cated to the acquiring corporation and, where the acquisition occurs in an excessprofits-tax year, the amount of the adjustment should be prorated accordingly. C-13. The definition of "property paid in" for the computation of historical invested capital should include the value of services rendered and the amount of debts liquidated through the issuance of shares of stock or paid in as a contribution to capital.

This section defines property (other than money) previously paid in for stock, or as paid in surplus, or as a contribution to capital as property paid in for the purpose of computing equity invested capital used in arriving at historical invested capital.

That definition should be amended specifically to provide that such "property paid in" includes the value of services rendered and the amount of debts liquidated through the issuance of shares of stock or paid in as contribution to capital. Such a change in the definition would be consistent with the recognized accounting definition of capital and would provide a more equitable means of determining historical invested capital for excess-profits-tax purposes.

C-14. The allocation of credit by a component corporation under section 461 (c) should be required only if the acquiring corporation elects to utilize the amount of the component's credit which would be allocable to it.

Part II grants certain "acquiring corporations" the option to use the base period experience of their predecessors if it is to the successor's advantage. However, the allocation (and consequent reduction) of the credit of the component is mandatory. This constitutes an unjust penalty against the component if the acquiring corporation does not exercise its option to make use of the portion of the credit allocated to it.

The forum recommends that only where the acquiring corporation elects to use the amount of the component's credit available to it should the component be required to allocate the credit.

C-15. Section 462 (j) (2) and 464 (a) (1) (B) should be amended and integrated so as to allow equitable computation of the credit where a newly organized corporation becomes an acquiring corporation in a part II transaction.

Where a new corporation is organized and subsequently becomes an acquiring corporation in a part II transaction, section 462 (j) (2) and section 464 (a) (1) (B) should be applicable only where a portion of the average base period net income and base period capital addition, respectively, are to be used by the acquiring corporation in the year in which the part II transaction occurs. As section 433 (a) (2) requires the excess-profits net income of the acquiring corporation for the short taxable year to be annualized, the acquiring corporation should be allowed the full amount of the excess-profits credit, without any adjustment on account of the proportionate length of the short period.

The forum recommends that such remedial amendment be enacted.

C-16. Where a corporation becomes the successor, in a tax-free reorganization, it should step into the "tax shoes" of the predecessor corporation for all tax purposes.

Under sections 112 and 113 of the code, property acquired by a corporation in a "tax-free" corporate reorganization, liquidation or exchange has the same basis for tax purposes as in the predecessor company. The underlying theory is that the successor should step into the “tax shoes" of the predecessor. This theory, however, has not generally been applied to other tax rights of the predecessor. For example, the Commissioner has not conceded that net operating losses of a predecessor can be carried forward against income of the successor, or vice versa. The commissioner likewise refuses to allow the successor to step into the "tax shoes" of the predecessor regarding pension carryovers and past service credits, capital loss carryovers, excess profits credit carryovers, and many similar situations.

This should be corrected by providing that the successor in such a "tax-free" reorganization succeeds to the tax status and all tax rights of the predecessor under the income and excess profits tax provisions of the code. The corrective amendment should be made applicable retroactively to all taxable years not barred by limitation or closing agreement.

The CHAIRMAN. At this point I have two letters here, one from the R. J. Reynolds Tobacco Co., Winston-Salem, N. C., addressed to me, in which they express opposition to the extension of the excessprofits tax.

Without objection, I would like to make the letter a matter of record at this point.

Here is another one from Laurens Glass Works, Inc., Laurens, S. C. They ask to have their views expressed in the record and if there is no objection, I will place this in the record.

I hear no objection, so it is so ordered. (The two letters follow:)

The Honorable DANIEL A. REED,

LAURENS, S. C. June 3, 1953.

Chairman of the House Ways and Means Committee,

House Office Building, Washington, D. C.

MY DEAR SIR: I wish it were possible for me to come to Washington and appear before the House Ways and Means Committee in regard to the excessprofit tax. However, it is impossible for me to do so at the present; therefore, I would like to submit the following statement on why I am opposed to an extension of the excess-profit tax.

The Laurens Glass Works is a corporation capitalized at $1 million and is engaged in manufacturing glass containers for soft drinks. None of its profits are derived from defense contracts or any other activity connected with the Korean war.

I have been president of the Laurens Glass Works for over 25 years. Our business has progressively increased since it was started in 1910. For example, our gross volume has more than doubled since 1946. This increase illustrates a constant pattern and is not merely a result of postwar prosperity.

Our progress has been due to strictly adhering to sound business principles such as economical and efficient production, maintenance of a high quality product, good salesmanship, and sound conservative corporate financing. I have always advocated and enforced these principles in my organization. However, not only have I been greatly penalized for it by the excess-profit tax, but am now faced with great difficulty in continuing to operate along these well proven lines due to the excess-profit tax.

The difficulty arises thusly: As I have previously stated, our business has more than doubled since 1946 and our profits have increased proportionately thereby increasing our normal corporate tax; however, I want to make it clear that I am not objecting to this normal income tax, but in addition to the normal tax we are heavily burdened with the excess-profit tax. This burden is to such an extent that it has become necessary to borrow money to operate on, and I am unable to make improvements and expansions necessary to take care of our present volume without any consideration for future increases in volume.

I contend that the Federal Government will derive far greater revenue from corporate and individual income taxes if the excess-profits tax is not extended than if it is extended. The basis for my contention is this: The Laurens Glass Works, and other corporations in similar circumstances, without the excess-profits tax, can go ahead with its badly needed improvement and expansion program thereby making more jobs available to individuals and increasing revenue from individual income taxes; and, thereby allowing my corporation to be able to increase its sales and profits resulting in a greater corporate income tax.

In addition to the obvious discriminatory unfairness in the excess-profit tax, I believe I have presented herein sound reasoning as to why the excess-profit tax should not be extended beyond June 30, 1953.

I will greatly appreciate it if you will submit this statement to the House Ways and Means Committee for their consideration. Respectfully yours,

Hon. DANIEL A. REED,

LAURENS GLASS WORKS, INC. E. D. EASTERBY, President. WINSTON-SALEM, N. C., June 2, 1953.

Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C.

DEAR MR. REED: In connection with the hearings being held by the Committee on Ways and Means on the proposal to extend the excess-profits tax from June 30, 1953, to December 31, 1953, we respectfully request that our views as set forth in this letter be considered and that the letter be inserted in the record of the hearings.

We urge that the excess-profits tax not be extended. Our primary objections to the tax are as follows:

1. It is unfair and discriminatory.

2. It results in excessive and unreasonable taxation for those corporations that since the base period, through expansion of business and the exercise of greater efficiency or economy, have increased their earnings.

3. It increases debt.

4. It retards business growth.

5. It causes postponement of expenditures for needed additions and improvements in the physical plant of corporations.

6. It reduces returns to stockholders.

7. It penalizes thrift.

8. It fosters inflation.

In short, as admitted even by those who are advocating extension, the tax not only violates the first basic principle of taxation-fairness-but also is destructive to the national economy.

The reasons underlying the objections to the tax enumerated above have been stated so frequently that it would serve no purpose to repeat them here. We do desire, however, to point out how the discriminatory nature of the tax has penalized our company as against others in our industry.

There is attached hereto a statement setting forth with respect to the 7 cigarette companies that publish figures as to their earnings an analysis for 1952 of their respective incomes subject to Federal taxes, the Federal income tax charged, the Federal excess-profits tax charged or credited, the total of these Federal taxes, the percentage relationship between the Federal taxes charged and the income subject to the charge, and the net earnings after taxes. It will be noted that the Federal tax burden on income subject to tax varied among these 7 companies in the same industry from 48.25 percent to 65.52 percent, substantially all of the difference being due to the excess-profits tax. The heaviest burden, as a percentage of income subject to tax, fell on the company having the least taxable income.

With respect to our company, it will be noted that while our income subject to the tax was some $14.5 million greater than the second company shown, our Federal tax burden, due almost entirely to the excess-profits tax, was of such proportions that our net earnings after taxes were some $2 million less.

Any tax on earnings that result in penalizing a member of an industry to such an extent that its net earnings after taxes are less than those of a competitor having less taxable income is patently inequitable, discriminatory, and violative of all sound principles of taxation.

The sole reason advanced by those who advocate extension of the tax is the need of the Government for revenue. However, the extent to which the tax contributes to the net intake of the Government is questionable.

Without the excess-profits tax, it is highly likely that receipts from other taxes, particularly the normal tax and surtax on individuals and corporations, will be materially increased, perhaps sufficiently to offset any loss in revenue resulting from discontinuing the excess-profits tax. This will result from the tendency to increase dividends, which will be taxable in the hands of the recipi ents, from the elimination of corporate expenditures that are made only because of the confiscatory tax rates, and from the stimulation that business in general will receive as corporate funds are made available for plant additions and improvements that have been deferred due to the excess-profits tax.

Apart from the highly important question of revenues for the Government, there is, however, an even more important consideration-a consideration that touches the foundations of free society. Democratic government succeeds only if those governed are treated justly and fairly. This applies to all governmental activities, including taxation.

The excess-profits tax is admitted by those seeking its extension to be unjust, discriminatory, harmful, and even vicious. With such admitted basic faults, the extension of the tax, even for a relatively short period of time, would violate elementary principles of good government and would establish a precedent that might result in dire consequences for free government. Governmental policy in taxation, as well as in all other activities, should not be permitted to be determined on the basis of expediency but rather on principles of honesty and justice.

In the interest of justice, sound economy, and good government, the excessprofits tax should not be extended.

Respectfully,

R. J. REYNOLDS TOBACCO Co., By E. A. DARR, President.

Income before Federal taxes on income, Federal income and excess-profits taxes, and net earnings for the year 1952 of 7 companies that manufacture cigarettes and publish financial statements

The CHAIRMAN. The next witness is J. B. Lanterman, controller, American Steel Foundries, Chicago, Ill., appearing as the official representative of the Illinois States Chamber of Commerce.

Please give your name and capacity in which you appear for the benefit of the committee and the record and we will be glad to hear you.

STATEMENT OF J. B. LANTERMAN, CONTROLLER, AMERICAN STEEL FOUNDRIES, CHICAGO, ILL., APPEARING AS THE OFFICIAL REPRESENTATIVE OF THE ILLINOIS STATE CHAMBER OF COMMERCE Mr. LANTERMAN. I am Joseph B. Lanterman, Controller, American Steel Foundries, Chicago, Ill.

In my appearance here, I am representing the Illinois State Chamber of Commerce; this is a membership organization comprised of 11,000 business men from 4,600 companies in various fields of business located throughout Illinois. I am chairman of the chamber's Federal taxation committee which consists of 82 members. The statement that I am presenting is based upon recommendations prepared by that committee and approved by the chamber's board of directors.

We have taken active interest and concern in the excess profits tax problem ever since enactment of the measure in World War II. Among other things, we made intensive study of the difficulties that taxpayers had with the application of relief section 722 and made a number of basic recommendations in conferences with Mr. Colin Stam and others for the better administration of that section.

The recommendations that we have in respect to the present excessprofits tax may be stated very simply:

We strongly urge that this tax be allowed to expire on the scheduled date of June 30, 1953. So that there will be no misunderstanding of our viewpoints about this tax, let me say that after intensive study we find that the best we can say about it is that it was enacted as a temporary measure containing an automatic expiration date.

The excess-profits tax fails signally to meet the basic criteria that are generally accepted as desirable by students of taxation. The tax is not equitable; it is not readily understandable in its application;

it is difficult to administer, and its effects upon economic activities are undesirable. A fundamental difficulty is the impossibility of laying down any rules for the determination of normal profits that would fit the widely differing corporate circumstances and problems entering into the computation of the tax. This inability to compute normal profits obviously makes it impossible to ascertain excess profits.

Furthermore, the high rate of tax which in many cases allows corporations to retain only 18 cents out of every profit dollar gives rise to undesirable consequences. Among these consequences are the destruction of incentive to produce, lack of incentive to economize in business spending, and inability to accumulate funds for industrial growth. These basic difficulties have been recognized by former Secretary Snyder, Under Secretary Folsom, Secretary Humphrey, and other officials of the Government. The difficulties are so widely known that I shall not belabor them here.

I believe I can be most helpful in your consideration of this question of continuing or discontinuing the excess-profits tax by reciting some of the experiences that the company with which I am associated, American Steel Foundries, has had with it. First, I shall give you some background as to my company's size, products manufactured, industries served, and so forth. In our last fiscal year, we had a sales volume of $140 million, consisting of steel castings and other component parts for the railroads; boring mills, hydraulic equipment and roller chain for general industrial use and for the defense effort; defense materiel primarily for the tank program and other products for industrial use.

We have approximately 15,000 employees and net worth in the neighborhood of $60 million. You can see from these brief statistics that we are small when compared with General Motors, United States Steel, and so forth, but that we are large when compared with the thousands of so-called small businesses throughout the country. We operate as a parent company and two subsidiaries. Each of the three files a separate tax return and is taxed as a separate entity. We, therefore, are associated with problems of "bigness" and problems of "smallness" in the handling of our tax matters.

I stated previously that an excess-profits tax is not readily understandable in its application and it is difficult to administer, primarily because of the impossibility of establishing rules for the determination of what is normal profit and, in turn, what is excess profit.

The parent company has been trying for 8 years to settle its World War II excess-profits tax and it appears that, at least, 2 more years of costly court proceedings will be involved before a satisfactory settlement will be reached.

The point at issue involves the determination of invested capital, more specifically the value of property paid in at the time of the incorporation of the company back in 1902, over half a century ago. Thousands of dollars have been spent by the company and thousands more by the Government and still no satisfactory solution has been reached.

I stated previously that an excess-profits tax was inequitable. Congress has regularly recognized these inequities by providing relief provisions. In the World War II act, taxpayers attempted to alleviate some of the inequities by filing so-called section 722 claims. I do not