(4) Where contributions in any year are in excess of the maximum deduction, the excess should be carried forward to future years.

(5) Partners' salaries should be reported as if received at the same time as their profits in the firm are deemed distributable to them.

(6) The declining balance method of depreciation should be allowable for all depreciable assets, old and new, original and secondhand, and whether acquired before or after December 31, 1953.

When H. R. 8300 first saw the light of day, I wrote to Congressman Reed on behalf of our committee and complimented him and his technical experts on their accomplishment. That still goes. I am happy to report to you that of the 51 recommendations we made to the Ways and Means Committee last year, over two-thirds were adopted in whole or in part. The fact that we now have 213 recommendations in connection with H. R. 8300 merely attests to the complexity and range of the problems embraced by the bill.

We do think that considering the tremendous importance of a bill of this sort, the Congress, and the technical people on both sides of the table, should have adequate opportunity to subject a bill to critical analysis before it is catapulted into law. We urge your committee to proceed in that way in this and future major tax legislation.

Our own committee will be glad to hold itself available for further sessions with your technical experts to any extent that they feel we can be of help.

Let me again express the gratitude of the American Institute of Accountants for giving us the opportunity to present our views, both to you and your technical experts.

Mr. Chairman, if you will permit, I would like to place in the record, in extension of my testimony, a complete list of our recommendations. The CHAIRMAN. Thank you very much. It will be placed in the record.

(The recommendations referred to follow :)

RECOMMENDATIONS ON INCOME TAXES IN RESPECT TO H. R. 8300, COMMITTEE ON FEDERAL TAXATION, AMERICAN INSTITUTE OF ACCOUNTANTS, NEW YORK 16, N. Y.

1. Section 2 (b): Is there a loophole that permits an affluent father to support a married daughter whose husband is capable of supporting the daughter, but who refrains from doing so because of the greater advantage to the father, taxwise, in establishing head-of-the-family status where the daughter and husband do not file joint returns?

2. Section 34: Dividends from stock insurance companies subject to the regular corporate tax should be eligible for the dividend exclusion, credit, and deduction allowed on corporate dividends.

3. Section 34 (a) (1): For ease in administration and application, the dividend credit should be applied to dividends received after December 31, 1953, and the percentage credits in 1954 and 1955 should be scaled down accordingly. 4. Section 34 (e): A possible abuse of the dividend credit exists through the purchase of stock just before the dividend is paid and the sale immediately thereafter in order to use the credit as an offset to any short-term gain income that the taxpayer may have. A possible solution is to condition the credit upon a prescribed holding period before and after the stock goes ex-dividend.

5. Section 34 (e): Though not related to the credit, a similar tax saving device exists in going short the stock just before dividend payment, and covering right after. A possible solution is to treat the dividend on the short stock as part of the cost of the covering stock rather than as an ordinary deduction.

6. Section 34 (e): The dividend credit also sets up a tax-saving impetus in borrowing to buy stock. Assuming the interest deduction and dividend income offset each other, the taxpayer is ahead by the amount of the dividend credit.

7. Section 62 (2) (D): This provision, relating to trade or business expenses, should apply to all outside representatives of an employer rather than just salesmen.

8. Section 76: Discharge of indebtedness should not result in income greater than amount of solvency.

9. Section 76 (a) (1): This provision, relating to discharge of indebtedness, should include payment in poverty.

10. Section 76 (b): The treatment of discharge of indebtedness should not be conditioned upon how the creditor treated the item.

11. Section 101 (a): There should be an affirmative provision that exemption of life-insurance proceeds does not apply to an outside purchaser of the insurance policy.

12. Section 101 (b): In view of the intent to remove the restrictions in the 1939 code, this provision with respect to the $5,000 exclusion should be made effective in respect to deaths occurring after December 31, 1953.

13. Section 101 (b) (2): It should be made clear that the $5,000 payment is to be considered as a deduction by the employer.

14. Section 164 (d): Reference "real" property should be deleted throughout so that the apportionment will apply to any property taxes.

15. Section 164 (d) (1): The apportionment of taxes should apply not only to sales but also to other dispositions, such as exchanges.

16. Section 165 (e): The loss should be allowed in either the year of theft or the year of discovery. Otherwise the taxpayer may, as a result of the theft, find himself insolvent in the year of discovery.

17. Section 165 (g) (1): The deduction for worthlessness should be made independent of the possible workings of section 267 where the securities involved are those of a related taxpayer. (This correspondingly applies to section 166 (d) (1) (B).)

18. Section 166 (f): A foreclosure should be treated as a closed transaction with the fair market value of the property repossessed treated as a reduction of the amount of the debt.

19. Section 167 (b) (2): The proposed depreciation rules would entail complex schedules and computations of depreciation for those desiring the decliningbalance method. Assets would have to be classified between those acquired before December 31, 1953, and those after. Those after would in turn have to be classified between original user and secondhand. It will also be necessary to identify construction before and after December 1953 and related cost. A practical approach is to permit the declining-balance method to the net balance of all depreciable assets at December 31, 1953, at double the normal life rates, and to all acquisitions thereafter.

20. Section 167 (b) (2): Attention is called to the fact that by reason of the elimination of the factor of salvage value in the computation of the decliningbalance method, the resulting initial amount of depreciation may be considerably more than twice what is allowed under the straight-line method. The situation becomes accentuated in those cases where assets have a very high salvage value. 21. Section 167 (b) (3): The limitation of the amount of depreciation under other methods to the aggregate allowable under the declining-balance method should be removed. The limitation can, at a particular point of time, destroy the effectiveness of such an approved depreciation method as the unit of production. Furthermore, it is not clear whether the limitation embraces the restrictions of section 167 (c). If it does and if there is no construction or original user acquisition after December 31, 1953, nothing will be allowable to the user of a method other than the straight-line method.

22. Section 167 (c) (1): In any event, the declining balance method should apply to the entire construction, etc., if completed after December 31, 1953.

23. Section 167 (c) (2): Eliminate the original user concept. Where property is acquired after December 31, 1953, from a related taxpayer the acquisition date should be deemed the date of first acquisition by related taxpayers.

24. Section 167 (e): 1. The elimination of depreciation rate disputes by machanical arrangement such as the 10 percent margain test is unsatisfactory. The present policy, under the Commissioner's recent directive, is effectively solving, on an administrative basis, the dispute area concerning depreciation. It should be left that way.

2. As an alternative, if a differential must be provided by statute, a 25 percent differential rather than 10 percent would be nearer to the practical area of difference.

25. Section 170: Charitable contributions in kind should be treated as a sale or exchange at fair market value to avoid inordinate tax benefit or inequity. This should be made effective from the date of enactment of the new bill.

26. Section 170: Contributions in excess of prescribed limits should be allowed to be carried forward.

27. Section 171: The converse of the premium on tax-free bonds should apply to a discount. A taxpayer should be permitted to increase his basis by a proration of the discount to maturity. At present a capital-gains tax can be levied on what is really part of tax-free interest.

28. Section 171 (b): The 3-year call provision merely sets up another arbitrary criterion and does not deal effectively with the loophole. The premium should, in the first instance, be amortizable from date of acquisition of the bond to date of maturity. In the event of an actual call before maturity, the unamortized premium should be allowed as a deduction in that year.

29. Section 172: The effective date of the net-operating-loss provision will create a distortion for fiscal-year taxpayers. For example, companies on a November 30 fiscal year will not be able to apply the 2-year carryback in respect to its operations for the 11 months in 1954. This should be corrected in the same way as was recently done in the Technical Change Act in respect to 1947 and 1948 fiscal years, that is, to allow a pro rata computation under the 1939 and 1954 codes based on the number of months in 1953 and 1954. (This same principle should apply throughout the code. There should be no undue advantage or disadvantage in respect to taxpayers on a fiscal year. Some of the sections to which this applies are sections 174 (a) (2), 175 (d) (1), 248 (c), 267 (d), and 462.)

30. Section 172 (d) (5): The dividend and other deductions in part VIII and in section 922 should be permitted to stand in the loss year and the carryback and carryforward years.

31. Section 174 (b) (1): The parenthetical material in the last sentence, relating to benefits from research should be eliminated. There may never be benefits realized from the research, and establishing time or extent of abandonment may be impossible.

32. Section 174 (b) (2): It should be made clear what the status is of undeducted research and experimental expenditures of prior years.

33. Section 213 (b): Eliminate the separate limitation on medicine and drug costs. It sets up a difficult allocation and computation problem that is hardly worthwhile for the amounts involved.

34. Section 213 (d) (2): The limitation on the deduction of expenses of the last illness should be removed. The expenses of the last illness should be deductible for both income- and estate-tax purposes just as if the amount had been paid by the decedent.

35. Section 214 (a) The words "during such year" should be deleted. Otherwise there is an unnecessary complication for an expense of child care which is ordinarily on a cash basis.

36. Section 243: The deduction on intercorporate dividends should be 100 percent.

37. Section 243: Since in the case of dealers in securities stocks are part of their inventory, no dividend deduction or credit should be allowed except for dividends on stock held for investment account.

38. Section 248: The deduction for organizational expenditures should be mandatory rather than elective.

39. Section 248: This provision, relating to organizational expenses, should be expanded to include reorganization, registration, and stock-listing costs.

40. Section 267 (a) (2) (A): If the amount accrued is not paid within 21⁄2 months after the close of the year of accrual, the deduction should nevertheless be allowed if the related party reports the item as income either in the year of accrual or the succeeding year.

41. Section 267 (b) (9): The bill should define what is meant by control of a charitable organization. The approach in section 503 (c) might provide a guide.

42. Section 267 (d): The basis for determining gain or loss to the transferee should be the same as the basis to the transferor. This should also apply to the holding period.

43. Section 272 (a): Eliminate the provision relating to certain administrative and other expenses in connection with timber cut. The accounting segregations and computations that will be involved are most difficult if not impossible.

Furthermore, it is not clear why all the expenses are deductible while the timber is standing and become nondeductible when the timber is cut.

44. Section 275: 1. This section, dealing with the disallowance of interest on certain debts and securities, should be eliminated.

2. In the alternative the section should be made effective only for issues after enactment. If the section is retained then regardless of the time of issue, the credits, deductions and exclusions of section 34 (a), 116, and 243 (a) should apply.

45. Section 302 (a): Where stock redeemed is treated as the distribution of a taxable dividend the basis of such stock should be added to the basis of any other stock owned by the person in that corporation. If there is no stock then a capital loss should be allowed in respect of the basis of the stock redeemed. Otherwise the basis completely vanishes. (This correspondingly applies to sec. 304.)

46. Section 302 (c): The 10-year period applicable to reacquisitions provided by this section should be changed to 5 years.

47. Section 302 (c) (2) (A): The parenthetical insert defining the type of interest in a corporation should be removed. It is unnecessarily restrictive. On the other hand, the word "interest" should be broadened to include the type of interest defined in sections 544 (a) (3) and 544 (b), namely, options and convertible securities.

48. Section 302 (c) (2) (B): The reopening of closed years in the event that redemption is later held to be a dividend should also be applied for changes in income caused by changes in basis calculations.

49. Section 302 (c) (2) (B): This provision, with respect to acquisition of an interest in the corporation should exclude reacquisitions through foreclosure. On the other hand, as recommended for section 302 (c) (2) (A), reacquisitions: through options and convertible securities should be included.

50. Section 303 (b) (1) (B): The additional period of time within which redemption of stock to pay death taxes may take place should not be restricted to the period before the Tax Court but should include any court.

51. Section 304: An exception from treatment as a dividend should be pro-i vided for redemptions to pay estate tax under section 303.

52. Section 305 (b): It is not clear whether an exchange of bonds for stock would be tax free if part of the stock was to pay for interest in arrears.

53. 305 (c) (1) (A): 1. Since a straight stock dividend would have been non-' taxable, a distribution in this form should be nontaxable.

2. In any event, limit the measure of the dividend to the excess of the fair market value of the dividend stock and the related nonparticipating stock after the distribution over the basis of the related nonparticipating stock before the' distribution, but not in excess of the amount of arrearage of the amount of earnings or profits of the distributing corporation.

54. Section 305 (c) (1) (B): This provision with respect to distributions by corporations should be extended to cover options payable either in stock or "securities." Otherwise, an option to take stock or cash is taxable as a dividend, whereas the equivalent option to take stock or bonds is not taxable.

55. Section 306: The old rule on boot should be restored. It worked out a sound economic result. The proposed rule of first matching principle amount of securities against principal amount does not attain the same result.

56. Section 306 (b) (2): The gain or loss involved in a disproportionate distribution should be classified as a gain or loss resulting from a sale or exchange. (This correspondingly applies to section 306 (d) (2) (A) and (B).)

57. Section 306 (c) (2): Provision should be made for stock with no par, no stated value, and no call price. The amount the stock is entitled to upon liquidation could be the criterion. (This correspondingly applies to secs. 306 (c) (3) and 310 (c).)

58. Section 306 (d): This provision as to exchanges for securities, etc., is unrealistic if based on very minor retention of stock. As a minimum, the 1 percent rule in section 302 (a) (5) should be applied to distinguish the application of section 306 (d) from section 306 (b).

59. Section 307 (b) (1): As a further simplification, no allocation of basis should be required in connection with stock dividends under the 15 percent limitation.

60. Section 308 (b): The measure of imputed gain on LIFO inventories should be the assumed realization by the corporation of the fair market value of the inventory. Otherwise it may be difficult if not impossible to determine what the inventory would have been on a LIFO basis.

61. Section 308 (c): It should be specified that the gain or loss recognized to the distributing corporation is classified as a gain or loss resulting from a sale or exchange.

62. Section 309: The remedy for the "bail out" is to tax the person bailing out. To tax the corporation makes minority stockholders bear the brunt of the tax saving of a particular stockholder. Furthermore, the 85 percent tax is easily defeated by a sale of the stock to a proper buyer such as a subsidiary company of the stockholder, or a charity, or an insurance company that will hold the stock for the 10-year period. The net result is that the tax is likely to serve merely as a trap for the unwary. The remedy is to tax the "bail out" as ordinary income. The identification of the "bail out" can be along the lines prescribed in the bill: In no event should the "bail out" category attach to stock that had been originally issued for value or stock that had been previously taxed as a dividend.

63. Section 309 (a): The 10-year period provided by this section should be changed to 5 years. The 5-year period shall in any event apply to distributions prior to the effective date of the bill to accord with administrative practice.

64. Section 309 (a) (1): This provision as to redemption of nonparticipating stock should be deemed complied with not only by concurrent redemption but also an antecedent redemption of the related participating stock.

65. Section 309 (a) (2): Extend the provision so as to cover concurrent redemption of nonparticipating stock on which a preferred stock dividend had been issued.

66. Section 309 (a) (3): The 105-percent test should apply not only to "property" but also "securities" for which the redeemed stock was issued.

67. Section 309 (b): Is this provision, relating to redemptions of nonparticipating stock, intended to apply to a case where, in a section 352 or 353 transaction, nonparticipating stock is exchanged, tax free for participating stock, and the participating stock is later redeemed?

68. Section 309 (c): The provision as to date of issuance should apply only to nonparticipating stock issued after the effective date of the provision. If stock acquired before then is, after that date, exchanged for other stock in a nontaxable transaction, the stock acquired shall take the issue date of the stock given up. 69. Section 311 (b): There should be added to the 50-percent value requirement the additional requirement that there be ownership of more than 50 percent of the combined voting power of all classes of stock.

70. Section 311 (c): 1. A beneficiary should be deemed to own only his pro rata part of the interest of the trust or estate just as is done in the case of partnerships, and a contingent or future beneficiary should be deemed to own no part.

2. In any event, the sole test should be the interest in the income, and because of the difficulties of computation the actuarial test should be removed.

71. Section 312 (a) (1) (B): The separate segregation of the current year's earnings should be eliminated and the parenthetical provision should be made part of (A). The current-year test is a hangover from the undistributed profits tax that has long since been repealed.

72. Section 312 (c): 1. Instead of the word "securities," it would be more clarifying to use a word such as "indebtedness." The definition should include subdivisions (1), (2), and (3). The definition should affirmatively require that there be a fixed date or dates for the payment of principal.

2. In the alternative, if any distinction in this subchapter is continued in reference to publicly held corporations, subdivisions (1), (2), and (3) should not apply to such corporations.

73. Section 312 (c): Subdivisions (1), (2), and (3) should not apply to securities issued as a dividend. Otherwise there is a possible loophole in the taxfree distribution of a subordinated debt that the 25-percent stockholder then sells to an outsider. The selling stockholder would realize capital gain. In the bands of the buyer, the subordinated debt becomes regular debt with interest fully deductible and redemption free of dividend status.

74. Section 312 (d): Nonparticipating stock should be defined as stock that is limited in its interest both as to earnings and distribution of assets. Participating stock should be defined as "all other stock" to insure that there will always be a participating stock.

75. Section 312 (f): The definition of property should be extended to include open-account indebtedness. Otherwise that item is not provided for.

76. Section 331 (d) (2): Appreciated inventory should be dealt with as suggested for section 308 (b), namely, as if realized by the liquidating corporation. The provision as written is inequitable and unrealistic. What would be the