereto."

Under section 3443 (d) of the present Internal Revenue Code it is specifically provided that the three requirements described in the language quoted above do not apply in the case of a credit or refund arising as to price readjustments and other cases now generally covered under section 6416 (b) of H. R. 8300.

This change in substance is not mentioned in the report of the Committee on Ways and Means of the House of Representatives and it is believed that the omission of a cross-reference exempting section 6416 (b) from the conditions imposed by section 6416 (a) was omitted through inadvertence.

The change in the law which is apparently made by section 6416 of H. R 8300 would impose an impossible burden upon persons paying the manufacturers' excise tax. Section 6416 should be amended by inserting the following language immediately after the word "shall be allowed" in the third line of subsection (a): "(otherwise than under subsection (b))."

The CHAIRMAN. Mr. Stott. Make yourself comfortable, Mr. Stott and identify yourself to the reporter.