Mr. BYRNES. Did they consider it then as 1950 income to the company? Mr. LESOURD. Correct. That is right, sir. Mr. BYRNES. Did you pay an excess-profits tax on that income then? Mr. LESOURD. No, there is a provision in the present law that removes from excess-profits net income an amount that is abnormal to the taxpayer. They permitted us to pay only ordinary corporate rates on that income in 1950. But, nevertheless, they declined to permit us to use it in our excess-profits tax base even though it was attributable to the base-period years. Mr. BYRNES. But at least you did not have to pay excess-profits tax on that? Mr. LESOURD. We only paid 52 percent on the income in 1950. The CHAIRMAN. Are there any other questions? If not, we thank you for your appearance and the information you have given us. Mr. LESOURD. Thank you, Mr. Chairman. (Mr. LeSourd's prepared statement follows:) STATEMENT OF F. A. LESOURD OF SEATTLE, WASH. I appear on behalf of Superior Portland Cement, Inc., of Seattle, Wash., to urge that there be coupled with any extension of the excess-profits tax, or that there be adopted even though the tax not be extended, provisions along the lines of H. R. 610, retroactively correcting the inequities in that tax. When our tax law gives a bonanza to a wrongdoer and penalizes his victim, which is the effect of the excess-profits tax as interpreted by the Bureau of Internal Revenue in Superior's case, corrective legislation is needed. In addition to its plant at Concrete, Wash., Superior Portland Cement, Inc., operated a cement plant in Seattle Wash., called the "Diamond plant" under The lease lease for a long period of time, the lease expiring December 31, 1946. provided that if the lessor decided to sell the plant, Superior should have the first refusal to buy. Immediately following termination of the lease, Superior discovered that the lessor was selling the plant to a competitor of Superior. Superior gave notice of exercise of its option to buy, but the lessor refused to recognize Superior's rights. During the first part of 1947, Superior brought action for specific performance, depositing in court a total of $800,000 to apply on the purchase price. By decision in 1949, the Supreme Court of the State of Washington confirmed Superior's rights, directed that the plant be conveyed to Superior, held that the lessor had been in wrongful possession of the plant since the first part of 1947, and required the lessor to pay to Superior the profits earned from the plant in 1947, 1948, and 1949. The legal proceedings were, however, not finally completed until 1950, and the profits were not paid to Superior until that time. Under these facts, the Bureau of Internal Revenue takes the position that the income earned by this plant during the base-period years of 1947, 1948, and 1949, cannot be used by Superior as a base for excess-profits-tax credit, since Superior did not receive the income until 1950. The result is that even though Superior was legally entitled to possession of the plant and the income therefrom during these base-period years, and eventually was paid that income, nevertheless, the lessor and not Superior get excess-profits credit for that income, and Superior must operate the plant during the excess-profits-tax years without the excessprofits-tax base to which the plant is entitled. Attempting to get some relief under the present act, Superior asked the Bureau of Internal Revenue to rule that one of the relief provisions, namely, Internal Revenue Code, section 444, was applicable and that the income paid to Superior in 1950 could be accrued in 1949. Both requests were denied. The situation of this company is an example of the inequitable effect that the Excess Profits Tax Act as now written can and does have in actual application. While perhaps there is no other taxpayer involved in exactly the same circumstances as confront Superior, nevertheless the present act is so arbitrary in its excess-profits-credit provisions that a great many taxpayers find themselves subjected to unjustified treatment. Since adoption of the Excess Profits Tax Act of 1950, this committee has sought to meet inequities by specific remedial legislation applicable to the circumstances of each case. To continue to follow this method, however, would be to burden Congress with details rather than general policy. A better solution is found in H. R. 610, introduced by Mr. Simpson, of this committee. This bill has had thorough study, has been endorsed by the tax section of the American Bar Association. While the bill is somewhat along the lines of section 722 of the World War II excess-profits tax, the experience under that section has been utilized to avoid the administrative difficulties and lack of adequate standards of relief that caused so much criticism of section 722. I will not attempt a detailed discussion of H. R. 610 since that undoubtedly has been or will be done by the official representatives of the American Bar Association. However, I do wish to propose an amendment to H. R. 610 as introduced in this Congress. This amendment is to eliminate the words "the pattern of" appearing in lines 9 and 10 of page 2 of the official print of the bill. If these words remained in the bill, there might be some ambiguity as to whether H. R. 610 covered Superior's case. The wrongful withholding of the cement plant was an abnormal circumstance adversely affecting Superior's income under section 476 (a) (2) of the bill, but someone might argue that Superior had no "pattern" of income because it had not previously owned the plant which was wrongfully withheld from it. In endorsing H. R. 610, the tax section of the American Bar Association recommended elimination of these same words. In the event that this committee should decide to continue to meet each case of inequity by specific remedial legislation rather than by a general provision like H. R. 610, some relief could be given to Superior by amending Internal Revenue Code, section 444 so as to make clear that it applies to this case. Section 444 requires that the capacity for production on December 31, 1949, be 150 percent of the capacity for production on December 31, 1946. On December 31, 1949, Superior was the owner of the Diamond Plant. The Bureau of Internal Revenue held, however, that this acquisition did not increase Superior's capacity for production because on December 31, 1946, Superior had held the plant under lease. December 31, 1946, was the last day of the lease, the plant being turned back to the lessor on midnight of that day. The kilns had been shut down for some time in preparing for the transfer and no cement was manufactured on December 31, 1946, nor did the plant have any practical capacity for production on that date. Section 444 should apply to Superior because its purpose is to remedy situations where the income from facilities, operated from 1950 on, is not adequately reflected in the base period income of the taxpayer, because the facilities were not operated by the taxpayer during a substantial part of that period. It could be applied to this case by an amendment recognizing that where a lease terminates on December 31, 1946, there is no practical capacity for production on that day and a later acquisition of the plant constitutes an increase in facilities in accordance with the purpose of the section. This amendment would add a subsection (h) to section 444, as follows: "(h) In determining under subsection (b) the capacity for production or operation on the day prior to the beginning of the 36-month period, facilities held under a lease which expired on that day and was not renewed shall not be deemed to have any capacity for production or operation." In conclusion, may I say that we should continually remind ourselves that the success of the taxing system of the United States is due in large part to public confidence in its fairness. To correct inequities in the tax laws involves very little loss of revenue and very large benefits in continued confidence of taxpayers and corresponding continued ease in collection. The CHAIRMAN. I am going to ask Mr. Thomson to defer for just a moment. Mr. R. G. Parkhurst has to leave for Chicago, as I understand it. His statement is short and I would like to accommodate him so he can get away. If you will come forward and give your name and the capacity in which you appear for the record, we will be glad to hear you. STATEMENT OF R. G. PARKHURST, ASSISTANT TREASURER, SANTAY CORP., CHICAGO, ILL. Mr. PARKHURST. I am R. G. Parkhurst, an officer of the Santay Corp., Chicago, Ill. I appear as the seventh witness on the official list. I would like to thank Mr. Thomson for letting me appear before him. Mr. Chairman and members of the Committee on Ways and Means, I have a prepared statement that is quite short. I would like to make a few preliminary remarks. We are a small corporation. The CHAIRMAN. You may insert your statement in the record as part of the record, without objection, and then you may proceed. Mr. PARKHURST. Thank you. (Mr. Parkhurst's prepared statement follows:) STATEMENT OF R. G. PARKHURST, ASSISTANT TREASURER, SANTAY CORP., CHICAGO, ILL., AGAINST EXTENSION OF EXCESS-PROFITS TAX Mr. Chairman and members of the Committee on Ways and Means, this company was started in 1919 as tool and die makers, and since 1936, has produced injection molded plastics, metal assemblies and automotive accessories. Most of the corporation sales volume since 1946 has been for molded plastic parts in the radio and television field. From January 1, 1946, to December 31, 1952, Santay Corp. net profit after taxes has amounted to $1,179,000. In this same period $733,000 has been spent for additional equipment and buildings, and of this capital expenditure, $450,000 has been spent in 1950, 1951, and 1952. As a result of these capital expenditures our 1952 net sales were $7,111,000, almost double the average annual net sales during the excess profits tax base period years of 1946 to 1949 inclusive. For the years 1950, 1951, and 1952, $112,000 has been reserved for payment of the excess-profits tax portion of our corporate Federal income tax. With net sales of $7,111,000 in 1952, we were left with $190,000 after Federal income taxes. We are now striving to increase our working capital in 1953 for an estimated sales volume of $8 million and may have to borrow money to operate after the second installment of our Federal income tax is paid on June 15, 1953. Our corporation feels the excess-profits tax is definitely unfair and discriminatory in the case of small business such as ours, particularly in a fairly new industry that has grown 600 percent in output in the past 10 years. There is no sound basis for determining the profit return necessary for the continued growth of our industry. This tax is a tremendously unfair handicap to us in competing with larger producers because of our lack of working capital which means very limited expansion or replacement of equipment. The excess-profits tax is a penalty on good management and efficiency in business. Mr. PARKHURST. We are a small corporation in a relatively new industry, in the plastics field. In the last 10 years, the plastic industry output has grown 600 percent. The margin of profit, net profit, of sales in the plastic industry, as far as we are concerned, is very, very small. Back in the base period years, our margin of profit was a greater percent of our net sales than it has been in the past 3 years, years in which we have paid excess-profits tax. In a small company like ours, the excess profits tax simply removes all opportunity for us to continue research in a vastly expanding industry because we virtually have no money left to put back into the business. There is a strong possibility that when we pay our second installment of Federal income tax on June 15 of this year, we will have to borrow money from the bank because of our lack of capital. It does not seem feasible to our corporation that a tax that takes away from approximately 80 percent of the companies that contribute, whose incomes are so small, that this tax should take away our working capital which is so badly needed in our industry for expansion. The CHAIRMAN. May I ask a question? Mr. PARKHURST. Yes, sir. The CHAIRMAN. You need not answer it unless you wish to, in as much as it might effect your credit if it got out. If you have no objection, do you have some debts? Mr. PARKHURST. We do; yes, sir. The CHAIRMAN. Your company does have some debts. The CHAIRMAN. Very well. You have to have money to meet those obligations also, do you not? Mr. PARKHURST. That is right. The CHAIRMAN. All right. Mr. PARKHURST. The other one point that I would like to make is that in a small corporation the size of ours, the matter of expansion and new equipment takes considerable thought and time to do in the manner that we have had to operate with insufficient working capital. In the years 1950, 1951, and 1952 we spent approximately a half million dollars in additional new equipment and buildings, thus increasing our volume of sales to approximately twice what it was during the base-period years of 1946 to 1949. Our return, our percentage of profit on net sales, has been even smaller, yet our taxes have been so high that we are now unable to continue buying equipment that is necessary in a new industry to keep pace with the changes in improvements that are necessary to stay in business. The CHAIRMAN. Is your plant located right in Chicago? The CHAIRMAN. Where you are located is that sort of a community in itself? Mr. PARKHUrst. No. The CHAIRMAN. You are right in the confines of Chicago? Mr. PARKHURST. We are in the confines of Chicago, on the West Side of the city. The CHAIRMAN. Are there any questions? Mr. SIMPSON. I have a question, Mr. Chairman. The CHAIRMAN. Mr. Simpson will inquire. Mr. SIMPSON. Yours is distinctly a small business, is it not? Mr. PARKHURST. Yes, sir. Mr. SIMPSON. And you express the probability that in order to pay your taxes you may have to borrow money this year? Mr. PARKHURST. Not necessarily to pay our taxes, but we may have to borrow money after the taxes are paid in order to continue operations. Mr. SIMPSON. I understand. The point is that you may have to seek borrowed money as a result of certain expenditures which include taxes. Mr. PARKHURST. Yes, sir. Mr. SIMPSON. I raise that situation because this very afternoon. over in the House, they are debating and considering the passage of a bill that will set up an agency to make loans to small businesses which are being taxed out of existence by, among other things, this excess profits tax. The right hand does not know just what the left hand does, even in Government many times. Thank you. Mr. PARKHURST. Thank you very much. The CHAIRMAN. Are there any other questions? We thank you very much for your fine statement before this committee. Mr. PARKHURST. Thank you, gentlemen. The CHAIRMAN. The next witness is Mr. J. Cameron Thomson, chairman of the Fiscal and Monetary Committee of the Committee for Economic Development. Mr. Thomson, we are very glad to have you appear here. If you will just state your name for the record, and the capacity in which you appear, and that of your associate, we would appreciate it very much, and will be glad to hear you. STATEMENT OF J. CAMERON THOMSON, CHAIRMAN, FISCAL, MONETARY, AND DEBT MANAGEMENT COMMITTEE, COMMITTEE FOR ECONOMIC DEVELOPMENT Mr. THOMSON. I am J. Cameron Thomson, president of the Northwest Bancorporation of Minneapolis, Minn. I am Chairman of the Committee on Fiscal, Monetary, and Debt Management Policy of the Committee for Economic Development. My associate is Mr. Howard Myers, research director of the CED. I am grateful for the opportunity to present the views of the Research and Policy Committee of the Committee for Economic Development on the proposed 6 months' extension of the excess-profits tax. I am reading to save your time, but I would like to say this to you: As I have sat here this morning I have been tremendously impressed with the difficult problem that you folks face. I wish you the best of luck, and I hope that what I say will make some contribution. The Committee for Economic Development is a private, nonpolitical organization of businessmen, formed to study and report on the problems of achieving and maintaining a high level of employment and production in a stable, free economy. A list of the members of the CED Research and Policy Committee is appended as page 7 of my statement. I shall not take the time of the committee to read the names of all those who join in the views I present. They include such men as Frazar B. Wilde, chairman, president, Connecticut General Life Insurance Co., Hartford, Conn.; Elliott V. Bell, chairman of the executive committee, McGraw-Hill Publishing Co., Inc., New York, N. Y.; John D. Biggers, president, Libbey-Owens-Ford Glass Co., Toledo, Ohio; S. Sloan Colt, president, Bankers Trust Co., New York, N. Y.; Gardner Cowles, president, Des Moines Register and Tribune, and Cowles Magazines, Inc., New York, N. Y.; Harlow H. Curtice, president, General Motors Corp., Detroit, Mich.; Meyer Kestnbaum, president, Hart, Schaffner & Marx, Chicago, Ill.; and |