anteed survival of these tax benefits, risk-free if you will, as opposed to the present marketplace system where both sides sit down and calculate the risk of survival of the loss carryover under 269 in the present law, and discount the purchase price accordingly. That, of course, gives a higher rate of return. In that respect, I think the staff rate may not be too far off the mark. Senator CHAFEE. In summary, Professor Andrews, you are for the committee staff report, right? Professor ANDREWS. Yes, sir. Senator CHAFEE. You are for it, Professor Eustice? Professor EuSTICE. Yes, sir. Senator CHAFEE. You are for it, Mr. Kiefer? Mr. KIEFER. I am not really in a position to characterize myself as for or against it. Senator CHAFEE. Well, I will characterize it. Mr. KIEFER. OK. That's fair. [Laughter.] Senator CHAFEE. And tell me exactly where you stand, Professor Auerbach. Professor AUERBACH. Have I been sufficiently ambiguous? With potential revisions I would be in favor of it. Senator CHAFEE. With what revisions? Professor AUERBACH. With revisions to the treatment of built-in losses. And perhaps to somehow bring in treatment of companies Senator CHAFEE. No, we can't bring any more treatment in. Professor AUERBACH. OK. If you ask me just to vote yes on this Senator CHAFEE. Yes or No. Professor AUERBACH. I would vote Yes. Senator CHAFEE. All right, fine. Well, thank you all very much. I appreciate your coming down. Will the next panel come up? I have to take about a 3-minute break and will be right back. [Whereupon, at 10:55 a.m., the hearing was recessed.] Senator CHAFEE. All right, our next panel consists of Hugh Calkins; M. Bernard Aidinoff; Dale S. Collinson, accompanied by Herbert L. Camp; and Evelyn Low. Mr. Calkins, please proceed. STATEMENT OF HUGH CALKINS, CHAIRMAN, AMERICAN BAR ASSOCIATION, SECTION OF TAXATION, CLEVELAND, OH Mr. CALKINS. Thank you, Senator Chafee. My name is Hugh Calkins. I am chairman of the tax section of the American Bar Association, and I appear here today as a representative of the American Bar Association to present its position with respect to title III of the Subchapter C Revision Act-title III, of course, relates to the net operating loss carryovers. Because neither the tax section nor the ABA have had an opportunity to take an official position with respect to titles I and II. I will present no testimony on those important subjects; but I am accompanied by M. Bernard Aidonoff, a former chairman of the tax section, who will present individual comments with respect to both topics. With me also is Robert Jacobs, formerly a chairman of our tax section's committee on corporate stockholder relationships, who will assist me in answering your questions relating to the net operating loss subject. At the outset I would like to make three points: First, the ABA supports title III. Even if no changes were made in it, we would urge this committee to approve it and the Congress to enact it. It is a great improvement on both the present law and on the 1976 amendments which are scheduled to take effect on January 1. Second, the Tax Section commends the staff, the Chairman, and the committee on the procedure which this bill reflects. It is, in our view, exactly the right way to deal with complex portions of the Internal Revenue Code. We hope that the procedures which began with the installment sale changes some years ago and continued through the subchapter S revision more recently and are now reflected in this Subchapter C Revision Act will continue their steady course. Through those procedures, we hope that we can approach much more closely than at present the universally-acclaimed objectives of simplicity, conformity to reasonable expectations, and neutrality in the tax law. Third, this act promotes all three of those objectives. It eliminates the all-or-nothing aspect of present law relating to net operating losses; it makes the transfer of a loss company a neutral act by according approximately the same value to a loss whether the transaction takes place or not; and, once communicated, the neutrality principle makes all of the necessary line drawing and abuseprevention provisions understandable and predictable. In short, we are enthusiastically in support of title III of this act. There are only six significant differences between the proposal and statutory language which the ABA approved in February 1985 and the proposed statutory language in the staff report. The ABA respectfully calls attention to these differences and urges that its recommendations be carefully considered by the committee. The five most important differences are: First, both staff and ABA achieve the neutrality principle by limiting the carryovers to a percent of the purchase price and a number of years during which a loss can be carried forward. As the previous discussion has indicated, there is a considerable difference between the ABA proposal and the staff proposal in this regard. The ABA proposes 24 percent of the loss each year for five years, while the staff proposes the Treasury rate and a 15-year period. The ABA prefers its proposals because it thinks it more realistically reflects the realities of the business world: businessmen do not think out much beyond a 5-year span, and the rate of return on a company with losses ought to be the equity return and not some kind of a bond return. Second, we have a difference with respect to the trigger. We both say it should be 50 percent. The staff wants all changes within 3 years to count, and the ABA wants only related changes to count. Third, the concept of the bill requires an anti-stuffing rule, and there is an important difference between the staff proposal and the ABA with respect to debt. The ABA believes that its proposal more realistically reflects the situation of small companies where, typically, the principal shareholders are also creditors. Fourth, there is a significant difference with respect to how creditors are treated in loss-workout situations. The staff wants to limit that to a Chapter-11 Bankruptcy Act kind of proceeding, and the ABA would favor a more informal workout along the lines of what section 108 of the code now provides. Finally, fifth, there is a difference between the style of drafting. It takes the staff 480 lines to draft its proposal; the ABA did it in 210 lines. We think the shorter version is better, because the neutrality principle is sufficiently easy to understand that regulations can flush out the fine points. Thank you, Mr. Chairman. Senator CHAFEE. Thank you, Mr. Calkins. [Mr. Calkins' written testimony follows:] Statement of Hugh Calkins, September 30, 1985 I am Hugh Calkins, Chairman of the Section of Taxation of the American Bar Association. I am pleased to be here to present the views of the American Bar Association on those portions of The Subchapter C Revision Act of 1985 that relate to limitations on net operating losses and other tax attributes, as well as those portions of the report of the Staff of the Committee on Finance 1 ("Final Report") that deal with this subject. Before commencing discussion of the subject of limitations on net operating loss carryovers, I would like to comment briefly on the process by which the Subchapter C Revision Act of 1985 has evolved. The proposals contained in the Revision Act are refinements of earlier proposals contained in a preliminary report ("Preliminary Report") in 1983 by the Finance 1 Staff on the Senate Committee on Finance, "The Subchapter C Revision Act of 1985, A Final Report Prepared by the Staff," 99th Cong., 1st Sess., S. Print 99-47 May, 1985. 2 Committee Staff." We testified at hearings held on October 24, 1983, on the Preliminary Report. Helpful testimony was also received from the Department of the Treasury, other bar associations, practitioners, academicians, and representatives of business. Since then, the Staff has worked in cooperation with the representatives of other Congressional staffs, the Treasury Department, the Internal Revenue Service, and a group of practitioners and academicians to review and improve the proposals in light of the testimony given at those hearings. Members of the Section were invited to participate, and did so actively, in this process. In addition, several of our substantive committees have studied the proposals extensively and our full membership has been exposed to several programs exploring the operation of the proposals. 2 Staff of the Senate Committee on Finance, "The Reform and Simplification of the Income Taxation of Corporations," 98th Cong., 1st Sess., S. Print No. 98-95 (Sept. 22, 1983). The Preliminary Report was based in large part upon recommendations contained in a detailed, thoughtful study prepared by the American Law Institute, recommendations of the Section of Taxation of the American Bar Association, and the other materials cited in the Final Report. |