As an illustration of what I mean, we will say there is a fraternal organization, classified as 101 (3) which today is neither susceptible to income-tax returns, nor is it obliged to file information returns. Where one such establishment caters to public functions every day in the week for profit, it seems incredible that such a practice can be continued without the Treasury Department advising that establishment that it has lost its tax-exempt status by repeatedly benefiting from this unrelated income.

For instance, it is just such an organization as we have been describing here where Commissioner Andrews himself is to be the principal speaker in a Midwest city this week. I have the advertisement here in my hand. It is expected that an attendance of 600 people will be present. The meeting has no possible bearing upon the purposes for which that fraternal organization was chartered, and incidentally the State itself is already imposing certain realestate taxes on that particular establishment growing out of a finding that a large part of its activities were in fields unrelated to the purposes for which it was chartered. But that group goes along merrily, year after year, doing an annual volume estimated to be well in excess of $100,000. How much longer shall the tax-paying establishments of the country be required to endure this degree and type of inequity? We are willing, Mr. Chairman, to face up to any kind of competition such groups want to give us if they want to enter the food business, as an example. But we do insist that when they cater to public groups, for profit, they should be exposed to Federal income tax on such profits, the same as we are.

To that end, we propose two amendments which I won't read, but which are incorporated in my brief, and which would cover what we think would be the inequities involved in these particular taxexempt organizations.

Then I would like to speak briefly on the subject of depreciation. On behalf of the hotel industry, we would like to offer a few remarks on proposed section 167 relating to depreciation. The typical hotel of America was built in the 1920's and consequently today is 25 or 30 years old. Considering that the average useful life of hotel structures is about 40 years, this means that the great majority of American hotels today have a remaining life-time of from 10 to 15 years, possibly in some cases, 20 years. During the 14-year period of 1939 to 1953, motor courts of this country increased from 13,500 to over 50,000 which is an increase of 370 percent. During the same time there was very little hotel construction with the result that hotels increased in numbers by less than 10 percent. However, many thousands of hotels are in direct competition with motor courts and one advantage of the motor court is their newness. There is no obsolescence in motor courts, today. A number of hotels have been renovated and improved in appearance and, by reason of the expected benefits from the declining balance method of depreciation, more hotels may see fit to invest in renovations and improvements. Therefore, it seems appropriate that we should request that some_means be devised of assuring two things to the hotel industry, and other elements of business similarly situated.

First, that renovation and improvements taking place after Janu ary 1, 1954, be permitted to be depreciated by use of the declining

balance method of depreciation described in code section 167 (b) (2). We assume that this is covered by the use of the term "reconstruction," in section 167 (c) (1).

The second thing is that the renovation and improvement of older hotel structures will not be used as a reason to generally extend the life of hotels for depreciation purposes. There is nothing in the proposed code that assures this to the hotel men who wish to make these improvements. Some reassurance on that score is badly needed. One of the objectives of revising these depreciation procedures is to stimulate additional investment in American enterprises. And we conclude this particular section of our brief, with certain recommended modifications of this law, or of these sections of the law which would be beneficial to the hotel industry, and would give them an opportunity to rehabilitate their properties, make a further investment to the general welfare of the business, and to the traveling public as a whole.

The CHAIRMAN. Thank you very much indeed.

Mr. Rolla D. Campbell.

(The prepared statement of Mr. Arthur J. Packard follows:)

STATEMENT OF ARTHUR J. PACKARD ON H. R. 8300

Mr. Chairman and gentlemen of the committee, I am Arthur J. Packard, president, Packard Hotels Co., with headquarters in Mount Vernon, Ohio. I am chairman of the governmental affairs committee of the American Hotel Association.

The hotel industry wants to take this opportunity to congratulate everyone who has played a part in the development of H. R. 8300 as it stands today. We do feel that it goes a long way toward removing long-standing inequities, and closes numerous loopholes in the revenue code.

Similarly, we do feel that, in most respects, Congress did a good job in passage of the excise-tax amendments 3 weeks ago. Our industry, together with all segments of American business, and the public at large, will profit from the careful deliberations of the Congress. There was only one instance in the items which meant the most to the hotel business, where factual evidence was swept aside. We regretted deeply the fact that when your committee bill reached the floor of the Senate, that body declined to reduce the 20-percent tax on entertainment rooms in hotels, even though the Treasury's own figures reveal that that levy has long since passed the point of diminishing returns. Convenience rule

We do want to acknowledge gratefully the action of the House in spelling out section 119 so that a problem of long standing in our business shall be largely resolved. This is the stipulation regarding the placing of evaluation on meals and lodging for withholding-tax purposes.

Net operating loss deduction

We are also appreciative of the inclusion of section 172, which proposes to extend the net operating loss carryback period to 2 years, instead of 1 year, as at present. This postwar readjustment period has been a difficult one for hotels, and it is quite likely that this provision will prove extremely helpful to many individual properties.

Delay of effective date of subchapter C

Subtitle A of the Internal Revenue Code contains chapter 1 which in turn includes subchapter C, relating to corporate distribution and adjustments. This subchapter is designed to eliminate much of the confusion now present in existing law with respect to corporate reorganizations generally. The hotel industry generally was refinanced in the 1930's. Many of these refinancing measures still affect a number of hotels today with the result that the hotel industry may be materially affected by subchapter C. The extent of this effect cannot be gaged in the brief time that is available for the study of subchapter C. Moreover, even a brief study of this subchapter reveals certain conflicts that might result

in more confusion than is present in the existing law. As an example, IRC section 312 (g) of the proposed law states that the terms defined in sections 312 (b) to (f) inclusive shall be applicable only with respect to subchapter C. However, section 275 of the preceding subchapter B refers to section 312 (d) for definitions. This seems to make section 275 inoperative by reason of the exclusive application of section 312 (g). There are a number of other apparent conflicts in subchapter C which cannot be positively stated but which seem to require extensive study before this subchapter is enacted into law.

The American Hotel Association recommends that subchapter C, of chapter 1, subtitle A, be eliminated from the proposed code and the existing law be permitted to stand until the proposed subchapter C is given further study. As an alternative, it is recommended that subchapter C be made effective not earlier than July 1, 1955. If this later date is adopted, adequate time will be available for Congress to clear up apparent conflicts in subchapter C when it meets in 1955.

Tax-exempt establishments

For several years now spokesmen for the hotel industry have been urging the Congress to close some of the loopholes in section 101 of the existing revenue code. Congress did make a beginning in this direction in the 1950 Revenue Act, when it exposed to Federal income-tax liability the proceeds from unrelated business activities of certain categories of 101 organizations. I do stress for you today, however, gentlemen, that one of the most serious inequities remaining in the code reposes in this section. And unfortunately H. R. 8300, as it stands today, fails to tighten further these provisions.

I hold in my hand the type of exhibits which we have been assembling for several years and turning over to appropriate authorities. These have been filed with congressional committees and with the Internal Revenue Service. They reveal an increasing volume of instances where tax-exempt establishments are catering to the general public, for profit, and serving luncheons, dinners, receptions, etc. This provides eminently unfair competition to taxpaying establishments. There are even some of these organizations today which are providing transient rooms for the general public, operating as hotels. This certainly goes beyond the original concept of services to members for which these organizations were initially granted a tax-exempt status.

The Treasury Department has estimated that 5.5 percent of all consumer expenditures are channeled into business-type receipts of exempt organizations. If this measurement is applicable in food service, it means that $550 million worth of hotel and restaurant business is avoiding Federal income tax.

These tax-exempt organizations have a terrific advantage over us. First, they can undersell us considerably because they are not subject to Federal income tax which all private corporations must pay. Second, operating in the guise of organizations which cater only to their members, they frequently solicit public groups to have dances and other forms of entertainment without payment of cabaret or admissions tax, and so forth. It is essential that Congress provide the Internal Revenue Service with authority and funds which will permit a better nolicing job in this field.

In 1950 the Congress stipulated that certain 101 organizations were to be subjected to Federal income tax. These were 101 (1), (6), (7), and (14). (All references are to existing code sections.) Now let me ask the committee a question. Is it your interpretation of the code that 101 organizations not covered by the 1950 amendments, such as a 101 (3) organization, can be deprived of its tax-exempt status if found to be engaging repeatedly in catering to public functions, for a profit, in fields which are entirely unrelated to the purposes for which it was originally chartered? As an illustration of what I mean, we will say there is a fraternal organization, classified as 101 (3), which today is neither susceptible to income-tax returns, nor is it obliged to file information returns. Where one such establishment caters to public functions every day in the week for profit, it seems incredible that such a practice can be continued without the Treasury Department advising that establishment that it has lost its tax-exempt status by repeatedly benefiting from this unrelated income. For instance, it is just such an organization as we are describing where Commissioner Andrews himself is to be the principal speaker in a Midwest city this week. It is expected that an attendance of 600 persons will be present.

The meeting has no possible bearing upon the purposes for which that fraternal organization was chartered, and incidentally, the State itself is already imposing certain real-estate taxes on that particular establishment, growing out of a

finding that a large part of its activities were in fields unrelated to the purposes for which it was chartered. But the group goes merrily along, year after year, doing an annual volume estimated to be well in excess of $100,000. How much longer shall the taxpaying establishments of the country be required to endure that degree of inequity? We are willing, gentlemen, to face up to any kind of competition those groups want to give us, if they wish to be in the food business. But we do insist that when they cater to public groups, for profit, they should be exposed to Federal income tax on such profits, the same as we are.

To that end, may we propose two amendments. First, may we propose that you consider including in the present bill a provision amending title 26, section 54 (f), of the present code, by striking section (5). The effect of this amendment would be to require information returns from fraternal beneficiary societies now exempt under section 101 (3). Section 54 (f) (5) now provides that no information return need be filed by those groups. We feel very sure that if the Treasury began to assemble information returns from these fraternal beneficiary groups it would soon learn what a prodigious volume of unrelated business activities are annually experienced.

Then may we respectfully suggest that you amend title 26, section 421 (b) (1) (A) in the bill to read, "The taxes imposed by subsection (a) (1) shall apply in the case of any organization (other than a church, a convention, or association of churches, or a trust described in paragraph (2)) which is exempt, except as provided in this supplement, from taxation under this chapter by reason of paragraphs (1), (3), (6), (7), (8), (9), or (10) of section 101. Such taxes shall also apply in the case of a corporation described in section 101 (14) if the income is payable to an organization which itself is subject to the tax imposed by subsection (a) or to a church or to a convention or association of churches." Such an amendment would expose to Federal income tax the following categories of organizations: 101 (3), (8), (9), and (10).

Depreciation

In behalf of the hotel industry we would like to offer a few remarks on proposed code section 167, relating to depreciation. The typical hotel of America was built in the 1920's and consequently today is 25 to 30 years old. Considering that the average useful life of motel structures is about 40 years, this means that the great majority of American hotels today have a remaining lifetime of 10 to 15 years, possibly in some cases 20 years. During the 14-year period of 1939 to 1953, the motor courts of this country increased from 13,500 to over 50,000-an increase of 370 percent. During the same time there was very little hotel construction with the result that hotels increased in numbers by less than 10 percent. However, many thousands of hotels are in direct competition with motor courts and one advantage of the motor courts is their newness. A number of hotels have been renovated and improved in appearance and, by reason of the probable benefits of the declining balance method of depreciation, more hotels may see fit to invest in renovation and improvement. Therefore, it seems appropriate that we should request some means be devised of assuring two things to hotels:

First. That renovation and improvement taking place after January 1, 1954, be permitted to be depreciated by use of the declining balance method of depreciation described in code section 167 (b) (2). We assume that this is covered by the use of the term "reconstruction" in section 167 (c) (1).

Second. That the renovation and improvement of older hotel structures will not be used as a reason to extend the life of hotels for depreciation purposes. There is nothing in the proposed code that assures this to hotels.

One of the objectives of revising depreciation measures of the Internal Revenue Code is to stimulate additional investment in American enterprises. The stimulation is afforded by permitting higher writeoffs in the early years of the life of assets and we believe that this point has been so thoroughly covered in testimony and explanations that we need not dwell further on it. However, the hotel industry, like other industries of this country, would not be so encouraged if the result of investment in renovation and improvements of property results in action by the Secretary or his delegates to extend the life of such property. Manifestly, this would remove a great deal of the incentive for reinvestment in existing property and would shift the advantage to investors in completely new property. We don't believe that this is the intention of Congress.

A careful study of the proposed code indicates that only code section 167 (e) respecting dispute as to useful life and rate, is the only section that provides any protection at all against indiscriminate extensions of useful life of prop

erty. Even this section is not directly on the point of concern to the hotel industry and to other indusries in a similar position. There is no real guidance for the investor in the proposed code that will encourage him to renovate and improve existing property without fear that such will be used as an excuse for extension of useful life. To this end, it is believed that a mutual service will be rendered if the following addition to the proposed code be made and known as section 167 (e) (3), as follows:

"The burden of responsibility for proving that the useful life of property should be extended shall fall upon the Secretary and his delegates whenever in any taxable year expenditures in the nature of capitalized renovation and improvement are made to existing depreciable assets in amounts not exceeding 10 percent of the original basis for depreciation."

Such a provision in the proposed code, together with the other proposed provisions, would provide the very best guaranty that American hotels and other industries would give the utmost consideration to the renovation and improvement of their properties.

Before leaving the subject of depreciation, we feel obliged to make one other observation respecting code section 167 (c). Subsection (c) (2) denies the use of declining balance depreciation to hotels that were built before December 31, 1953, but which have been acquired by new owners subsequent to that date. This is a severe penalty to place upon investors in hotels that acquired their interests subsequent to December 31, 1953. Equitable considerations would seem to require that section 167 (c) (2) be amended by striking out any reference to "original use" of property acquired after December 31, 1953. Subsection (c) (1) permits the use of declining balance depreciation only to property constructed after December 31, 1953, or to such portion as is completed after that date. This would appear to impose a tedious mathematical problem on investors of property that was in process of completion on that date. One could conceive of a situation where one-half of a building completed in 1953 had to be depreciated on one basis and the other half, completed in 1954, could be depreciated on another basis. It seems therefore that this should be obviated by having section 167 (c) (1) read "the construction, reconstruction, or erection of which is completed after December 31, 1953," and eliminate the balance of the presently stated section.

STATEMENT OF ROLLA D. CAMPBELL, NATIONAL COUNCIL OF COAL LESSORS, INC.

The CHAIRMAN. Identify yourself to the reporter.

Mr. CAMPBELL. Mr. Chairman and gentlemen of the committee, my name is Rolla D. Campbell, of Huntington, W. Va. I am a lawyer. I am president of a company which owns coal lands and leases them to operating companies. I am vice president of National Council of Coal Lessors, Inc., and was one of its organizers several years ago.

I wish to compliment those persons who have worked on preparing H. R. 8300 and the accompanying report. The bill and report are monumental and they embody many long-needed improvements in the code. I hope that the bill will be reported out by this committee and passed at this session.

However, it is inevitable that in a complex work of this type some corrections are needed. It is my purpose today to call your attention to some of the changes made by the bill and to some needed corrections in the bill in which the members of the National Council of Coal Lessors are particularly interested.

First, I wish to direct your attention to sections 631 (b) and 272 (b) of the bill. These sections amend sections 117 (j) and 117 (k) (2) of the present code, which accord capital-gains treatment to gains from coal and timber royalties.

We are not interested in the changes proposed with respect to timber royalties. While most of the members of the National Council of