The CHAIRMAN. Mr. Kaliker.

Is Mr. Kaliker present?

Mr. Murphy.

Make yourself comfortable, Mr. Murphy, and identify yourself to the reporter.

STATEMENT OF MR. RAY MURPHY, GENERAL COUNSEL, ASSOCIATION OF CASUALTY AND SURETY COMPANIES

Mr. MURPHY. Mr. Chairman, and members of the committee, my name is Ray Murphy. I am general counsel of the Association of Casualty and Surety Companies, of 60 John Street, New York.

I have filed a statement with the clerk, which I respectfully ask to be included in the record.

The CHAIRMAN. It will be included in the record.

Mr. MURPHY. And since my statement on behalf of the association will be in the record, I shall be very brief.

The association is a trade group of 112 capital stock casualty insurance and surety companies. In 1953, these companies had combined premium income in excess of $2 billion. They pay Federal income taxes at the same rate as do other types of corporations and are afforded no special tax treatment, nor privilege or exemption under present law. They desire no special consideration nor any treatment different from that given to corporations generally under the proposed new tax law. However, they find under H. R. 8300, in present form, that they would be discriminated against in four particulars. (1) Their stockholders would be denied relief from double taxation of dividends. The reference is to section 34 (c) (1) and 116 (b). Senator LONG. Might I ask you how much it would cost to give your association and all others this relief on double taxation of dividends?

Mr. MURPHY. I am afraid I can't answer that question.

Mr. STAM. I don't have that figure, but I might say this particular provision he is talking about was an oversight in the bill.

Senator LONG. How much does it cost to give all corporations that hold stock in other corporations and insurance companies and all those the benefit of this double taxation on dividend relief?

Mr. STAM. We will have to make a check on that. I wouldn't want to give a figure now, but we will get that figure.

The CHAIRMAN. This subject has also been rather fully presented to this committee. The staff is completely aware of the problems involved.

As I said to another witness, I am not a predicter here, and I can only speak for myself at this stage of the game, but I think the problem is being taken care of.

Mr. MURPHY. Senator, I think I will be briefer by making an extremely brief reference to them.

Senator LONG. Is there any particular reason why you were left out of all four of these provisions that were put in there, that others would benefit from?

Mr. MURPHY. As Mr. Stam has indicated, I think that with reference to the dividend matter there perhaps had been a first impression that our companies received some type of favorable consideration as compared to corporations generally.

As you know, there are different methods of taxes for different types of insurance companies. As it happens, our companies are taxed on exactly the same basis as are corporations generally, which is not true of some other types of companies.

The CHAIRMAN. In other words, your stock is the same as other stock?

Mr. MURPHY. Exactly.

(2) The dividends received credit now allowed to corporate stockholders would be eliminated with respect to dividends received by corporate stockholders of capital stock insurance companies.

I am aware that the Treasury Department and the staff of the joint committee have already given consideration to a correction of these discriminatory features, and I know that this committee has received from other groups adversely affected thereby considerable testimony. And for that reason, and because points (1) and (2) are fully covered in my prepared statement in the record, I shall pass to the two other discriminatory features of H. R. 8300. These would deny the capital stock insurance companies.

(3) The credit provided in the section 37, with respect to business income from foreign sources-the reference being section 923 (d) (2), and

(4) Would deny the capital stock insurance companies the right to make an election with respect to the treatment provided by part IV of H. R. 8300, concerning deferred income from sources in foreign countries.

These points have also been heretofore made to this committee, and I have previously discussed them with Mr. Stam in the presence of Mr. Gimmell, at which time, Mr. Stam, while indicating points (1) and (2) heretofore mentioned and pertaining to dividends perhaps were well taken, as I trust he now feels they are, said he would like to have additional information with respect to points (3) and (4), pertaining to foreign income.

In conclusion therefore, may I say that my filed statement contains amplification as to types and dollar amounts of insurance business done by capital stock insurance companies in a considerable number of foreign countries.

Precisely the same lines of insurance, with the same kind of coverages are written by our companies abroad as are written here. The business is transacted in the same way as here, and, as here, under trict supervisory requirements created by law.

I may say I assume the theory of that part of the proposed law is to encourage American production and American business in foreign countries. And frankly, Senator, I cannot see how that business would be adequately or completely encouraged and covered, except with insurance going along as a handmaiden and as a part of it. Therefore, I see no reason why there should be any discrimination against our companies, even though the volume at this time is not huge, compared to some other forms of enterprise. It is growing all the time. The CHAIRMAN. How many companies are in your association? Mr. MURPHY. 112.

The CHAIRMAN. How much is the amount of premium you mentioned?

Mr. MURPHY. The amount of premium overall is in excess of $2 billion a year.

The CHAIRMAN. How many stockholders?

Mr. MURPHY. Senator, I cannot say how many stockholders. It runs into the hundreds of thousands, I would assume.

I have taken as little of the time of the committee as is possible in covering these 3 or 4 points, which were covered on April 12 by Senator Scott Lucas and other witnesses, with whom I fully concur. I have done so to emphasize the great interest which the association has in the subject matter. As the largest group of casualty and stock security companies in this country, we would be considerably remiss, I believe, if we failed to stress to this committee our interest in these provisions and our hope that what we leave with you will be given careful consideration.

We wish to assure the committee and the staff that we will be pleased, indeed, to provide any additional information we can in which they may find any interest.

The CHAIRMAN. We are very glad to have your testimony. Senator Lucas and others have made quite an impressive presentation on this, as you have.

Mr. MURPHY. Thank you.

The CHAIRMAN. Thank you very much.

(The prepared material of Mr. Murphy follows:)

MEMORANDUM SUBMITTED ON BEHALF OF THE ASSOCIATION OF CASUALTY & SURETY COMPANIES WITH RESPECT TO DISCRIMINATORY PROVISIONS OF H. R. 8300

The membership of the Association comprises 112 capital stock insurance companies engaged in the writing of casualty, surety and allied lines of insurance. A list of such membership is attached.

This memorandum is directed to the following provisions of H. R. 8300 which unreasonably and inequitably discriminate against capital stock insurance companies and their stockholders:

1. Section 34 (c) (1) and 116 (b) which deny to individual stockholders of such insurance companies the newly provided relief from double taxation of dividends;

2. Section 246 (a) (1) in which the 85 percent dividends received credit, to which corporate stockholders (including corporate stockholders of such insurance companies) are now entitled under existing law, and which the bill continues as a deduction for corporations generally, would be completely eliminated with respect to capital stock insurance company dividends received by corporate stockholders;

3. Section 923 (d) (2) which denies to such insurance companies the credit provided in section 37 with respect to business income from foreign sources; 4. Section 951 (c) (4) which denies to such insurance companies the right to make an election with respect to the treatment provided by part IV of H. R. 8300 with respect to deferred income from sources within foreign countries.

Member companies to this association, in common with hundreds of other like companies, are now subject to tax under section 204 of the Internal Revenue Code and, in accordance therewith, pay the full 30 percent normal tax and the full 22 percent surtax on their entire net income. Thus such companies, under present law, pay Federal income taxes at precisely the same rates as do manufacturing corporations, mercantile corporations, and other corporations generally.

Under the provisions of H. R. 8300, our member companies would be subject to the tax to be imposed under proposed section 831, which, in part, provides: "Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of every insurance company (other than a life or mutual insurance company) ***” Section 11 imposes a normal tax of 30 percent of taxable income and a surtax of 22 percent on certain taxable income in excess of $25,000.

Thus, if H. R. 8390 is enacted, capital stock casualty and surety companies will continue to pay a Federal income tax on their entire net profits at present regular corporation income-tax rates. Such companies do not enjoy any special tax ad

vantage of any kind under the present law and no tax advantage is granted them under H. R. 8300.

Accordingly, it is grossly inequitable and unreasonable to deny to individual stockholders of such companies the relief from double taxation newly proposed in the bill with respect to individual stockholders of corporations generally, and to take away from corporate stockholders of such insurance companies the relief from double taxation which the present law provides and which the bill would continue for corporate stockholders of other corporations generally.

In recent years, the insurance business, as well as business generally and the national economy, has grown tremendously, and all indications point to a continuation of this growth. Such growth requires and will continue to require large sums of additional capital. In fact, since the end of World War II, a number of insurance companies, large and small, have been finding it necessary to offer new stock issues to the public in order to be able to write a rapidly mounting volume of business. Obviously, the discrimination with respect to dividends paid on the stock of insurance companies would seriously impair the desirability of such stock, thereby making it difficult to acquire additional capital to meet the needs of expanding business.

Among the lines of insurance written by our member companies are workmen's compensation, automobile, aircraft, general public and miscellaneous liability and physical damage, accident and health, credit, surety and fidelity bonds, boiler and machinery, glass, and burglary and theft. It is obvious that these lines of insurance are vitally necessary to the operation of business and industry generally and directly affect the national economy. Accordingly, the national economy could be seriously affected by any curtailment in the business of writing such insurance and this curtailment could well result from an inability to acquire additional capital created by the proposed discrimination with respect to stockholders' dividends of such insurance companies.

It is, therefore, respectfully requested that section 246 be amended to continue the present 85 percent dividends received credit in the form of a deduction for corporate stockholders and that section 34 be amended to extend the benefits of the newly proposed relief from double taxation of dividends to individual stockholders of insurance companies which would be subject to the tax imposed by section 831 of H. R. 8300. It is suggested that the foregoing purposes could be acomplished by amending sections 34 (c) (1) and 246 (a) (1) to read as follows: "(1) an insurance company (other than a stock insurance company taxable under section 831) subject to a tax imposed by subchapter L (section 801 and following);"

Equally inequitable and unreasonable are the discriminations against capital stock insurance companies contained in sections 923 (d) (2) and 951 (c) (4) in which such companies are denied the 14 percent credit against the United States tax for business income from foreign sources and the right to make an election with respect to deferment of foreign income under certain circumstances. Heretofore, the Congress has never discriminated against these companies. Their foreign income presently is subject to taxation for normal and surtax rates, less credits or deductions for foreign income taxes in the same manner as other corporate taxpayers.

These companies do business in foreign countries in various ways, including (a) directly through branch offices or agents; (b) through associations such as the American Foreign Insurance Association (AFIA) or American Insurance Underwriters (AIU); (c) through subsidiaries; (d) by participation in reinsurance transactions.

An association consists of a group of insurance companies which have pooled their resources to write business in foreign countries under the supervision of trained experts in the foreign field. Companies participate in the business written by the association on a percentage basis.

reserves.

Most countries require such insurers to make substantial qualifying deposits on entry and additional deposits to cover their unearned premium and loss As these reserves increase in size, the deposit requirements also increase. It is estimated that in Canada alone casualty, surety, and fire companies have at least $200 million invested, the major part of which is deposited with the Dominion authorities for the protection of policyholders.

The business of insurance, by its very nature, is a highly important and integral part of the economic structure of the country. It is the vehicle for the credit required by other businesses and it constitutes the vital protection of the investment of those businesses in their physical assets. Very large amounts of capital are placed at risk by these insurers. Among the many lines