direction. The one thing I would like to point out to the committee at this time, as far as we have been able to ascertain, there is no actual revenue loss from this bill. It does specifically spell out the exemption that regulating investment companies will get although we are presently according them that treatment. For this reason the District does not object to the bill although we would rather see it included in a general conformity bill.

Senator EAGLETON. Thank you very much, sir. I appreciate your coming.

Mr. Bernard J. Nees, president, Washington Mutual Investors Fund, Inc.

STATEMENT OF BERNARD J. NEES, PRESIDENT, WASHINGTON MUTUAL INVESTORS FUND, INC.; ACCOMPANIED BY DON A. CHRISTENSEN, PRESIDENT, GREATER WASHINGTON INVESTORS, INC.; AND JOHN H. QUINN, ESQ.; ZUCKERT, SCOUTT & ROSENBERGER

Mr. NEES. Mr. Chairman, I am Bernard J. Nees, president, Washington Mutual Investors Fund, Inc., appearing on behalf of several regulated investment companies located in the District of Columbia. Seated with me is Don A. Christensen, president of Greater Washington Investors Inc., a closed-end venture capital company. These companies have agreed to present their views through me to conserve the committee's time, but each of us is prepared to answer any questions which you may have.

H.R. 15381 concerns the taxation of regulated investment companies located in the District of Columbia. Regulated investment companies can be divided into two types-mutual funds and closed-end investment companies. Both types aggregate the capital of small investors for the purpose of investing in other companies, and both types are taxed under the same provisions of the Federal Internal Revenue Code.

The need for this legislation arises from the passage of the District of Columbia Revenue Act of 1969. That act conformed the provisions of the District of Columbia Income and Franchise Tax Act to the provisions of the Federal Internal Revenue Code with respect to capital gains and losses generally. Although the 1969 act did not explicitly accord to regulated investment companies the treatment which is available under the Federal law, the District of Columbia government does interpret the act to accord with the Federal treatments.

The Federal Internal Revenue Code provides that the capital gains and investment income of regulated investment companies are taxed either to the company or to its shareholders. The underlying purpose of the conduit treatment is to avoid double taxation of capital gains and dividends, for example, (1) taxation of the regulated investment company on gains from the sale of securities owned by it; and (2) taxation of the shareholder of the regulated investment company on the distributions of such gains to him. Many States. provide for conduit treatment of regulated investment companies. H.R. 15381 generally would conform the District taxation of regulated investment companies to the Federal method. The bill as passed by

the House would provide that a District shareholder would pay District income tax on his share of the capital gains of the companies. The result is to provide explicitly for the same general treatment of regulated investment companies in the District as occurs under the Federal Internal Revenue Code.

It is essential that the regulated investment companies located in the District of Columbia be assured that their income taxation by the District will conform to the Federal method. Accordingly, on behalf of the regulated investment companies located in the District, I urge enactment of H.R. 15381 without further amendment. Thank you.

Senator EAGLETON. Do any of the gentlemen accompanying you desire to add anything to your statement?

Mr. NEES. Mr. Christensen?

Mr. Quinn?

(Nodded negatively.)

Senator EAGLETON. Thank you very much.

Mr. Joseph D. Riviere, Riviere Realty Trust.

STATEMENT OF JOSEPH D. RIVIERE, RIVIERE REALTY TRUST

Mr. RIVIERE. Mr. Chairman, I am Joseph D. Riviere of the Riviere Realty Trust. Our company is a common law trust organized under District of Columbia law in November 1963. The trust has been selling its shares to the public since February 1964, and we presently have more than 1,300 stockholders, the majority of whom reside in Maryland, Virginia, and the District of Columbia. The moneys the trust receives through the sale of its securities have been invested in income-producing real estate, apartments, office buildings, and other properties located in the District of Columbia and elsewhere. Supporting our position today are representatives of other District of Columbia trusts-Washington Real Estate Investment Trust, Columbia Realty Trust, and Federal Realty Investment Trust-with shareholders, mostly in this area, numbering about 6,000. In 1960, Congress enacted Public Law 86-779, which, in the words of the conference report "amends the Internal Revenue Code of 1954 to provide substantially the same tax treatment for real estate investment trusts as present law provides for regulated investment companies." Regulated investment companies, commonly known as mutual funds, are concerns in which individuals desiring to invest in stocks and securities pool their funds by buying shares, and the investment company in turn invests these resources in stocks and securities of operating companies. Real estate trusts also take individuals' pooled funds but specialize in investments in real estate and real estate mortgages.

For many years prior to 1960, regulated investment companies which distributed 90 percent or more of their ordinary income were taxed only on their retained earnings. The distributed earnings are taxed only to the shareholders. The 1960 amendment to the Revenue Code accorded this same type of tax treatment to real estate investment trusts, with respect to taxable earnings of those trusts beginning after December 31, 1960. Congress made it abundantly clear that the amendment to the law was designed to secure for real estate trust shareholders the same type of tax treatment that they would enjoy were they investors in regulated companies.

Your committee believes that the quality of tax treatment between the beneficiaries of real estate investment trusts and the shareholders of regulated investment companies is desirable since in both cases the methods of investment can secure advantages normally available only to those with larger resources. These advantages include the spreading of the risk of loss by the greater diversification of investment which can be secured through the pooling arrangements; the opportunity to secure the benefits of expert investment counsel; and the means of collectively financing projects which the investors could not undertake singly.

In addition to providing equality of tax treatment between the trust beneficiaries and the investment company shareholders your committee believes it is also desirable to remove taxation to the extent possible as a factor in determining the relative size of investments in stocks and securities on one hand, and real estate equities and mortgages on the other. This is particularly important at the present time because of the shortage of private capital and mortgage money for individual homes, apartment houses, office buildings, factories, and hotels. At the present time the financing of these real estate equities and mortgages is dependent largely on Governmentguaranteed money, and investments by special groups, such as insurance companies and pension trusts.

In most cases, the Federal practice is followed, and mutual funds and real estate trusts do not themselves pay income taxes but are treated as conduits for the benefit of shareholders. District of Columbia law, however, taxes both the entity and the shareholder. If money were not paid in income taxes in the District of Columbia by law, those same funds would be distributed to shareholders of mutual funds and real estate trusts as dividends. The House passed bill (H.R. 15381) now before this committee amends the District of Columbia income tax law to correspond with the provisions of the U.S. Internal Revenue Code. As the manager of the House bill, Mr Fuqua stated:

Its purpose is to make clear that investment companies domiciled in the District of Columbia will be accorded treatment under the laws of the District of Columbia similar to that which they are accorded under federal law; namely the flowthrough or conduit treatment in connection with their distribution of dividends to their shareholders.

Mr. Fuqua further stated, as did the Committee Report 91-847, that if the conduit treatment was held to be unavailable to mutual funds, the net effect would be to cause triple taxation, that is, taxation by the corporation paying dividends to the mutual funds, taxation if the mutual fund itself were taxed, and then taxation by the shareholder.

We strongly support the principle that mutual funds and real estate investment trusts should be treated in the District of Columbia as they are in most States and be allowed to distribute their dividends to their shareholders without the burden of an added local tax. The House bill, however, changes District of Columbia tax law to Federal practice only in the case of regulated investment companies and does. not extend to real estate trusts. Since the 1960 law made it clear that mutual funds and real estate trusts are to be on the exact same footing taxwise, we urge this committee to amend H.R. 15381 to make clear that both real estate trusts and mutual funds are to be relieved of District of Columbia income taxation.

Senator EAGLETON. Thank you, Mr. Riviere. Since Mr. McCally is still with us I will ask him to supply to the committee in writing the comments of the District government on the proposed amendment that Mr. Riviere has offered to us, as to whether you are for it or against it, and also, what revenue consequences, if any, such amendment would have.

Mr. McCALLY. Senator, do I understand that Mr. Riviere will submit general language to us affecting this?

Senator EAGLETON. I'm going to ask him to submit the general draftsmanship of it. But it is his general proposal that real estate investment trusts be considered along with, or the same as, mutual funds.

Mr. RIVIERE. That's correct. I do have a draft of the proposed amendment. I also wish to mention for the record that what we are talking about is corporate taxes. In the case of these trusts I'm representing, our total corporate taxes last year were less than $11,000. We did pay almost $620,000 in real estate taxes. Of course, if this amendment goes through we will continue to pay real estate taxes, but effect of corporate taxation, I think, is to keep real estate taxes out of the District of Columbia.

Senator EAGLETON. Will you submit that to us to be made part of the record and a Xerox copy to Mr. McCally for his examination, and thereon, the District government's comments?

(The draft of Mr. Riviere's proposed amendment to H.R. 15381 follows:)

(17) REAL ESTATE INVESTMENT TRUSTS.-In the case of a real estate investment trust as defined in section 856 of the Internal Revenue Code of 1954, which meets the requirements of section 857(a) of the Internal Revenue Code of 1954, the dividends paid by the real estate investment trust which qualify for the dividends-paid deduction under section 857(b)(2)(c) and section 857(b)(3)(ii) of the Internal Revenue Code of 1954, including dividends considered as having been paid during the taxable year by reason of section 858 of the Internal Revenue Code of 1954.

SEC. 2. The amendments made by this Act shall apply with respect to taxable years of real estate investment trust beginning after December 31, 1968.

Senator EAGLETON. Are there any other witnesses that desire to be heard on H.R. 15381? If not the hearings on that bill are concluded. Let me say at this time, the reporter will make this a final statement with respect to all of the bills that we are hearing today, that the record on each of these measures will remain open for a period of 2 weeks for any further statements et cetera for any interested witness. That applies to every bill that we are hearing this afternoon.

We will now hear testimony on S. 3905, a bill to authorize the District of Columbia Council to fix the rates charged by the District for water and water services and for sanitary sewer services.

I now place in the record a copy of S. 3905 and the letter of transmittal from the District of Columbia government.

91ST CONGRESS 2D SESSION

S. 3905

IN THE SENATE OF THE UNITED STATES

JUNE 2, 1970

Mr. EAGLETON (by request) introduced the following bill; which was read twice and referred to the Committee on the District of Columbia

A BILL

To authorize the District of Columbia Council to fix the rates charged by the District of Columbia for water and water services and for sanitary sewer services.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That the third sentence of subsection (a) of section 101 of 4 title I of the District of Columbia Public Works Act of 1954 5 (68 Stat. 101), as amended (D.C. Code, sec. 43-1520c 6 (a)), is amended to read as follows:

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II

"In computing the charge for the consumption of water in excess of the minimum amount allowed for metered service, if such charge is for a period beginning prior to a change in water rates and ending thereafter,