Various revenue and tariff bills

MISSING IMAGE

Material Information

Title:
Various revenue and tariff bills
Physical Description:
Book
Language:
English
Creator:
United States -- Congress. -- Senate. -- Committee on Finance
Publisher:
U.S. Govt. Print. Off. ( Washington )
Publication Date:

Record Information

Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 24531999
oclc - 2515310
System ID:
AA00022271:00001

Table of Contents
    Front Cover
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
    Main body
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
        Page 76
        Page 77
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
        Page 86
        Page 87
        Page 88
        Page 89
        Page 90
        Page 91
        Page 92
        Page 93
        Page 94
        Page 95
        Page 96
        Page 97
        Page 98
        Page 99
        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
        Page 105
        Page 106
        Page 107
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
        Page 113
        Page 114
        Page 115
        Page 116
        Page 117
        Page 118
        Page 119
        Page 120
        Page 121
        Page 122
        Page 123
        Page 124
        Page 125
        Page 126
        Page 127
        Page 128
        Page 129
        Page 130
        Page 131
        Page 132
        Page 133
        Page 134
        Page 135
        Page 136
        Page 137
        Page 138
        Page 139
        Page 140
        Page 141
        Page 142
        Page 143
        Page 144
        Page 145
        Page 146
        Page 147
        Page 148
        Page 149
        Page 150
        Page 151
        Page 152
        Page 153
        Page 154
        Page 155
        Page 156
        Page 157
        Page 158
        Page 159
        Page 160
        Page 161
        Page 162
        Page 163
        Page 164
        Page 165
        Page 166
        Page 167
        Page 168
        Page 169
        Page 170
        Page 171
        Page 172
        Page 173
        Page 174
        Page 175
        Page 176
        Page 177
        Page 178
        Page 179
        Page 180
        Page 181
        Page 182
        Page 183
        Page 184
        Page 185
        Page 186
        Page 187
        Page 188
        Page 189
        Page 190
        Page 191
        Page 192
        Page 193
        Page 194
        Page 195
        Page 196
        Page 197
        Page 198
        Page 199
        Page 200
    Appendix
        Page 201
        Page 202
        Page 203
        Page 204
        Page 205
        Page 206
        Page 207
        Page 208
        Page 209
        Page 210
        Page 211
        Page 212
        Page 213
        Page 214
        Page 215
        Page 216
        Page 217
        Page 218
        Page 219
        Page 220
        Page 221
        Page 222
        Page 223
        Page 224
        Page 225
        Page 226
        Page 227
        Page 228
        Page 229
        Page 230
        Page 231
        Page 232
        Page 233
        Page 234
        Page 235
        Page 236
        Page 237
        Page 238
        Page 239
        Page 240
        Page 241
        Page 242
        Page 243
        Page 244
        Page 245
        Page 246
        Page 247
        Page 248
        Page 249
        Page 250
        Page 251
        Page 252
        Page 253
        Page 254
        Page 255
        Page 256
        Page 257
        Page 258
        Page 259
        Page 260
        Page 261
        Page 262
        Page 263
        Page 264
        Page 265
        Page 266
        Page 267
        Page 268
        Page 269
        Page 270
    Back Cover
        Page 271
        Page 272
Full Text


94th Congress }
2d Session I


COMMITTEE PRINT


VARIOUS REVENUE AND TARIFF BILLS





TESTIMONY TO BE RECEIVED TUESDAY,
AUGUST 24, 1976, AND
DEPARTMENTAL COMMENTS





COMMITTEE ON FINANCE
UNITED STATES SENATE
RUSSELL B. LONG, Chaim'n n

tt 'Li,? -







AUGUST 24, 1976




Printed for the use of the Committee on Finance

U.S. GOVERNMENT PRINTING OFFICE
7-946 0 WASHINGTON : 1976


I


I

































COMMITTEE ON FINANCE


RUSSELL B. LONG,
HERMAN E. TALMADGE, Georgia
VANCE HARTKE, Indiana
ABRAHAM RIBICOFF, Connecticut
HARRY F. BYRD, JR., Virginia
GAYLORD NELSON, Wisconsin
WALTER F. MONDALE, Minnesota
MIKE GRAVEL, Alaska
LLOYD BENTSEN, Texas
WILLIAM D. HATHAWAY, Maine
FLOYD K. HASKELL, Colorado


Louisiana, Chairiman
CARL T. CURTIS, Nebraska
PAUL J. FANNIN, Arizona
CLIFFORD P. HANSEN, Wyoming
ROBERT DOLE, Kansas
BOB PACKWOOD, Oregon
WILLIAM V. ROTH, JR., Delaware
BILL BROCK, Tennessee


MICHAEL STERN, Staff Director
DONALD V. MOOREHEAD, Chief Minority Counsel

(II)













CONTENTS


Page
Ad Hoc Coalition for Cemetery Care, R. L. McNitt, Jr., chairman --------169
American Association of Bicycle Importers, Inc., Philip Kamler, president- 103
Asbill, Mac, Jr., on behalf of World Airways, Inc ---------------------- 95
Association of American Publishers, Townsend Hoopes, president -------- 43
Barlow, Wallace D., executive director, Stock Option Writer's Association- 19
Bicycle Manufacturing Association of America, Stewart J. Northrop,
president, Huffman Manufacturing Co ---------------------------- 125
Chicago Board Options Exchange, Leon Pomerance, chairman of the board
of directors -------------------------------------------------- 21
Distilled Spirits Council of the U.S., Inc., John F. MeCarren, general
counsel -----------------------------------------------------35
Friedlander, Philip R., Jr., general manager, National Tire Dealers &
Retreaders Association, Inc -------------------------------------179
Goldberg, Sanford J., for the National Association of Recording Mer-
chandisers ---------------------------------------------------61
Gortikov, Stanley M., president, Recording Industry Association of
America, Inc ------------------------------------------------- 61
Hathaway, Hon. William D., a U.S. Senator from the State of Maine----- 189
Hoopes, Townsend, president, Association of American Publishers ------- 43
Jewel Co. of America, Donald Stevens, vice president -------------------77
Kamler, Philip, president, American Association of Bicycle Importers, Inc- 103
Lynn A. Williams Engineering Co., Lynn A Williams, president ----------165
McCarren, John F., general counsel, Distilled Spirits Council of the U.S.,
Inc. --------------------------------------------------------35
McNitt, R. L., Jr., chairman, Ad Hoc Coalition for Cemetery Care --------169
Metcalf, Hon. Lee, a U.S. Senator from the State of Montana --------------1
Monagan, John S., on behalf of Shimano American Corp ----------------121
National Association of Recording Merchandisers, Sanford J. Goldberg_-- 61
National Tire Dealers & Retreaders Association, Inc., Philip R. Fried-
lander, Jr., general manager ------------------------------------ 179
New York Foam Sales Co., Alen York, president ----------------------- 91
Northrop, Stewart J., president, Huffman Manufacturing Co., on behalf of
the Bicycle Manufacturing Association of America -------------------125
Pomerance, Leon, chairman of the board of directors of the Chicago Board
Options Exchange ---------------------------------------------21
Recording Industry Association of America, Inc., Stanley M. Gortikov,
president ----------------------------------------------------61
Rubber Manufacturers Association, Edward E. Wright, vice president ---- 183
Schwinn Bicycle Co., Jay C. Townley, director of product safety and gov-
ernmental affairs --------------------------------------------135
Shimano American Corp., John S. Monagan -------------------------- 121
Silverman, Arthur H., Washington counsel, Wine Institute -------------- 73
Stevens, Donald, vice president, Jewel Co. of America -------------------77
Stock Option Writer's Association, Wallace D. Barlow, executive director- 19
Townley, Jay C., director of product safety and governmental affairs,
Schwinn Bicycle Co ------------------------------------------ 135
Wine Institute, Arthur H. Silverman, Washington counsel --------------- 73
World Airways, Inc., Mac Asbill, Jr --------------------------------- 95
Wright, Edward E., vice president, Rubber Manufacturers Association ---- 183
York, Alen, president, New York Foam Sales Co ------------------------ 91


(IMl)








Appendix-Departmental comments received as of August 23, 1976, on
the various House-passed revenue and tariff bills:
H.R. 1386: page
Department of Commerce----------------------------------- 203
International Trade Commission -----------------------------205
H.R. 2177:
Department of Commerce -----------------------------------207
International Trade Commission ----------------------------- 205
H.R. 2181:
Department of the Treasury ---------------------------------211
Special Representative for Trade Negotiations -----------------213
Department of Commerce ----------------------------------- 215
International Trade Commission -----------------------------217
H.R. 4047:
Department of the Treasury ----------------------------------221
Department of Commerce ----------------------------------223
International Trade Commission ----------------------------- 225
H.R. 7228: Department of the Treasury ---------------------------229
H.R. 8283: Department of the Treasury --------------------------231
H.R. 8586: Special Representative for Trade Negotiations ----------- 233
H.R. 11259:
Department of the Treasury ---------------------------------235
Special Representative for Trade Negotiations ----------------237
Department of Commerce -----------------------------------239
Office of Management and Budget ----------------------------241
H.R. 11321: Department of Commerce ----------------------------243
H.R. 11605:
Department of the Treasury ----------------------------------247
Office of Management and Budget ----------------------------249
Department of Commerce -----------------------------------251
Special Representative for Trade Negotiations -----------------253
International Trade Commission ----------------------------- 255
H.R. 12254:
International Trade Commission -----------------------------261
Department of Commerce ----------------------------------267







TESTIfIO'iY OF SENATOR LEE [VIETCALF


THE ELECTRIC UTILITY TAX [TXEMPTION !iCT
T,,,- ENATE FINANCE COIF-IITTEE
21t UGUST, 17


rR rHAIR!MAN, I AM, TESTIFYI;Vr TODAY IN SUPPORT OF
r"Y DILL, ?'73 THE FLECTRIC !'TILITY TAX FXEMPTION
ACT. BECAUSE OF ITS IMPORTANCE TO CONSUMERS O!
ELECTRICITY AND THE DEVELOPMENT OF SOUrJD ENERGY REGULATION,
I PROPOSED MY BILL AS AMENDMENT NUtMBER 1R11 TO THE TAX
REFORM ACT OF 1.971 F12,
I WITHDREW PY AMENDMENT AFTER RECEIVING ASSURANCE
FROM .ENhATOR PIPICOFF, THE ACTING FLOOR MANAGER, THAT
THIS COMMITTEE WOULD HOLD A HEARING ON '. 02" PPIOP TO
FI,"AL ADJOURNMENT OF THF 'INETY-FOURTH CONGR--SS, FROM
OUR COLLOQUY AT THE TImE T WITHDREW MY AMENDMENT- I
KNOW THAT SENATOR "ASKELL IS CONCERNED ABOUT THE SERIOUS
PROBLEMS FOR, CONSUMERS WHICH HAVE EVOLVED FROM APPLICATION
OF THE FEDERAL INCOtlE TAX LAWS TO ELECTRIC UTILITIES,













I BELIEVE THAT THE OTHER MEMBERS ON THIS COMMITTEE

ARE ALSO CONCERNED OVER THE FINANCIAL HARDSHIPS WHICH

WORKING FAMILIES AND THOSE LIVING ON FIXED INCOMES HAVE

BEEN FORCED TO ENDURE DUPING THE PAST FEW YEARS AS A

RESULT OF SKYROCKETING ELECTRIC RATES.

APPLICATION OF THE FEDERAL INCOME TAX LAWS IN

SETTING ELECTRIC RATES HAS UNNECESSARILY AGGRAVATED THE

BURDEN OF RAPIDLY RISING ELECTRICITY PRICES FOR RESIDENTIAL

CUSTOMERS AND BUSINESSMEN. CONGRESS MAY NOT BE ABLE TO

CONTROL SOME OF THE FACTORS BEHIND THE INCREASED COST OF

ELECTRICITY, BUT WE CAN ELIMINATE UNNECESSARY COST

BURDENS RESULTING FROM THE FEDERAL INCOME TAX LAWS,

J INTRODUCED S. 1/13 AS OME PRACTICAL WAY FOR

CONGRESS TO CORRECT THE RATE-MAKING ABUSES WHICH HAVE

RESULTED FROM THE APPLICATION OF EXISTINr FEDERAL INCOME

TAX LAWS. THIS BILL WILL WORK BECAUSE ELECTRIC RATES

WOULD NO LONGER BE SUBJECT TO THE UNFAIR AND CONTRA-

DICTORY ACCOUNTING TECHNIQUES WHICH APE USFn TO CHARGE

CUSTOMERS FOR FEDERAL INCOME TAXES THAT UTILITIES DO NOT

PAY#










-3-


THE FLECTRIC !TILITY TAX EXEMPTION PCT PROVIDES

SIMPLY THAT INVESTOR-OAMIED ELECTRIC UTILITIES WOULD PE

RELIEVED OF ALL OBLIGATIONS AND BENEFITS ARISING UiNDER

THE FEDERAL INCOME TAX LAW1, INFORMATION COMPILED BY

THE FEDERAL POWEP COMMISSION CONFIRMS THAT ENACTMENT OF

S. 2213 WOULD HAVE A RELATIVELY LIMITED IMPACT ON TREASURY

RECEIPTS WHEN COMPARED TO THE VAST AMOUNTS OF CUSTOMER

OVERCHARGES WHICH WOULD BE PREVENTED.

DATA FROM 1.711 THE MOST RECENT AVAILABLE SHOWS

THAT THE ENTIRE ELECTRIC UTILITY INDUSTRY PAID ONLY FIVE

HUNDRED ANT TWENTY-EIGHT MILLION DOLLARS IN FEDERAL INCOME

TAXES ON TOTAL ELECTRIC OPERATING REVENUES OF THIRTY-

SEVEN AND TWO-TENTHS BILLION DOLLARS. THAT WAS ACTUALLY

A FORTY-EIGHT PER CENT DECREASE IN ABSOLUTE DOLLARS FROM

THE ONE BILLION DOLLARS PAID IN FEDERAL INCOME TAXES PY

ELECTRIC UTILITIES IN 195 TWENTY YEARS AGO.

rIORE THAN ONE-THIRD OF THE MAJOR ELECTRIC UTILITIES

PAID no FEDERAL INCOME TAXES AT ALL IN .070. INSTEAD,

THOSE UTILITIES ACCUMULATED OVER TWO HUNrlRED AND EIGHTEEN

MILLION DOLLARS OF TAX CREDITS.

nN A RELATIVE BASIS, THE AMOUNT OF FEDERAL INCOME

TAXES PAID BY INVESTOR-OWNED ELECTRIC UTILITIES DECLINED

FROM FOUPTEEN AND SEVEN,-TENTHS PER CENT OF REVENUES IN

1.o5'r TO ONLY ONE AND FOUlR-TENTHS PER CENT OF REVENUES IN
:1.71!,








-Lt -




SINCE TAXES ARE BASED ON INCOME, IT SHOULD BE NOTED

THAT THE ELECTRIC UTILITIES' PROFITABILITY, AS MEASURED

BY THEIR RETURN ON COMMON STOCK EQUITY, WAS THE SAME IN

1955 AND 1971!. IN BOTH YEARS, THEYAVERAGED A TEN AND

EIGHT-TENTHS PER CENT RETURN ON EQUITY,

THE ABUSES PRESENT IN THE EXISTING TAX LAWS ARE

BEST ILLUSTRATED BY COMPARING TOTAL FEDERAL INCOME TAXES

PAID BY ELECTRIC UTILITIES IN 1971, WITH THE FEDERAL

INCOME TAXES CHARGED TO CUSTOMERS ON JUST THE AMOUNT OF

RATE INCREASES GRANTED IN A SINGLE YEAR.

"ASED ON A RECENT SURVEY OF STATE REGULATORY

COMMISSIONS, THE LIBRARY OF CONGRESS ESTIMATES THAT

INVESTOR-OWNED ELECTRIC UTILITIES WERE GRANTED ADDITIONAL

GENERAL RATE INCREASES TOTALING THREE AND THRFE-TENTHS

BILLION DOLLARS IN 1.975 ALONE. A PPROXIMATELY ONE HALF OF

THAT AMOUNT MORE THAN ONE AND SIX TENTHS BILLION DOLALRS-

WAS EARMARKED FOR THE PAYMENT OF FEDERAL INCOME TAXES ON

THE ADDITIONAL AMOUNT OF UTILITY REVENUES.










-5-



THE ONE AND SIX-TENTHS BILLION DOLLARS CHARGED TO

CUSTOMERS FOR INCREMENTAL FEDERAL INCOME TAXES SUPPOSEDLY

DUE OM RATE INCREASES IN 197c WAS THREE TIMES THE AMOUNT

OF FEDERAL INCOME TAXES ACTUALLY PAID BY ELECTRIC UTILITIES

ON THEIR TOTAL OPERATING REVENUES IN 1974, :OW IS IT THAT

CUSTOMERS CAN BE CHARGED ONE BILLION DOLLARS MORE FOR

TAXES IN A SINGLE YEAR OF RATE INCREASES THAN THE ENTIRE

ELECTRIC UTILITY INDUSTRY PAID FOR FEDERAL INCOME TAXES

ON TOTAL REVENUES THE PREVIOUS YEAR?

THE ANSWER LIES IN THE EXTENSIVE ARRAY OF COMPLICATED

TAX BENEFITS WHICH WERE AVAILABLE TO ELECTRIC UTILITIES IN

1974. SINCE 197t1, CONGRESS HAS PROVIDED NORE BENEFITS BY

RAISING THE INVESTMENT TAX CREDIT FOR UTILITIES FROM FOUR

TO TEN PER CENT, AND REMOVING THE RESTRICTIOr;S ON ITS

APPLICABILITY.

THE MAJOR PROBLEM WITH EXISTING, COMPLEX PROVISIONS

TO AID ELECTRIC UTILITIES IS THAT THEY DO NOT ALSO BENEFIT

CONSUMERS HARD-PRESSED BY VASTLY INCREASED ELECTRICITY

RATES. MANY "EMBERS OF CONGRESS HAVE MISTAKENLY BELIEVED

THAT VOTING FOR COMPLICATED ACCELERATED DEPRECIATION AND

INVESTMENT TAX CREDIT PROVISIONS WOULD RED'ICE RATES FOR

CONSUMERS.








-6-



THE PRESEN..T TAX I'FJEFITS FOR INVESTOR-OThNED" ELECTRIC
UTILITIES DO NOT GENERALLY PASS THROUGH TO CONSUMERS

BECAUSE THE ELECTRIC UTILITIES CONTINUE TO CHARGE CUSTONtERS
FOR FEDEr-AL INCOME TAXES AS IF THE TAX BENEFITS DID NOT

EXIST, ,9E ELECTRIC UTILITIES ARE ABLE TO DO THIS WITfi

THE AID OF SOPHISTICATED ACCOUNTING TEC:INIOUES WHICH PERMIT

THE61 TO KEEP ThO SETS OF 7OOKS ONE SHOUIING LITTLE Or

NO TAXES OWED FOR USE BY THE I$, AND ONE SHOWING SUBSTANTIAL

TAXES OWED FOR USE IN SETTING RATES#

THE DIFFERENCE CAN PE PUITE DRAMATIC, FOR EXArfPLE,

A REGULATORY COMMISSION WHICH DETERMINES THAT A UTILITY

NEEDS AN INCOME INCREASE OF TEN MILLION DOLLARS MAY ORDER

A RATE INCREASE FOR CUSTOMERS OF ALMOST TWENTY MILLION

DOLLARS. THE DOUBLING OF THE INCOME REQUIRED TO DETERMINE

THE RATES CHARGED CUSTOMERS IS TO PERMIT THE ELECTRIC

UTILITIES TO PAY FEDERAL INCOME TAXES AT THE THEORETICAL

FORTY-EIGHT PER CENT ON THE AMOUNT OF RATE INCREASE, AND

STILL HAVE TEN MILLION DOLLARS LEFT FOR INCOME.

OF COURSE, NEARLY ALL INVESTOR-OWNED ELECTRIC UTILITIES

PAY LITTLE OR NO FEDEPAL INCOME TAXES. .NSTEAD, THEY KEEP

THE EXTRA MONEY CHARGED FOR TAXES, AND CUSTOMERS ARE LEFT

HOLTJING THE BAG BECAUSE OF A FINE POINT OF ACCOUNTING

THEORY$








7 -



THE PROCESS OF CHARGING CUSTOMERS FOR INCOME TAXES

WHICH ARE NOT PAID TO THE FEDERAL GOVFRrVIMErT HAS LED TO
VAST OVERCHARGES THAT ARE NOT RELATED TO INCREASED COSTS

OF SERVICE. AT THE END OF 1D7', THE INVESTOR-OWNED ELECTRIC

UTILITIES 14ERE HOLDING FIVE AN'D THREE-TENTHS BILLION DOLLARS

W, VHICH HAD BEEN C14ARGED TO CUSTOMERS FOR FEDERAL INCOME

TAXES,

PAST EXPERIENCE INDICATES THAT CUSTOMER MONEY PEIMCG

KEPT BY UTILITIES FOR FEDERAL INCOME TAXES WILL NEVER BE

PAID TO THE THE FEDERAL GOVERNMENT, I"EW TAX DEFERRALS ANT)

CREDITS ALWAYS EXCEED PAST TAX OBLIGATIONS COMING DUE, SO

THE TOTAL AMOUNT OF KEPT TAXES IS CONSTANTLY INCREASINlG,

KY PILL EXTENDS THE FEDERAL INCOME TAX BENEFITS

GIVEN ELECTRIC UTILITIES TO THEIR CUSTOMERS. 7Y EXEt1PTIIG

ELECTRIC UTILITIES FROM THE FEDERAL INCOME TAX LAWS, THEY

WILL NO LONGER BE ABLE TO CLAIM A ONE HJDRED PER CENT BONUS

ON EVERY RATE INCREASE, BASED ON A CHARGE FOR FEDERAL INICOMF

TAXES THAT WILL NEVER BE PAID.

THE INVESTOR-OWNED ELECTRIC UTILITIES WILL BENEFIT

FROM S, "213 BECAUSE IT ASSURES THAT THEY WILL RElAfI!

FREE FROM THE BURDEN OF PAYIm G FEDERAL INCOME TAXES, THFIR

CUSTOMERS WILL BENEFIT FROM S, ?213 BECAUSE ELECTRIC PATES

WILL NOT INCLUDE ALLOWANCES FOR UNPAID FEDERAL INCOME

TAXES,













A DECISION BY A REGULATORY COMMISSION THAT AN ELECTRIC

UTILITY NEEDS INCREASED INCOME OF TEN MILLION DOLLARS WILL

RESULT IN A RATE INCREASE FOR CUSTOMERS OF TEN MILLION

DOLLARS, NOT TWENTY MILLION DOLLARS.

THE GOAL OF REGULATORY REFORM WILL ALSO BE ADVANCED

SIGNIFICANTLY BY ENACTMENT OF S, 2213. THE CONFUSION

AND EXPENSE RESULTING FROM TWO SETS OF BOOKS, SPECIAL

TAX ACCOUr!TS, COMPLEX ACCOUNTING PROCEDURES, AND VOLUMINOUS

RECORD-KEEPING WOULD BE ELIMINATED FROM RATE PROCEEDINGS.

FEDERAL INTERFERENCE IM STATE REGULATORY PROCEEDINGS

THROUGH TAX PROVISIONS WOULD BE STOPPED BY ENACTMENT OF ,!Y

BILL. FOR EXAMPLE, SECTION 45(E) OF THE INTERNAL "EVFINUE
CODE REQUIRES THAT REGULATORY COMMISSIONS PERMIT ELECTRIC

UTILITIES TO COLLECT A PROFIT FROM CUSTOMERS ON KEPT TAXES

RELATING TO UNAMORTIZED INVESTMENT TAX CREDITS.

bEFORE SECTION !|r(E) WAS EN'!ACTED BY CONGRESS IN 171,

THE VAST MAJORITY OF STATE REGULATORY COMMISSIONS HAD

DECIDED THAT IT WAS UNFAIR TO REQUIRE UTILITY CUSTOMERS

TO PAY A PROFIT ON FUNDS THEY HAD PREVIOUSLY PAID TO THE

UTILITY FOR FEDERAL INCOME TAXES,

SECTIO! 1!r'(E) DENIES STATE REGULATORY COITMISSIOMS

THE ABILITY TO EXERCISE THEIR SOUND DISCRETION IN SETTIr!

FAIR ELECTRIC RATES FOR THEIR CITIZENS. ENACTMENT OF

S. 22173 WOULD RESTORE TO THE STATES COMPLETE AUTHORITY

TO DETERMINE THE FAIRNESS OF ELECTRIC RATES.












EXEMPTING ELECTRIC UTILITIES FROM THE FEDERAL INCOtlE

TAX LAWS MAY ACTUALLY INCPEASE UNITED D STATES TREASURY

RECEIPTS. IN 1711,, SHAREHOLDERS OF SOME ELECTRIC UTILITIES

RECEIVED A TOTAL OF SIX HUNDRED AND FORTY-NINE MILLION

DOLLARS IN DIVIDENDS 1',HICH WERE NOT SUBJECT TO PERSONAL
r
,EDERAL INCOME TAXES,

THIS WAS AN UNINTENDED BENEFIT WHICH CONGRESS HAS

UNSUCCESSFULLY TRIED TO CORRECT$ FNACTMEJT OF S, ?2J

WILL ENSURE THAT ELECTRIC UTILITY DIVIDENDS ARE FAIRLY

TAXED BY THE FEDERAL GOVERNMENT.

S. 2213 WOULD REFORM TAX-RELATED ABUSES IN SETTING

ELECTRIC RATES BY SIMPLY EXEMPTING ELECTRIC UTILITIES

FROM THE PROVISIONS OF THE INTERNAL REVENUE rODE. ANOTHER

APPROACH WOULD BE TO REFORM ACCOUNTING PROCEDURES ,!'HICH

HAVE BEEN DEVELOPED TO PROVIDE LEGITIMACY FOR THESE ABUSES

OF THE REGULATORY SYSTEM.

THE REPORTS, PCCOUNTING AND "ANAGEMENT ?UBCON,:IITTEE,

OF WHICH I AM CHAIRMAN, HAS BEEf STUDYING THE DEVELOPMErJT

AND APPLICATION OF ACCOUNTING PROCEDURES THAT HAVE RESULTED

IN MISLEADING AND INCONSISTENT INFORMATION, EEI!'JG REPORTED

TO THE PUBLIC. ONE OF THE MAJOR PROBLEM ARFAS IN ACCOUNTING

IS THE USE OF MORE THAI' ONE SET OF BOOKS TO REPORT

DIFFERENT FINANCIAL RESULTS TO DIFFERENT PARTIES.






10


COMMON SENSE OFTEN GIVES WAY TO ABSURD, BUT

EXPEDIENT ACCOUNTING THEORIES WHEN CORPORATIONS ARE REOUIRED

TO REPORT ON THE RESULTS OF THEIR ACTIVITIES TO

GOVERNMENTAL AUTHORITIES OR THE PUBLIC. UNFORTUNATELY,

ACCOUNTING FOR FEDERAL INCOME TAXES IM SETTING ELECTRIC

RATES HAS BEEN ONE OF THE MOST FRUITFUL AREAS OF RESOURCEFUL

CREATIVITY IN DEVELOPING MISLEADING ACCOUNTING PROCEDURES.

I RECEIVED THE TREASURY "EPARTMENT'S COMMENTS ON

S, 2213 ONLY LAST THURSDAY, BUT ITS OBJECTIONS TO MY BILL

DEMONSTRATE SOME OF THE PROBLEMS I HAVE DESCRIBED.

TREASURY POINTS OUT THAT FIVE HUNDRED AND TWENTY-

EIGHT MILLION DOLLARS IS TOO MUCH REVENUE FOR THE TREASURY

TO LOSE. TREASURY DOES NOT MENTION THE FIVE AND THREE-

TENTHS BILLION DOLLARS OF UNPAID FEDERAL INCOME TAXES 111HICH

ELECTRIC UTILITIES WERE KEEPING AT THE END OF 1971!.

IF UTILITY CUSTOMERS WERE NOT OVERCHARGED THAT

AMOIJNT,, THAT MOMEY WOULD UNDOUBTEDLY BE SPENT IN OTHER

SECTORS OF OUR ECONOMY, INCLUDING SUCH DEPRESSED AREAS

AS AUTOMOBILES AND HOUSING, THOSE EXPENDITURES WOULD

PROBABLY YIELD MORE TAX REVENUES FOR THE FEDERAL GOVERNMENT

THAN WOULD BE LOST BY ENACTMEtfT OF S. 2213.






11






THE TREASURY DEPARTMENT ALSO STATES THAT THE LOSSES

AND MEAGER INCOME SHOWN BY ELECTRIC UTILITIES FOR FEDERAL

INCOME TAX PURPOSES IS A MORE REALISTIC INDICATION OF THEIR

TRUE EARNINGS THAN PUBLICLY REPORTED UTILITY EARNINGS.

FVEN THE I.IVESTOR-OWNED ELECTRIC UTILITIES AND THEIR HIGH-

PRICED TAX LAWYERS AND ACCOUNTANTS HAVE NOT TRIED TO PUSH

THAT NONSENSE.

OUR STUDIES CLEARLY INDICATE THAT ACCOUNTING PROCEDURES

USED BY UTILITIES IN REPORTING TO THE PUBLIC ARE DEVELOPED

'IITH A PRIMARY CONCERN FOR PROMOTING THE UTILITIES' INTERESTS,

FINALLY, THE TREASURY DEPARTMENT BELIEVES THAT S, '_??7

CONFLICTS WITH THE "GOAL OF ACHIEVING INCREASED ENERGY

INDEPENDENCE BY WASTEFULLY ENCOURAGING ENERGY CONSUMPTION.

"E KNOW THAT IT IS A MAJOR POLICY OF THE PRESENT ADMINISTRATION

TO RAISE THE COST OF BASIC AND NECESSARY ENERGY SUPPLIES

FOR CONSUMERS.

CONGRESS HAS NOT ACCEPTED THAT POLICY, AND I BELIEVE

SUCH A POLICY DISREGARDS THE MAGNITUDE AND EFFECTS OF

COST INCREASES WHICH HAVE ALREADY OCCURRED.
THE ELECTRIC UTILITIES HAVE NOT SUPPORTED ', ??17

BECAUSE, UNLIKE THEIR CUSTOMERS, THEY HAVE SUCCESSFULLY

TURNED THE CONCEPT OF FEDERAL INCOME TAXATION INTO A COST-

FREE SOURCE OF READY CASH. THEY CALL IT ':CASri FLO'.', AN1D

SPEAK OF THE BENEFITS EXISTING FEDERAL TAX POLICiES SPI;G

TO CUSTOMERS$





12


I CALL IT TAX-KEEPING, AND SAY THAT IT IS UNFAIR TO
REQUIRE HARD-PRESSED RESIDENTIAL CUSTOMERS AND BUSINESSMEN

TO PAY 'PHANTOM" FEDERAL INCOME TAXES. I HAVE NOT YET MET

A CUSTOMER WHO BELIEVES THAT HE SHOULD PAY FOR PROPERTY

USED BY MONOPOLIES TO PROVIDE BASIC AND NECESSARY ELECTRIC

SERVICE AT A HEALTHY PROFIT.
HOWEVERR, I HAVE HEARD FROM ANGRY CUSTOMERS WHO ARE

OUTRAGED AT BEING CHARGED FOR FEDERAL INCOME TAXES WHICH

ARE NOT BEING PAID BY THEIR ELECTRIC UTILITIES,

MILLIONS OF CUSTOMERS CAN NO LONGER AFFORD THE

UNNECESSARY AND EXTRAVAGANT "CASH-FLOW" PROVISIONS FOR
ELECTRIC UTILITIES WHICH ARE EMBEDDED IN THE PRESENT

FEDERAL TAX LAWS,

I URGE THAT THIS COMMITTEE GIVE SERIOUS CONSIDERATION
TO S. 2217 AND THE REFORM IT INOULD BRING TO THE PROCESS OF

SETTING ELECTRIC RATES. I ALSO URGE THAT THE FINANCE
COrIMITTEE STAFF WORK 14ITH THE STAFF OF MY SUBCOMMITTEE IN

FURTHER EXPLORING THE WAYS IN WHICH ACCOUNTI,04G PROCEDURES

.RIIG CONFUSION AND INEQUITY INTO THE COMPUTATION OF
FEDERAL I!N!COtE TAXES$

I BELIEVE THAT A JOINT EFFORT WOULD BE VERY HELPFUL

TO CONGRESS IN REFORMING OUR TAX LAWS, AND UNDERSTANDING
THE IMPORTANCE OF PROPER ACCOUNTING PROCEDURES*





13






1R. CHAIRMAN, I WOULD LIKE TO SUBMIT FOR THE RECORD

A LIST OF MY REMARKS IN THE CONGRESSIONAL RECORD CONCER,'lIIf-'

FEDERAL INCOME TAXES PAID BY ELECTRIC UTILITIES. TihOSE

REMARKS CONTAIN MUCH DETAIL WHICH I HAVE OMITTErD FROll MY

TESTIMONY TODAY. I ALSO INCLUDE FOR THE RECORD A COPY

OF MY Al.ENDrMENT 1840 TO H,,. 10612, WITH CORRECTIOr OF TW'O

TYPOGRAPHICAL ERRORS Irl THE PRINTING OF THAT AMENDMENT.

I ALSO SUBMIT FOR THE HEARING RECORD AN ARTICLE FROM

THE 13 SEPTEMBER, 1075 PHILADELPHIA INOIIRER. IT SHOl.!S

HOW UTILITY CONSUMERS ARE OVERCHARGED FOP PHANTOM FEDERAL

TAXES.

IN THIS INSTANCE PHILADELPHIA FLECTRIC EASED A 1!74

RATE INCREASE REQUEST, IN PART, ON A PROJECTED FEDERAL TAX

PAYMENT OF ONE HUNDRED AND TWO MILLION DOLLARS THAT YEAR.
THE STATE UTILITY COMMISSION, WHICH EVENTUALLY rRA1TED

MOST OF THE RATE-INtCREASE REOUEST, CONTENDED THAT THE

COMPANY WOULD HAVE TO PAY ONLY NINETY-ONE MILLION DOLLARS

IN FEDERAL TAXES.
PUT, AS IT TURNED OUT, THE COMPANY DID NOT PAY A CENT

OF FEDERAL INCOME TAXES IN _.7/', DESPITE EARIIICGS OF ONE

HUNDRED AND TWENTY-NINE MILLION DOLLARS.

INSTEAD, THE COMPANY ACCUMULATED TAX CREDITS OF

MORE THAN ELEVEN MILLION DOLLARS.


75-946 0 76 2





14


-14 -

THAT IS THE COSTLY EFFECT OF THE PRESENT LAW ON
THE CONSUMERS OF JUST ONE UTILITY IN ONE STATE,
RUT, MR, CHAIRMAN, THE MOST OUTRAGEOUS PART OF THE
UTILITY TAX RIP-OFF IS YET TO COME, IF THE UTILITIES GET
THEIR WAY,
THEY WANT TO SELL THEIR UNUSED TAX CREDITS:
THE BOARD CHAIRMAN OF PACIFIC POWER AND LIGHT, PON
C. FRISBEE, TESTIFIED ON THAT POINT BEFORE THE WAYS AND
f EANS COMMITTEE LAST YEAR,
HE RECOMMENDED THAT UTILITIES BE ALLOWED TO SELL
UNUSED INVESTMENT TAX CREDITS, I WONDER HOW MUCH THAT
WOULD COST THE TREASURY, WHICH DID NOT EVEN MENTION, IN
ITS COMMENTS ON MY AMENDMENT, THE MORE THAN FIVE BILLION
DOLLARS THE UTILITIES WERE KEEPING AT THE END OF 1974.
So THE UTILITIES DON'T WANT TO SETTLE FOR JUST BEING
TAX-KEEPERS, RATHER THAN TAXPAYERS, THEY WANT THEIR CAKE,
THEIR FROSTING, AND THE PAN,
I URGE THIS COMMITTEE TO BRING AN END TO THIS
NONSENSE BY ADOPTION OF MY PROPOSAL,









Cedar No. 891
91rii CONGRESS I4E
2DSESS$1N fl R o 10612




IN T ,Hji SENATE OF THE UNITED STATES
t.-,-: 14, 1976
Ordered to lie on the table and to be printed




AMENDMENT
Intended to be proposed by 3r. METCALF to 11.R. 10612, ail
Act to reforin the tax laws of the United States, viz: At the
appropriate place ins:ert the following:
1 SEC. EXEMPTION OF ELECTRICAL UTILITIES FROM

2 INCOME TAX.

3 (a) IN GENERA',L.-SectlOI1 501 (c) (3) (relating to

4 ist of exeillpt orgalizatilis) is amended by adding at the

5 end thereof the following new paragraph:
6 ''(20) A corporation engaged in the sale of e1cc-

7 trical energy, if the rates for suchi sale have been estab-
8 listed or approved by a State or political subdivision

9 thereof, by an agenc\- or instrumentality of the United
10 States, or by a public utility or public service conimis-

11 sion or other similar body in the 1)istrict of Columbia or
12 of any State or political subdivision thereof.".

Amdt. No. 1840





16




.1 .(b) TECHNICAL ANI) (ON IN; AMEN I)MEN 1.-
(1) Section 46(c)(3) relatingg to public tility
3 )ropel't) i.i amended by striking out "electrical energy,
4 in su)paragraph (B) (i)\
7 (2) S,.'eiti 11;7 (: ) relatingg to definition of

6; l)lic tuilitv po lperty ) is amitended bIy strikiuig, out
7 "cIcctrical I cIergy, ilI s IIJ)dpa fra dl lI (.\) ( i)

(") Sectoli 2-1 (b,) (1) (rclatit,, to definitions of

p lulblic utility) is amended to read as follows:
1() ''(1) PUBILMc UTIILTY.-The term ')ublic utility'
11 iniaits ('orlratioIn (ngagCd in the furnishing of tele-

12 plione service or in the sale of gas or water if the rates
13 fo)r su'l fullIliig or ale, as tl(' case Inay )e 1,] 1vv
I IicI('.l t es81)li"ll('d (,1r l)lrov'cd !by a State or political sub-

15 division thereof or 1bv an agellcv (or instruiciltalitv of
16 thle Ullited States, or Y a )ullic utility or public service

17 commissil or other similar body of the I)istrict of
18 ('ohlumbia, ()r of mioly State or political subdivision

19 thereof.".
20 (4) Section 77()1 (a) (88 ) rlto to d "fi"i
21 (f regulated public utility) is anmene(d I)y strikin.g out

22 'clectri(. cIlerv-, in sil)paragrapli (A) (i)
23 14]TE"TIVE [, X-The aendents made hly this

21 sect jiol ap ply t,) ta xa lie ea rls 1)(glII jo Octoberl 1. 77.






17



Statements by Senator Lee Metcalf in the Congressional
Record Regarding Federal Income Taxation of Investor-
owned Electric Utilities.





11 September, 1974; p. S16345 Utility Consumers Simonized

29 July, 1975; p. S14090 Introduction of S. 2213

10 September, 1975; p. S15679 Competition Keen Among
Utilities For Taxkeeper of the Year Award

15 September, 1975; p. S15930 Competition Keen Among
Utilities for Tax Keeper of the Year Award Corrections
of Typographical Errors in Tables

4 arch, 1976; p. S2901 The $649 Million Tax-Free
Bonanza for Utility Investors

23 1arch, 1976; p. S3997 More Tax-Free Dividends for
Utilities

14 June, 1976; p. S9136 Introductory Remarks to
Amendment No. 1840 to l.R. 10612 The Tax Reform Act
of 1976










19




STOCK OPTION WRITER'S ASSOCIATION
6210 MASSACHUSETTS AVENUE
BETHESDA. MARYLAND 20016
WALLACE D. BARLOW TEL 301-229-6066
EXECUTIVE DIRECTOR H.R. 3052 (Mr. Rostenkowski)

TUESDAY, AUGUST 24, 1976

UNITED STATES SENATE, COMMITTEE ON FINANCE

TESTIMONY OF WALLACE D. BARLOW, EXECUTIVE DIRECTOR, STOCK OPTION WRITER'S
ASSOCIATION, 6210 MASSACHUSETTS AVENUE, BETHESDA, MARYLAND.

I am Wallace Barlow of Bethesda, Maryland. I have been trading in stock options
for the last 48 years. I appear today on behalf of the independent stock option writers,
whose existence has been threatened by H.R. 3052; (also by H.R. 12224 (Mikva), which has
now been added to the so-called "tax reform" bill.
This bill would transfer income from the pockets of the independent writers to the
pockets of the tax exempt organizations. Our option lapse income would be taxed at ord-
inary income rates; theirs would no longer be considered "unrelated business income" and
would NOT be taxed.
How important is option lapse income to the writer, (or seller), of stock options?
My own experience is typical. In the last ten years, an average of 66% of our options
lapsed. In 1973, 79% lapsed and in the first half of 1976, 40% lapsed. I4 1975, our
option lapse income was 80% of the total; dividends were 20%; capital gains were zero.
H.R. 3052 is, in effect, a private bill for the relief of the Chicago Board Options
Exchange, (CBOE); also the ASE and the PBW exchanges, in that it would enlarge their
markets. In this new market, the exempt organizations would have an unfair advantage over
the independent writers.
Already, since the advent of "listed" options, in 1973, most of the independent
writers are bankrupt. The few remaining writers of conventional, (or non-listed), options
have suffered, in that premiums on the listed options are much lower than on the non-
listed options. In 1976, to date, our annualized premiums as a percentage of the amount
at risk, amounted to 44.9% on the non-listed calls and 21.6% on the listed calls.
We need 45% per year to survive, since our investment may be ten times as large as
that of the buyer. Also, we need a cushion to protect us against the accumulation of
"rejects". For example, when Canadian Javelin fell from $21 to $2, and was de-listed,
we gained some option lapse income. However, we stand to lose far more than this on the
ultimate sale, or charge off, of 2200 shares.
We regard H.R. 3052 as rank and offensive discrimination and we ask the Committee
to protect our people against the ruinous competition of tax exempt organizations.
Thank you for the privilege of testifying.



Wallace D. Barlow













Summary of Statement
of
Leon Pomerance
on Behalf of
the Chicago Board Options Exchange
Before the
Senate Committee on Finance
August 24, 1976

The Chicago Board Options Exchange ("CBOE") strongly
supports H.R. 3052 which removes a barrier to the participation
in the options markets on the part of exempt organizations.
Present law unnecessarily discourages exempt organizations from
writing options to buy or sell securities by inconsistently
applying the unrelated business income tax to certain income
which exempt organizations receive from writing options.

Most exempt organizations are acutely aware of their
need for additional funds. One effective method to increase
the yield from their securities portfolio is an investment strategy
known as "covered option writing." In covered option writing,
an investor who owns a stock writes a "call" (an option to buy
that stock at a specified price within a specified period of
time). The option writer foregoes the possible appreciation
in the value of the stock during the option period in return
for the premium he receives when he writes the option. This
premium income is similar to other passive income, such as
dividends, which an exempt orqanization derives from investment
activity and which is not subject to the unrelated business
income tax.

The "unrelated business income tax" is imposed on the
net income derived from any unrelated trade or business of cer-
tain exempt organizations. However, the unrelated business
income tax is not applicable to investment income such as divi-
dends, interest, annuities, royalties, and capital gains from
the sale of investment assets. Under present law there is an
anomaly in the application of the unrelated business income tax
to exempt organizations. If an exempt organization writes an
option which is later exercised, the gain or loss realized upon the
exercise is treated as capital gain or loss, and is thus exempt
from the unrelated business income tax. In contrast, if the
option lapses or the organization terminates its obligation
under the option by entering into a closing transaction, the
gain or loss is treated as ordinary income or loss and is sub-
ject to the unrelated business income tax.

H.R. 3052 amends Internal Revenue Code 512(b) (5) to
exclude from the term "unrelated business taxable income" all
gains on the lapse or termination of options to buy or sell
securities, if the options have been written in connection with
an exempt organization's investment activities. Thus, H.R. 3052
removes the anomaly in present law: the change would bring the
tax treatment of lapse and closing transaction income into line
with other passive income derived by an exempt organization from
its investment activities.






22


2 -


Sound tax policy dictates that H.R. 3052 should be
adopted. First, for more than four years the Congress has
attempted to make this change and has recognized that all passive
investment income derived from an exempt organization's invest-
ment activities should be treated consistently: not subject to
the unrelated business income tax. Income from lapses or termi-
nated options is such passive investment income.

Second, the inconsistent treatment of income from
options should be corrected, since such treatment discourages
exempt organizations from writing options in their overall
investment strategy. When an exempt organization writes a
call option, it cannot know whether that option will be termi-
nated through exercise, lapse, or closing transaction. The
possibility that the unrelated business income tax will apply
to the income derived from writing options deters some exempt
organizations from writing options. We do not feel that the
Congress intends to discourage option writing on the part of
exempt organizations in this manner.

Finally, the purpose of the unrelated business income
tax -- to prevent tax exempt businesses from unfairly competing
with taxable businesses -- is not furthered by applying the
tax to income derived from the lapse of, or closing transaction
in, options written by exempt organizations in connection with
investment activities. Production of investment income, such
as capital gains, by exempt organizations simply does not
involve competition with taxable businesses.

H.R. 3052 is closely related to an amendment to H.R.
10612 (the Tax Reform Act of 1976), and H.R. 12224 which passed
the House on July 20, 1976. The amendment to H.R. 10612 and
H.R. 12224 are substantiallly the same and relate to the tax
treatment of income derived from writing options. These pro-
visions correct another example of inconsistent treatment of
transactions in options, and amend Internal Revenue Code 1234
to provide that gain on the lapse of, and gain or loss from any
closing transaction in, options shall be treated as short-term
capital gain or loss.

The CBOE supports the principles of consistency and
neutrality in the tax treatment of options and believes that
those principles underlie the amendment to H.R. 10612 and H.R.
12224. We therefore supported H.R. 12224 in testimony before
the Ways and Means Committee and suggested changes which were
ultimately adopted in that bill. We wish to point out that the
amendment to H.R. 10612 and H.R. 12224 will be disruptive to
transactions on our exchange and other options exchanges if they
were to contain an effective date which is significantly prior to
the date on which the bill is enacted into law. Since these






23


3 -



provisions change the character of gain on the lapse of, and
gain or loss from any closing transaction in, options from
ordinary income to short-term capital gain, investors will
be uncertain about the tax treatment of their transactions in
options between the effective date of the bill and the date of
enactment. Such uncertainty will deter many transactions.
We believe that both the House and the Senate recognized and
appreciated the severity of this problem and wrote into H.R.
12224 and the amendment to H.R. 10612 an effective date which
is their estimates of when the bill would likely be enacted
into law. We trust that the Conference Committee will estab-
lish an effective date which is not prior to the date of the
provision's enactment.









25


STATEMENT OF

LEON POMERANCE

ON BEHALF OF

THE CHICAGO BOARD OPTIONS EXCHANGE

BEFORE THE

SENATE COMMITTEE ON FINANCE

AUGUST 24, 1976



I am Leon Pomerance, Chairman of the Board of Directors

of the Chicago Board Options Exchange. With me are Daniel B.

Skelton, Vice President of the Exchange, and Ernest S. Christian,

Jr., special tax counsel.

The Chicago Board Options Exchange ("CBOE") is a national

securities exchange registered under the Securities Exchange

Act of 1934. It was the first exchange in the United States

to provide a central marketplace for trading option contracts

for the purchase and sale of stock, popularly known as "puts"

and "calls". The CBOE has overcome the deficiencies of the

over-the-counter market by providing an efficient and continuous

options market in which a position previously taken can be liq-

uidated at any time. At the present time, trading exists in

call options on stocks which are listed on the New York and

American Stock Exchange. The CBOE expects that trading in

puts will begin soon, and that the number of listed stocks in

which options are traded w, ill be increased.






26



-2-



CBOE's Position on H.R. 3052

The CBOE strongly supports H.R. 3052 which removes a

barrier to the participation in the options market on the part

of exempt organizations. H.R. 3052 modifies the provisions of

present law which unnecessarily discourage exempt organiza-

tions from writing options by applying the unrelated business

income tax to certain income which exempt organizations receive

from writing options to buy or sell securities.



The Importance of Option Writing to Exempt Organizations

The options exchanges provide exempt organizations with an

important new source of income from their investment activities.

The options markets, as sources of additional funds, are impor-

tant to most exempt organizations, particularly colleges and

universities, since they cannot attract sufficient funds from

contributions or grants, and therefore must look to their in-

vestments for additional income.

An investment technique, known as "covered option writing,"

is a low-risk investment strategy and should not be discouraged

by the tax law. On the contrary, the covered writer risks only

the possible appreciation in the value of the stock during the

option period. The writer foregoes this potential growth-in

return for the premium he receives when he writes the option.

This premium income is similar to other passive income, such

as dividends, which an exempt organization derives from in-

vestment activity and which is not subject to the "unrelated

business income tax."







27


-3-



Covered option writing may be illustrated by an example.

Assume that a university has stock in its portfolio with a

value of $10,000 on January 1, 1976, and that it intends to

hold the stock as a long-term investment. The stock will un-

doubtedly fluctuate in value; and at the end of the year, the

university will have an unrealized gain or loss on the stock.

However, except to the extent that the university has re-

ceived a dividend on the stock during the year, it will not

have realized any income from its investment.

Instead, suppose that the university writes a call

option with a $10,000 strike price on January 1, and receives

a premium of $1,000 for doing so. If the stock declines in

value or even remains the same during the option period, the

option will become worthless and will not be exercised. The

university will realize $1,000 of income when the option lapses,

and will also retain the stock which will then have a value of

$10,000 or less. Alternatively, if the stock increases in

value during the option period, the option will probably be

exercised. The university will realize the same $1,000 premium

from writing the option, but rather than having the stock with

a value in excess of $10,000, it will receive $10,000 in cash

for reinvestment.


Present Tax Treatment of Option Writing by Exempt Organizations

The "unrelated business income tax" is imposed on the net

income derived from any unrelated trade or business of certain

exempt organizations. However, the unrelated business income






28



-4-



tax is not applicable to investment income such as dividends,

interest, annuities, royalties, and capital gains from the sale

of investment assets.

Under present law, there is an anomaly in the application

of the unrelated business income tax to exempt organizations.

The tax treatment of income which an exempt organization derives

from writing puts and calls depends on whether the option is

exercised, lapses, or is terminated in a closing transaction.

If an exempt organization writes a call in connection with its

investment activities and the call is exercised, the underlying

stock is sold by the exempt organization. The premium previous-

ly received for writing the option is treated as part of the capi-

tal gain or loss from the sale of the underlying stock. If a gain

has occurred, the entire gain on the sale, including part or all

of the premium, is not taxed since present Internal Revenue Code

512(b) (5) provides that "unrelated business taxable income"

excludes all gains or losses from the sale, exchange, or other

disposition of capital assets.

On the other hand, the anomaly arises if an option written

by an exempt organization is not exercised, and the option lapses

or the writer terminates his obligation under the option by

entering into a closing transaction. In the case of both a

lapse and a closing transaction, any gain or loss realized is

classified as ordinary income or loss rather than capital gain

or loss. The Internal Revenue Service has ruled that income

realized by an exempt organization from call options which lapse







29



-5-




is income subject to the unrelated business income tax. Rev.

Rul. 66-47, 1966-1 C.B. 149.

.The Change in Present Law Effected by H.R. 3052

H.R. 3052 amends Code 512(b) (5) to exclude from the term
"unrelated business taxable income" all gains on the lapse or

termination of options to buy or sell securities, if the options

have been written in connection with the exempt organization's

investment activities. Thus, H.R. 3052, which has Treasury De-

partment support, removes the anomaly in present law: the change

would bring the tax treatment of lapse and closing transaction

income into line with other passive income derived by an exempt

organization from its portfolio securities.


Reasons for the Change Made by H.R. 3052

More than four years ago, in reporting H.R. 11196 (a bill

similar to H.R. 3052), the Committee on Ways and Means-recognized

that income from lapse or termination of an option should not be

treated differently from income upon the exercise of an option,

when the options have been written in connection with investment

activities of the organization. The Committee concluded that in

such circumstances both types of income should be exempt from

the unrelated business income tax because both types constitute

investment income traditionally exempted from that tax. H.R. 3052


75-946 0 76 3






30


-6-


again recognizes that the taxation of income from options which

are written by exempt organizations and which lapse or are ter-

minated is inconsistent with the generally tax-free treatment

accorded to exempt organization's income from investment activites.

The inconsistent treatment of income from option trans-

actions by exempt organizations should be corrected, since such

treatment discourages exempt organizations from using options in

their overall investment strategy. When the university in the

above example writes a call option, it cannot know whether that

option will be terminated through exercise, lapse, or closing

transaction. As explained, the covered writer foregoes part of

the possible appreciation in the value of the. stock during the

option period in reutrn for the premium it receives when it

writes the option. To the extent that under some circumstances

(i.e., lapse or closing transaction) the premium may be taxed as

unrelated business taxable income, this potential tax will deter

some exempt organizations from writing options. We do not feel

that the Congress intends to discourage option writing -- a

basically conservative investment strategy -- on the part of

exempt organizations.

Finally, the purpose of the unrelated business income tax --

to prevent tax-exempt businesses from unfairly competing with

taxable businesses -- is not furthered by applying the tax to

income derived from the lapse of, or closing transaction in,

options written by exempt organizations in connection with in-

vestment activities. The production of investment income, such









-7-



as capital gains, by exempt organizations simply does not in-

volve competition with taxable businesses. All of this passive

investment income, including gains from the lapse or closing

transactions in options, should therefore be exempt from the

unrelated business income tax.


H.R. 3052 and the Percy Amendment No. 325 to H.R. 10612

(Tax Reform Act of 1976)

In addition to our testimony in support of H.R. 3052, the

CBOE believes that it would be remiss if it did not point out

to the Committee the closely related provisions of Amendment

No. 325 to H.R. 10612 (Tax Reform Act of 1976) which amendment

was offered by Senator Percy and agreed to on August 6, 1976, and

H.R. 12224 which is substantially the same as the Percy amend-

ment and was passed by the House on July 20,1976. The Percy

amendment and H.R. 12224 deal with another example of incon-

sistent treatment of transactions in options, and amend Internal

Revenue Code 1234 to provide that gain on the lapse of, and

gain or loss from any closing transaction in, options shall be

treated as short-term capital gain or loss. Investors who buy and

sell stocks and securities receive capital treatment for gains and

losses derived from their investment activities. Similarly,

investors who buy and then resell options receive capital

treatment on their gains and losses. The inconsistency in

present law occurs in the tax treatment of option writers

whose options lapse or are terminated through a closing

transaction. Under rulings from the Internal Revenue






32


-8-


Service, gain or loss derived by an option writer from the lapse

of, or closing transaction in, options is ordinary income or loss

to the option writer. The Percy amendment and H.R. 12224 remove

the inconsistency in present law by providing that a writer's, gain

on the lapse of, and gain or loss from any closing transaction in,

options is treated as short-term capital gain or loss.

Removal of this inconsistency was the subject of extensive

public hearing in the Committee on Ways and Means, is supported by

the Treasury and results in a revenue gain of about $10 million.

Options traded on the CBOE should be taxed no more and no

less favorably than other similar securities and transactions.

We support the principles of consistency and neutrality in the

tax treatment of options and believe that those same principles

underlie the Percy amendment and H.R. 12224. We therefore support

those provisions.

We wish to point out that the Percy amendment and H.R. 12224

will be disruptive to transactions on the CBOE and other options

exchanges if they were to contain an effective date which is

significantly prior to the date on which the bill is enacted into

law. H.R. 12224 changes the character of gain on the lapse of,

and gain or losss from any closing transaction in, options from

ordinary income to short-term capital gain. Thus, it can

readily be appreciated that between the effective date of the

bill and the date of enactment investors will be uncertain

about the tax treatment of their transactions in options and

will therefore be deterred from making commitments which they

otherwise would have made.






33


-9-



We believe that the Committee on Ways and Means

recognized and appreciated the severity of this problem and

wrote into H.R. 12224 an effective date which reflected its

judgment concerning when the provision would likely be enacted

into law. Similarly, in adopting the Percy amendment to H.R.

10612, the Senate provided for an effective date of September 1,

1976, which is its estimate of when the provision would likely

be enacted into law. We trust that the Conference Committee

will establish an effective date which is not prior to the

date of the provision's enactment, and thus will avoid retro-

active treatment of investors.

In conclusion, Mr. Chairman, we thank you for your

attention and consideration of our views concerning these

two important provisions relating to the tax treatment of

options.










35


STATEMENT OF THE DISTILLED SPIRITS COUNCIL OF THE U.S., INC.

Before the Committee on Finance, U.S. Senate, in Support of HR 3055


The Distilled Spirits Council of the U.S., Inc. (DISCUS), the

national trade association of the domestic distilling industry, whose

members produce approximately 95% of all distilled spirits produced in

the United States, supports the provisions of HR 3055 for the reasons

set forth in attachment A to this statement (attachment A sets forth the

purposes of each section, the revenue impact, if any, and the reasons in

support of enactment). Attachment B is a section by section explanation of

HR 3055.

The bill would simplify and encourage the exportation of distilled

spirits. In addition, the bill would liberalize the removal of samples

for research, development, or testing and would relax existing requirements

for the mingling and blending of distilled spirits in bond. Production of

gin with greater uniformity and without loss in quality would be permitted.

Finally, the bill would extend to bulk spirits brought into the United

States from Puerto Rico or the Virgin Islands the same loss provisions pre-

sently applicable to imported and domestic spirits thereby curing an inequity

in the present law.

There would be no loss of revenue as a result of the amendments

contained in the bill; there would be a short-term lag in revenue of an

undetermined, but not major, amount resulting from Section 3 of the bill.

In keeping with our need and desire to improve our export position

in all fields, DISCUS urges adoption of these amendments. We appreciate

this opportunity to present our views on pending legislation and request

favorable consideration.







36



SUMMARY OF PRINCIPAL POINTS
Included in the Statement of Distilled Spirits Council of the U.S.. Inc.
Before the Committee on Finance, U.S. Senate, in Support of HR 3055


A. Benefits of Bill:

1. Simplification of export procedures

2. Liberalization and simplification of plant procedures

3. Equalization of loss provision applicable to all dis-
tilled spirits


B. Revenue Effect:

1. No loss of revenue

2. Short term lag in revenue in minor amounts











ATTACHMENT A


Summary of Provisions of H. R. 3055
94th Congress, First Session


A. Sets forth the purpose of the Section

B. The revenue impact, if any

C. The reasons in support of enactment


Section I

a) Would eliminate the requirement of showing on the label of gin

and vodka bottled in bond for export the name of the distiller.

b) Revenue effect none.

c) Would simplify the labeling of gin and vodka for export and there-

by facilitate export sales.


Section 2

a) Would extend to bulk imported goods which are bottled in the United

States for export the same tax benefits presently permitted for

domestically produced goods bottled for export.

b) Revenue effect none.

c) Would broaden market for goods to be exported from the United States.


Section 3

a) Would create an export facility on distilled spirits plant premises.

b) Revenue effect no loss of revenue but a short-term lag in revenue

of undetermined, but not major, amount.

c) Would simplify export procedures and encourage further development

of export markets.


Section 4

a) Would liberalize export procedures by permitting transfer to

any Customs-bonded warehouse for export.






38


Section 8

a) Would extend to bulk sririts brought into the United States

from Puerto Rico or the Virgin Islands the same loss provisions

made applicable to imported and domestic spirits.

b) Revenue effect none.

c) Would correct an oversight in prior law whereby loss allowances

applicable to domestic and imported spirits were not made applicable

to products from Puerto Rico and the Virgin Islands.


Section 9

Provides only for effective date.











ATTAOMrT B


H.R. 3055

94th Congress First Session

EXPLANATION OF THE BILL


This bill makes a series of amendments to the distilled spirits

plant provisions of the Internal Revenue Code which in general are designed

to remove restrictions which are not necessary for effective enforcement of

the revenue and regulatory aspects of these provisions and which would

facilitate and encourage exportations. These amendments will have no

adverse effect on the revenue. They can be summarized as follows:

SECTION 1. NAME OF DISTILLER ON LABEL OF GIN AND VODKA BOTTLED

IN BOND FOR EXPORT.

Section 1 of the bill would eliminate the requirement of shoving,

on the label of gin and vodka bottled in bond for export, the name of the

distiller. Such information serves ho useful purpose, and since gin and

vodka are produced from neutral spirits, compliance with the statute aeeans

showing the distiller of the neutral spirits which may be a person different

from the producer of the gin or vodka; the showing of such distiller on the

label could even be deceptive to the consumer.

SECTION 2. DRAWBACK FOR BULK IMPORTED GOODS BOTTLED I UNITED STATES.

Section 2 of the bill would authorize allowance of drawback of

tax on bulk imported goods which are bottled in the United States and exported

therefrom. Because of the limitation to goods "manufactured or produced in

the United States" in existing law, imported distilled spirits are not subject

to drawback under section 5062(b). However, by virtue of section 5523, IRC,

reduction in proof and bottling or packaging are deemed to constitute manufacturing

under section 311 of the Tariff Act of 1930. (19 U.S.C. 1311) This amendment

would make the export standards of Sec. 5062(b) consistent with those in

Section 311.







40



-2-


SECTION 3. DISTILLED SPIRITS RETURNED TO BONDED PREMISES.

Section 3 of the bill would permit the bottler or packager to return

to an export storage facility on bonded premises distilled spirits which would

be eligible for drawback under Section 5062(b). The return of the spirits

must be solely for the purpose of storage pending withdrawal for export, or

other withdrawal without payment of tax authorized under Section 5214(a), or

free of tax under Section 7510.

This section also permits the bottler to return to appropriate storage

facilities on the bonded premises distilled spirits which he had bottled in

bond after tax determination. Such spirits may be withdrawn for any purpose

for which distilled spirits bottled in bond before tax determination may be

withdrawn from bonded premises.

Appropriate amendments are made to provide for the remission, abate-

ment, credit, or refund of tax on spirits returned to bonded premises under

this section.

The amendments made by this section are designed to simplify and

encourage export transactions.

SECTION 4. WITHDRAWALS TO CUSTOMS BONDED WAREHOUSES.

Section 4 of the bill would authorize withdrawal of distilled spirits

from bonded premises without payment of tax for transfer to any customs

bonded warehouse. This provision applies to spirits bottled in bond for export

and to spirits returned to bonded premises under section 5215(b). The amendment

is designed to simplify and encourage export transactions.

SECTION 5. REMOVAL OF SAMPLES FOR RESEARCH, DEVELOPMENT, OR TESTING.

Section 5 of the bill would make a reasonable extension of the

purposes for which samples may be removed without payment of tax to include

plant research in addition to laboratory analysis. This amendment is similar

to the recent amendment to Section 5053 relating to beer.











-3-


SECTION 6. MINGLING AND BLENDING OF DISTILLED SPIRITS.

Section 6 of the bill would permit distilled spirits plant

proprietors to commingle distilled spirits within 20 years of the date of

original entry rather than the existing 8 years. The section also eliminates

the requirements of existing law that the mingled spirits be placed in the same

barrels and that the mingling must be for further storage in bond. Proper admini-

stration of the distilled spirits tax and regulatory provisions does not require

the limitations on commingling to 8 years or the return of the distilled spirits

to bonded storage. From a practical standpoint, the use of the same package

is an unnecessary restriction.

SECTION 7. USE OF JUNIPER OILS IN PRODUCTION OF GIN.

Section 7 of the bill would authorize the use of the extracted oils

of juniper berries and other aromatics in the production of gin without

incurrence of the rectification tax in addition to the present system of

redistillation of a pure spirit over juniper berries and other armnatics.

This amendment will permit production of gin with greater uniformity and

without loss in quality.

SECTION 8. LOSS PROVISIONS FOR SPIRITS BROUGHT IN FROM

PUERTO RICO AND THE VIRGIN ISLANDS.

Section 8 would extend to bulk spirits brought into the

United States from Puerto Rico or the Virgin Islands the same loss

provisions now applicable to imported and domestic spirits.

Due to an oversight when the law was amended to permit entry

of such spirits into bond the provisions applicable to imported and

domestic spirits were not extended to spirits brought in from Puerto Rico

or the Virgin Islands. Enactment of this section would cure inequities in

the present law.







42



-4-


SECTION 9. EFFECTIVE DATE.

The act would become -.ffective on the first day of the first

calendar month which begins more than 90 days after enactment. This will

give the Treasury Department and the distilling industry sufficient time to

modify procedures under the statutes amended.





43


STATEMENT OF

THE ASSOCIATION OF AMERICAN PUBLISHERS


In Support of Extending H. R. 5161


To Mass Market Paperback Books


Submitted to


The Committee on Finance


United States Senate


August 24, 1976






44


Summary of Principal Points

1. Proposed Amendment to H. R. 5161 Would Avoid Unjust
Discrimination. H. R. 5161 ameliorates a hardship in the
magazine distributing business by adopting a tax accounting
rule which is more consistent with the generally accepted
accounting principle of matching income and expenses. It
provides that distributions made primarily for display
purposes (and which are returned within 2 1/2 months after the
taxable year) are not includible in taxable income. The bill,
however, is limited to magazines, and failure to accord display
distributions of mass market paperback books the same treatment
would result in unjust discrimination between similarly
situated taxpayers.

2. Mass Market Paperbacks Meet the Substantive Tests
of H. R. 5161. The House bill would prescribe two requirements
for determining whether publications have been distributed for
display purposes. Mass market paperback publishers and
distributors, like magazine publishers and distributors, meet
these requirements. In both businesses --

a. Excess quantities of publications, in-
tended for retail display, are distributed
with no expectation that they will be sold.

b. Publishers and distributors are legally
bound to accept returns of the excess distri-
butions.

3. Mass Market Paperbacks and Magazines Have Other
Significant Characteristics in Common. Apart from meeting the
substantive requirements of H. R. 5161, mass market paperback
books have other characteristics in common with magazines
which strongly militate against disparate treatment of the
two types of publications. In both businesses --

a. The display distributions are substantial
in amount (about 35% for paperbacks). Therefore,
treatment of such distributions as completed
sales may have a significant distorting effect on
taxable income, particularly during periods of
inflation.

b. The publications have very short retail
shelf-lives.

c. Unsold distributions have little or no economic
value and are almost never resold. Display distri-
butions are generally returned in the form of covers
which have been stripped from the books.

d. The publications are generally distributed by
the same wholesalers, and often to the same retail
outlets with the same potential customers.

4. Summary. For the foregoing reasons, the improved
accounting method which H. R. 5161 would provide for magazine
publishers and distributors should be extended as well to
publishers and distributors of mass market paperback books.






45


STATEMENT OF
THE ASSOCIATION OF AMERICAN PUBLISHERS
IN SUPPORT OF

EXTENSION OF H. R. 5161 TO MASS MARKET PAPERBACK PUBLICATIONS

I. SUMMARY

A. Problem Addressed by H.R. 5161

H. R. 5161, approved by the House of Representatives

on August 2, 1976, would go a long way toward eliminating a

disparity which exists between the book and income tax

accounting of accrual basis taxpayers in the magazine pub-

lishing industry.

The disparity arises because, under Internal

Revenue Service interpretation, current law does not permit

magazine publishers and distributors to deduct from gross

income amounts which they place in reserve, in accordance

with generally accepted accounting principles, to provide

for refunds payable with respect to magazines distributed in

a taxable year and returned to them after the close of that

year. Such reserves are considered nondeductible for tax

purposes even though the publisher or distributor intentionally

oversells periodicals to wholesalers to assure adequate

display at the retail level and is legally obligated to

accept for refund all returns of the excess distributions.

In the periodicals industry, the law as so inter-

preted may result in significant distortions of taxable

income. Excess distributions of periodicals which the parties

never expect to be sold are nonetheless included in mncom.

When this occurs in the latter part of the tax year, most

returns of the excess distributions are not taken into

account until early in the succeeding year. The result is


75-946 0 76 4






46


2 -


that taxable income may be overstated during periods of

rising sales, and understated during periods of declining

sales.

Without affecting existing law relating to the

nondeductibility of estimated expenses, H. R. 5161 would

ameliorate the income-distorting effect on publishers and

distributors of periodicals. The House-passed bill, which

the Treasury Department has stated it does not oppose, would

accord those taxpayers an elective right not to include in

income distributions of periodicals made for display purposes

(as defined) where the taxpayer can establish, within two

and one-half months after the'close of the year of distribution,

that the periodicals have not been and will not be sold.

B. Position of Association of American Publishers

As described in detail below, accrual basis

publishers and distributors of mass market paperback books

are in the same tax position as periodicals publishers and

distributors.

In both industries

-- large quantities of publications are distri-

buted for display purposes with no expectation

that the excess distributions will be sold.

-- the substantial excess distributions which

are put on display are in fact a method of

advertising for retail sales.







47


3 -

-- publishers and distributors are legally bound

to accept all returns of the excess distributions

for full refund or credit, and the returns are

normally in the form of covers which have been

stripped from the books.

-- the two types of publications have very short

retail shelf-lives. Publishers release hundreds

of new paperbacks on a monthly basis and, because

of the scarcity of retail shelf space, many older

titles are withdrawn each month.

-- most returns early in a particular tax year

are attributable to the prior year's excess

distributions, and the returns are almost

never resold.

-- the publications are often distributed by the

same wholesalers.

-- the two types of publications are often displayed

at the same retail outlets with the same potential

customers.

Under these circumstances, mass market paperback

publishers and distributors have as strong a case as do periodicals

publishers and distributors for the relief which H. R. 5161

would provide. Limitation of its provisions to periodicals would

create an inequity between similarly situated taxpayers and

it is strongly urged that H. R. 5161 be modified to avoid this

inequity.

II. EXPLANATION OF H. R. 5161

H. R. 5161 would add a new subsection (e) to

section 451 of the Internal Revenue Code. The new provisions





48


4 -

would apply to sales of magazines or other periodicals "for

display purposes." Such sales aze defined in paragraph (2) of

H. R. 5161 as those made "in order to permit an adequate

display of the magazine or other periodical . if at

the time of sale the taxpayer has a legal obligation to

accept returns of such magazine or other periodical." For

transactions meeting this definition, paragraph (1) authorizes

accrual basis taxpayers to elect not to include in gross

income of the taxable year receipts from sales which are

returned by the 15th day of the third month of the next
1/
year, or with respect to which the taxpayer otherwise establishes

that sales have not occurred and will not occur (in accordance

with regulations to be prescribed by the Secretary or his

delegate). An election under these provisions would be

binding for subsequent years and would otherwise be treated

as a method of accounting.

In effect, H. R. 5161 would authorize a tax treat-

ment for excess distributions of magazines which is more

consistent with economic realities than is the present

treatment. Periodicals publishers and distributors would

no longer be required to report artificially created income

attributable to shipments in the latter part of the year

of excess quantities of periodicals which the parties know

will not be sold, provided the taxpayer also eliminates equally

artificial off-setting deductions now taken for returns made

in the following taxable year. Excess distributions returned

within the statutory period would be ignored for purposes of

taxation.



1/ The two-and-one-half month cutoff coincides with the date
on which corporate tax returns are normally due.







49



5-

III. REASONS FOR EXTENDING H. R. 5161 TO
MASS MARKET PAPERBACK PUBLICATIONS

In its Report on H. R. 5161, the Committee on Ways

and Means stated:

Your committee believes that when periodicals
are shipped to retailers for display purposes
with no expectation on the part of the parties
that these periodicals will be sold, it is not
appropriate to treat the shipment as income to
the publisher or distributor.

Since mass market paperback books are distributed under

substantially the same arrangement, H. R. 5161 should cover

these publications as well as magazines and other periodicals.

A. Nature and Size of Mass Market Paperback Business

Mass market paperback books, like periodicals, repre-

sent a distinct segment of the publications industry. They

are nontechnical paperbacks of standard "rack-size" (approxi-

mately 7" by 4-1/2" or smaller) intended for general consurpntz-i

and characteristically having lower prices and shorter shelf-

lives than special interest books or "trade" paperbacks (e.a.,

those educational publications, reprints of classics,

and religious and scientific books which have a limited

appeal). For both internal and industry-wide reporting

purposes, these characteristics distinguish mass market from

other paperback publications. The annual Industry Sales t-ii-

survey of the Association of American Publishers indicates t-a_

mass market paperbacks accounted for approximately $319 il
2/
in net sales in 1975.



2/ Total net sales of all books (hard covr and papers k
by U.S. publishers in 1975 amounted to approximately 23.81
billion.







50


6 -

Distribution of mass market paperback books is

highly competitive. It is estimated that the average retail

outlet contains fewer than 120 "pockets" for displaying

rack-size paperbacks. However, in recent years mass market

paperback new releases alone have exceeded 5,000 separate

titles annually. Considering the large number of releases

of mass market paperback publications, the relatively infre-

quent use of media advertising and the scarcity of retail

display space, it becomes obvious that steps to assure

adequate retail display are central to the sales strategies

of mass market paperback publishers.

To reach the maximum number of retail outlets,

mass market paperbacks, like periodicals, are distributed direct

to retailers and through a system of independent wholesalers

and jobbers. Indeed, in most cases periodicals and mass

market paperbacks are distributed by the same wholesalers.

As a result, as described below, the methods of marketing

the two types of publications are substantially the same.

B. Distributions for Display by Publishers of Mass Market
Paperback Books

Distributions -- technically in the form of sales --

for purposes of display within the meaning of H. R. 5161 are

as prevalent in the mass market paperback business as in the

periodicals business. Mass market paperback publishers and

distributors regularly and deliberately make excess distributions

of their publications for the same reason as do periodicals

publishers: experience has shown that net sales will suffer







51



-7-


unless sufficient quantities of books are shipped to assure

adequate display at retail outlets. In a very real sense,

for mass market paperbacks, perhaps even more so than for
3/
periodicals, the books themselves are their own advertisements.

The Association of American Publishers believes

all U. S. mass market paperback publishers employ the sale-

for-display marketing technique. As in the periodicals

industry, mass market paperback publishers and their customers

have no expectation that the excess distributions will in

fact be sold. Under agreements with their wholesalers and

jobbers, mass market paperback publishers and distributors

have a legal obligation to accept for full refund or credit

all returns of books not sold at the retail level. The

proportion of shipments which are in fact returned is clearly

substantial. AAP surveys indicate that 35 to 37 percent of

the mass market paperback books shipped in 1973 through 1975

were returned to the publishers for refund pursuant to legal

right and would qualify as sales for display purposes under

H. R. 5161.

In brief, excess distributions of mass market

paperback publications meet the definition of "sales for

display purposes" set forth in H. R. 5161. The excess




3/ A recent article from the Washington Post which describes
the marketing of mass market paperbacks is appended to this
memorandum. Based on industry sources the article indicates
that "the book has to display well," and "if it displays, it
sells." Further, it is stated that "Our ad campaigns are so
tiny, they are laughable. We don't rely on grand promotions.
Each paperback that we display is an advertisement for itself."







52


8 -

distributions are made to assure adequate display at retail

outlets, and mass market paperback publishers and distri-

butors are legally bound to accept all returns. Further-

more, as with periodicals publishers, the distorting effect

of treating as income excess distributions of mass market

paperbacks may be substantial, since such excess distri-

butions amount to more than one-third of all mass market

paperback shipments. And with inflation a continuing problem,

the distortion of income problem promises to be even more

serious in future years.

C. Short Retail Display Period of Mass Market Paperbacks

While the definition of "sales for display pur-

poses" contained in H. R. 5161 is not explicitly limited to

publications that have short retail shelf-lives, it is clear

that this characteristic of most periodicals is an important

part of the rationale underlying the proposed legislation.

Like periodicals, mass market paperback books also typically

possess very short retail shelf-lives. Thus, this characteristic

distinguishes mass market paperbacks as well as periodicals

from other publications and different kinds of goods sold at

retail outlets.

In the case of mass market paperbacks, a short

retail display period is a matter of practical necessity.

A publisher who releases 25 to 35 new titles each month must

have assurances that older titles will be regularly removed

from limited display space as new titles reach the retailer.

In practice, this is what occurs.

Mass market paperback publishers release approximately

400 new books on a monthly basis. These monthly distributions










9 -

are prescheduled for months in advance. In order to provide

adequate retail shelf space, many older titles must be withdrawn

each month. A recent survey of publishers who are members

of AAP's Mass Market Paperback Division indicates that the

expected retail display period of newly released mass market

paperbacks ranges from one to 12 weeks, with most of the

paperbacks having an average shelf-life of four to seven
4/
weeks. Monthly paperDack return figures requested as part

of this survey bear out the publishers' estimates. Given

the short retail display period involved, excess distributions

of mass market paperbacks in the latter part of a taxable

year are just as likely to produce distortions of income

under present tax law as are excess distributions of periodicals.

While it is true that magazines are dated and mass

market paperbacks are undated, this has no significance from

the standpoint of adopting a proper tax accounting rule. All

a date indicates is that there is a great likelihood that

the magazine will be returned for credit; for paperbacks,

this same point is demonstrated by historical statistics and

the monthly publication schedules. Thus, dating has no bearing

on the real issue -- that is, whether it is appropriate to

change a tax accounting rule which (1) fails to take into

account the unique nature of the business (e.g., the need for

significant display distributions subject to an unlimited right

of return), and (2) produces a serious distortion oF income.


4/ The shelf-life of a periodical will vary depending upon
whether new issues are releases on a weekly, monthly, quarterly,
or less frequent basis.







54


10 -

D. Destruction of Mass Market Paperback Returns

Mass market paperback books and periodicals have still

another characteristic in common which distinguishes them

from the products of many other taxpayers. Like periodicals,

mass market paperbacks generally have little or no economic

value to the publisher once their initial retail display

period has ended. Therefore, rather than incur the freight

charges which would be involved in requiring returns of full

books, mass market paperback publishers -- like periodicals

publishers -- accept as returns either covers stripped from

books or affidavits from wholesalers and retailers certifying

that the books have been destroyed. The recent AAP survey

of members of the Mass Market Paperback Division indicates

that more than 90 percent of all returns of mass market

paperback books accepted for refund or credit take the form

of stripped covers or affidavits. The small proportion of

full-books which come back to publishers are for the most

part damaged and, therefore, not saleable.

Within the context of H. R. 5161, the foregoing

practice, which is universal among mass market paperback

publishers, has double significance. First, it shows that

the excess distributions of mass market paperbacks are, in

fact, made-for display purposes. Publishers have no

expectation that they will be able to resell returned books

and therefore do not require full-book returns. On the

other hand, mass market paperback publishers do require

physical documentation that the excess distributions for

which refunds are sought have been rendered nonsalk:able.







55


11 -

Without altering their existing practices they are, therefore,

in a position to meet the requirement under H. R. 5161 that

the taxpayer establish that a book to be excluded from

income "has not been sold and will not be sold."

E. Conclusion

Because the sale-for-display practice prevails among

publishers and distributors of mass market paperbacks and

the marketing arrangements in that segment of the industry

are in all relevant respects similar to the methods used by

periodicals publishers and distributors, the Association of

American Publishers urges that the mass market paperback industry

be permitted to adopt the more realistic accounting rules provided

in H. R. 5161. Their exclusion would result in discriminatory

treatment of taxpayers which are similarly situated.


IV. REVENUE EFFECT

Based on the recent AAP survey of members of the

Mass Market Paperback Division and the 1975 amended Industry

Sales Statistics (adjusted for 1976 sales), it is estimated

that the extension of the provisions of H. R. 5161 to mass

market paperback publishers -- assuming they all make the

election -- will result in a one-time revenue loss of $16
5/
million, spread evenly over a 10-year period.


V. SUGGESTED EMENDATORY LANGUAGE

The change in H. R. 5161 proposed by the Association

of American Publishers can be accomplished by including specific



5/ The House Report indicates that the adjustment in the
transition year is to be spread over a ten-year period.







56



12 -


references to "mass market paperback books" in paragraphs

(1), (2) and (3) (B), of the bill as approved by the House of

Representatives. These changes are reflected in the proposed

revision of H. R. 5161 which is attached to this memorandum.











[Language to be added
is underscored; language Attachment
to be deleted is indi-
cated in brackets.]
Proposed Amendment to H. R. 5161


(e) SPECIAL RULE FOR CERTAIN PUBLICATIONS WHICH
ARE RETURNED.--

(1) IN GENERAL.-- In the case of sales of magazines,
[or) other periodicals or mass market paperback books
for display purposes, a taxpayer who is on an accrual
method of accounting may elect not to include in gross
income for the taxable year the income attributable
to the sale of any magazine, [or] other periodical or
mass markec paperback book which is returned not later
than the 15th day of the third month after the close of
the taxable year (or with respect to which the taxpayer
otherwise establishes in the manner provided by regu-
lations prescribed by the Secretary or his delegate that
the periodical has not been sold and will not be sold).

(2) SALES FOR DISPLAY PURPOSES DEFINED.-- For purposes
of this subsection, a sale is for display purposes if
such sale is made in order to permit an adequate display
of the magazine, [or] other periodical or, mass market
paperback book and if at the time of sale the Zaxpayer
has a legal obligation to accept returns of such magazine,
tor] other periodical or mass market paperback book.

(3) DISPLAY SALES TO WHICH SUBSECTION APPLIED.--
(A) ELECTION OF BENEFITS.-- This subsection shall
apply to sales for display purposes if and only if
the taxpayer makes an election under this subsection
with respect to the trade or business in connection
with which such sales are made. An election under
this subsection may be made only with respect to a
taxable year beginning after December 31, 1975,
and may be made only with the consent of the
Secretary or his delegate. The election shall be
made at such time and in such manner as the
Secretary or his delegate may by regulations
prescribe.

(B) SCOPE OF ELECTII.-- An ee:7ion made under
this subsection shall apply to all sales of maga-
zines, [and] other periodicals and -ass market
paperback books made for display purposes in
connection with the trade c. business with respect
to which the taxpayer has tahe the election. tA n
election made under thi subsection shall not a,-ly
to any sales made for display purposes before tne
first taxable year for which the election is made.







58



-2 -



(C) PERIOD TO WHICH ELECTION APPLIES.-- An
election under this subsection shall be effective
for the taxable year with respect to which it is
made and for all subsequent taxable years, unless
the taxpayer secures the consent of the Secretary
or his delegate to the revocation of such election.

(D) TREATMENT AS METHOD OF ACCOUNTING.-- For
purposes of this title, the computation of taxable
income under an election made -under this subsection
shall be treated as a method of accounting.







The Washington Post


FRIDAY, AUGUST 13, 1976 DI




Paperbacks:




tUP__ HLF_ The Super Sell
A NO.LOF-

REI.NT~ ._S By Paul Richard

-c You can tell a mass-market paperback by its cover.
One glance at the rack reveals Satan, sagas, far-off
worlds, Carter's face and World War II, clinches, foil.
a' die-cut holes and frightened virgins fleeing from The
Big House on the Hill.
The covers beg, blur and boast. Part ad, part art,
N part poster, they promise, as they have for years.
1Jdetectives hard as Hammer, tales weird as Bridey
'j "' Murphy', lands marvelous liliddle Earth, aud wom-
on as desirable as Scarlett, Amber, 0.
Covers sell.
In drugstores, bookshops, newsstands, bus stations
and markets, around 400 million paperbacks will be
.. .. .... . .. .. bought this year, lots of them on whim.
This book has the "dossier look." That one sells a
diet. The next may hint at movies, at talk-show guests
or Nazis. That one with the characters montaged on
the cover may evoke a memory of a book read long'
ago. Readers, undecided, wait for an impulse, a
memory, a sign.
'Last week, the bestselling paperback in America
A f' j".." was something called "The Omen."
Ut. I Signet's "terrifying new shocker of superrntural
evil" Is the child of a screenplay written by Divid
Seltzer for 20th Century-Fox. "People love to be
V, I" V I ., frightened," says Robert Hlaynie, editor of "The
t it t ~ Omen," which Is in its 17th printing aio has sold more
than 2.5 million copies since lhe first u--tc in July.
The previous week's bestseller was liyramid's "The
Titans," "a thundering, savage saga of love and war in
a land aflame." "The Titans," a paperback original, Is
volume No. 5 In "The American Bicentennial Series,"
a still-expanding set of historical-spectaculars produced
by Lyle Kenyon Engel and written by John Jakes.
"The beauty of the thing." says James Mclntyre, the
creative director at Pyramid, "is that If you like vol-
ume five, you're hooked; you'll probably go out and
buy volumes one through four."
'They cost $1.95 each. Three million copies of "The
in Jokes' series, already have been sold.
Because the average paperback today costs about $2,
and is produced for nickels, a hit can make a fortune.
The stakes are very high. Pyramid was lucky. It paid
less than $20,000 for the first novel by slightly known
., .i ,,i~ Titas." and sen lliony faos ofthen othe oels
Batmeo was already famous wen it sold to
Bantam Books for $1.85 million. Must mass-market
Paperbacks hit the stands without "R2i time's" fanfare.
Those that do not come equipped with good ta;iewa
and movie tie-ins are dependent on the ad campaigns
conducted by their covers in this ruthlessly co
iive $3815millloa market. m
See PAPERBACKS, B3, Col. I













iei-Sell, r You can -Tell a Market By Its Cover


PAPERBACKS, Frain SI
Most Puablihes's of paperbtcks
when selling an unknown ook
without a repuLotion reuse the same
old cover rma fel the elaracter
montage, for stancee, the bosm or
the gun-4hat have sild books in the
past'
Editors still muse on the sure-lire
success of an imahiary, book en
titled "Lincoln's Doctor's Dos:" Tap,
ping the same rs ,i ohaasduu. an
English wit wrote recently book
called "Golfing for Cats." been oif
Is big in Britain and so, too. arc the
kitties When "Goltfni for cat." ets
feared sn hardcover, id had a swastika
on the jaikel In today'x mass mike
Nasi numbers sell

The term "mass market plprback"
Is p ally misleading. There is not
one market. there are many--detcee
t'ieltion sword-and oreery, fnlon
oo'e.poPens. hotw-to. religion. health+
Bso3 are often sold more by enre
than by name
You co tell a Western by the tow,
boy on the royer. Tightly plotted
m stenes oten shoi a still tile of
corpus, weapons, clues Fivehundred
page 'omances boast pit.rp and curvy
letter that float upon the cover like
so ilny warm balloons.
tid you can always tell a GOthiC
In the world nf palerb~cko .o
genes is more riid tothi stores
vary shihtly. Goth,, octr din't
The hernine is always fleeing to.
ward the Mader Be she heiress niee
or gosernres she is searso a long
tow The lenfless trees are oilnuro
A cloud obscure the imon Sometimes
man of rystery 'tier enemyt her
loert lurk In shadow In the middle
distance sometimes hes uiphed And
one light, and one only. Slows yellow
in a window of the mansin on the

S piles of Gothic art came in once
that didon t hve the light." says Pyr.
mud s James Nlclntyre "You don't
tamper with a winner fit course I
seat it baelk
Most Bicentennial sagas too. Share
I certain somethin-. "The Titans,"
for example. or 'The Bastard" or 'The
Sekers" hr Avonbs "Freedom's ThaO
tire or B|llanti s -Valle'. Forge"
all show antique weapons wenches,
and the colors of the oll.
Herb Taus- the freelanre illuotra'
tar Who did all the cover paintings for
tils Jobn Jokes sericss sys he's "ot the
format down,"
"Each cover has Ia pObtrai. a loners'
eioeh a battle, and a weapon of the
Utme The background is the flag. 'The
71aust' 'a a red book, 'Tb. Bastard'
VU a white one. 'The Rebel' we. in
blue."
In the galleries today, paintings
that tell stores are not much In lash
as. The knack of pointing sliing.
torytelflng covers. Or string movie
Pcatore. or mallgaine Wtustretion. is a
dyrng art. PubliJhers of paperbacks
am keeping it alive. 'ol of get


,of n.w. on,, g+ + k, s, .+s 1

l'o | + e t '
4w t -: "

?i. ,.+e r+++,,++. '
+" *wareT2. asow i-- '.- +i
5 ss 7+.-+,,1i, .
i,.* +' li++',+,i ,'~il+1111,,

O+. ++ Ii +.+
.p.,, .- -j;+ + .











d '


betseren $3w and 1.10 for a cover.
desenilng on the hknue." says Touts.
"The Saturday Evening Post was, pay
ing more than that 1.0 yeors ago"
TaUs +'110 longer ht to rid-
thank God-the books that John
Jakes writes. They snd me s ynop.
bsi Then I do the research. A s) nopals
it enough "
A number of his colleagues read
even Ics than Taus
In Leonard Lones windowed .13th
floor office at 6G6 ilth Ase a 5.10''
Oil paintn leans against Ie wait II
shavi a alarinl ogirl. oliveskinod aIt
sivled. Salerno perhaps or the S,ltn"'
firatdi Faceted onyx pasties 'tcom
on her breasts.
".'he was painted by Bill EPdwaerd I
don't hase a title ytt, but I'm going t
buy this picture," says Leone. % book
will come long"
Pai ning for the others or west
erns, gOthlses or tomances are llten
bouht itr books that hate not yet
been written
Leone. 52 is the art dlrec'tnr it Ban
lam. the giant of the busines. Bon
tans's 1.00 titles have 1.300 eoer
and when It comes to vsiusivs Leone v,
hin charge.
hss oncknotted tlie, looed ascot-fsh
len. is tasked down wilth a pearl lHe
wears a diamond pinkie rang. lie
kno s his business well


I."roc's shop Iltouilti in the
ruoire Shock' ssrolsr sell. "t,
Published it in white. yellow. )link
goren blue and tangerine hen it
tamr to rack space we beat Ihe sam,
petition six to one" Leone rearrannel
the pills on "Valley of tlte Dolls,"
Added the lite drawings to tie tailed
It of "Ragtime," and it was Leone who
det ll to add Iuoe lagged teeth In
the shark of "Idwos"
,las" retlilm Leone 'wast Double
day's it larderostr They senI oVe' A
Jakel thai dudn t bane a picture Soot
lite title word In white on black Tile
type oas great but Olier Dyotcl. the
ioretiaenl of Bannot, Said the public
siloullnt lbU aIbsls about a dentist
I Awool tio oee 1lnl fish' tni J.is
el h0 Gntfryd Iut
it iss lh joket t'hren we got lhe
ertlek sIt sailer we sproed it upl a bit
lIe changed tihe blaik to Oliht t btle
It 0 lut .i1 1i1'. his ill W'e "tatio Mle
sarlk loaok hi'c it r its ippi lthe
,WimiIII14 girl stir u it %ear it
tiishii1g cos I ri'w mal'_nillet usc
Ir)ilui 4 ,l And- .|l'+tie utl,
leI Must,. slt "A Mes (lii11.11,
1) ... Ibledas ostdsits cii's. "that oarrcvso,
han many fathers"
'+s' 1i.ss ian' ishltirt n til e lit
olor Il Tite iila" a svihiartnr at
ltaks, the title fr'tcti ri ile feiuri'l
some phallic form itl the aapeibackl


'Blatk Sunday" is the blunt aimof e1a

Those who delgn paperbacks know
a ;ood Ihing when they see it
The unripping tipper on 'Fear of
Flying" ho. bred the Vs of ileh tirol
decorate 'The ilariled Lovers" and
'Aibout Harry Towns"
Headline.-urgent type is in fashion
So Is the "Lsxor1sI look." says Leone
"You Us a black or purple back
.round and P photographl symbl
is hiek nhouldn L be too bIg. but ought
Il he btlisr If 'soS an get ome
blown candles into il that's alwa
a real pluc
Whtlh pretty well desbet tlie
heIltteosd.Iltlebhr,t coei ,I 'the
Omen"
"No ton the Y"'p YorkTime'csradr
t'atl 'lttek lirmstsslet l.Is" itsw ithr
o er if 'hrie TM Bok" but most
et'er, tltat sell "No I" are not 50 sp,
silt I lh Totsl It|unin." t11+ iant'
I lie t 1 ..tiss llssilses '' it iisin ic
Th sugli Iiinltioliil'" and 'lhsIsi
skrlie" oIl say "No. I Thvy itshahlr.
lIsIin hoestsele'n Hal "Looking I.
.Nte tr ;nohar" in tle "No I Sfiellbi
atIs Bull, "laws" anti "Blark Sui
dOav are the "sVo I Soreethrllerl"
-The tionlis Printstile" is "IlIv S1ul r
,\o I thriller. '
Among ile blurhbs s Bria smders.
Mott b free-lance Sai lits itogr Ki


tel redid "Jaws" asid tinted Black
Sltidry s' hIleipn "lie can do sobthloig"
oayt Leone, "boygilr soaseapion sci-
ene fecion." Vtok Freta a sword
and-sorcerv tiretillst. and Western
artist James Bant aet- also Admired
as is San Juliani, who lises In Blere
tons, and Is said to do *grtl knock
lem."
Covel ar exal rlfte
Anyone it t's bought III old. but
newly packed mystery. aild) tO |tS
cover bl's read the book. knows that
cUel somglases mislead. 'hat feot iii
rlielh may Lake but one paragraph of
111 'the coter are of paperbacks
oltn flsls wtih hype.

So%0 many hooks ai re seen l'e ass
it is cloy to forget that the iliexpes'
ite tPaperblack ilth A ip)tur's oi Ire
eoer is a lltscentury denelosmeit
Tire llisis si ii dnte novels i I li
191h c'tnlury care snr tlo the mosvei
hill ltss' not1 lit Ilourloip Ioni itel
lrst lMicskel Book itipeared In IlWOB
Poket Bosok' first lisi of 10 to.
lected titles set a precedent thai
%tends
'Thert tas. u f, o 'Llne A Itnlhi
t"it uliertoig leihls't, a health book
("Wike up and Live'). a sagl wth ia
seir over (I'The tloy of All Flesh')


l i I I, ini" tin s, c an Agatha
i t Ir s11 14-t 5 i I te N u rd e r o f

"I ktr"' d' I tupr" for amuse'
,ut Ilii, itrltdie ol San l.uis Btey"
's'ir.i nr S hsake peare'i "Fite

it1: I to.tst's'' lii la, and
Ii+;tll i s lo live It&
I It', dnl'ini l lo pale loa l's took offI
losiu II orld cl r II A on Books
1-1 judslh 'i lit 1941 sPopular Li ,
lI n it 1 42, Dell In 1943 and Ba nl
l.osl 1s I0411 New t'inleias lt.ibrary
%a. fonded two years itlet and soon
lile qillt r novel satiis d r y o51,
A It ue c el IL tis bh 0,h s U l i' 1i3 v ie
sIltll lot .10 ceits

h' e fois t l'vt; lo n b ook ap pc a ted In
kmitlato s In tll A lIson Lane Its pu bn
li l t t: t uo g hl t u s cl i i llu sr a ti o n s V U l
gar. and Isi ninny years ini sted that
l'tgiinhts Show Just tpe
No doubt lie had a point Books
were htol) objects one. hlad-bound.
handwritten. prelous By 1932, a cor.
olite 01 the Coniies ivas warning
us About "lurid" cover ail
Still compared Ito liht inside
them. the oer art of plalperbacks is
lelsttlet mild .One, tinelher oi the
otler s| y little akesi o l som e
ilntho n isdty iN *lown onl, in 8
madidster ati iii sti ri I ni." -lriple.
l l iitolisy l's.-on so' iv i
I lih ie
If I l i i' si e n p n i l su s o ,.

li';y do lhnt kiniow sitriher Ott l hal is
lirrilir est tlu ai 5 Ibouk tlt in a dog
iiiio a IrsI sells'r tie ise s rsa
I ooe feels t le s ticu s" in 'The

Iloirr ti soxpetuiel" aid 'l1ovs and
t.trts 'lgie s.hrlt" did ieat iltrow for

sloles lUt lie' notes that catcher r in
lie IltC." lich. at .1 1) Slluttsers in
slslenie. "has Ihe dullest roser." still
nnagn.'es to ve'l ilti0 vop1 i every
month
Avon's youn designers. who hve a
style ot their own. supet fite sales of
ruaneo hange not oily on the pic.
lurs but on lite spacing and file full
ness ind the Inport of the type,
"The book has to display well," one
nf them ohbtt'se -II 41 displays it

.itoyh Anthny Posel l 12.toiume
om e i+ Dante to lite SIualc Of
I lne," i, now on the stands but pac,
aced Ai Ith o many rimisko Idlecu.
nate fuld. embotesd ttlei that at
l oa t sate H slie d t ov e l fe n insio ts
he till nut by)
"%lst', scar)" 'os l'Vs rmid's
Jamres Melo trc. "is that Ibis is i lull
return bushieM We iel it when We
fil Bniikx iliat do nssi sell are junked.
TIle d ls ent frlie Inset n ff 'elurns
it Is i raollls ani alistioe ast he
m i hs of lhe casrbs, that is left I
Af li'tr tonm Ilalinfli rom r
Adnerislig "Ill's S like setting
randy lr*. Bulrk s or C'ca Cola. "says
'slilnlire, s)lo's tried "ltiir ad can
sos's, tic -n tiny lites' are laughabe.
Lte doiil iel on grand promoiionI.
Ei'h paperback that we dlaspla is on
Adverloement for Itself"


:. 1~ ~ -1 _. _.1. __ .... .. . .. .... ......... .. .....








JOINT STATEMENT OF

SANFORD J. GOLDBERG

THE NATIONAL ASSOCIATION
RECORDING MERCHANDISERS

and

STANLEY M. GORTIKOV


PRESIDENT, RECORDING INDUSTRY
ASSOCIATION OF AMERICA, INC.


RE:


H.R. 5161


Before the

COMMITTEE ON FINANCE

UNITED STATES SENATE


NINETY-FOURTH CONGRESS, SECOND


August


24, 1976


75-946 0 76 5


FOR
OF


SESSION






62


SUMMARY

It is standard business practice in the sound
recording industry for distributors and manufacturers to sell
records and tapes with a guaranteed right of returning unsold
copies. Where sound recordings sold in a given tax year are
not returned before the end of that year, but are expected to
be returned during the following year, Generally Accepted
Accounting Principles require that an accrual method taxpayer
reduce its current income by the amount of the estimated
future returns. This principle is designed to insure that
income is not artificially inflated.
By contrast, the IRS permits the accrual method
taxpayer to exclude from income only the revenues attributable
to returns actually received, regardless of the likelihood of
returns during the following year. This is so even when the
purchaser has bought an excess supply of sound recordings for
display purposes, with a guaranteed right of return, and where
there is no expectation by the parties that all of the
products will ultimately be resold to consumers. The result
is a distortion of income for federal tax purposes.

H.R. 5161 is designed to remedy an identical
distortion of income problem for magazine distributors and
publishers. It would permit the accrual method seller of
periodicals to exclude from income amounts attributable to
sales for display purposes, where the products are returned
to the vendor within 2-1/2 months after the close of the tax
year in which the sales were made. The bill is equitable, has
little revenue impact, and can readily be administered by the
IRS.

The merchandising of sound recordings is closely
parallel to, if not identical with, that of periodicals. Both
industries sell their products with a guaranteed right of
return, and both experience a high percentage of returns.
Abrupt declines in sales occur frequently in both businesses.
Demand for the product is transient, for its life cycle is
brief, and consumer demand typically cannot be restimulated
by price decreases. Thus, the products, once returned,
usually have little more than scrap value.

It is therefore inequitable to bar members of the
sound recording industry from reducing their income for tax
purposes when they are required to do so for financial
accounting purposes. For smaller companies, the adverse
impact on cash flow of this tax accounting rule is an onerous
burden to bear. Yet the cost to the federal government of
curing this inequity is relatively inconsequential -- a one-
time deferral of approximately $18 million. Moreover, if the






63


Commissioner of the IRS were to elect to require that the
impact of the change be spread over 10 years, the revenue loss
would diminish to $1.8 million annually for 10 years.

Because the sound recording industry directly
parallels the periodical industry in every relevant regard,
it is respectfully urged that H.R. 5161 be amended as proposed
in Appendix A to encompass the sound recording industry.


- 2 -






64


STATEMENT

Mr. Chairman and Members of the Committee:


We are grateful for the opportunity to submit this

Statement on behalf of the National Association of Recording

Merchandisers (NARM) and the Recording Industry Association

of America (RIAA). NARM is a trade association which

represents the merchandising segment of the sound recording

industry. Among its membership are retailers, distributors

(wholesalers) and "rack-jobbers" (which supply display racks

and stock them with current sound recordings, primarily for

department stores). RIAA is a trade association which

represents the manufacturing segment of the business. Its

members create and market about 85 percent of the recorded

music and dramatic works sold in the United States.


H.R. 5161 would permit magazine distributors and

publishers to exclude from gross income sales of periodicals

returned within 2 1/2 months after the close of their taxable

year. We urge that it be amended as proposed in Appendix A

to encompass distributors and manufacturers of sound

recordings. Such an amendment would reduce the distortion of

income for federal tax purposes that exists under current law.






65


A. Present Law


Under existing law, taxpayers using the accrual method

of accounting must include in income gross revenues from sales

during the taxable year. Revenues are considered earned when

all of the events fixing the right to receive those revenues

have occurred, and the amounts can be determined with

reasonable accuracy. The determination of when these factors

warrant the inclusion of such earnings in income is required

to be based on accounting methods approved by the Internal

Revenue Service. In most instances, the approved methods

accord with Generally Accepted Accounted Principles.


One instance, however, in which tax accounting differs

from Generally Accepted Accounting Principles is where

products are sold by an accrual method taxpayer with a

guaranteed right of return. It is standard business practice

in the sound recording industry for records and tapes to be

sold with such a return privilege. When it is known that a
statistically ascertainable percentage of sold products will

be returned in future years, Generally Accepted Accounting

Principles require maintenance of a reserve account for

returns so that income for the year in which the sales occur

will not be artificially inflated. By contrast, the IRS does


- 2 -






66


not permit deductions based on estimates of such future

returns for tax accounting purposes, even though such

estimates accord with business reality. Quite recently, this

rule was held applicable to a member of the sound recording

industry. See Ertegun v. Commissioner, 531 F.2d 1156 (2d Cir.

1976).


Thus, even though it is understood that the purchaser

is buying an excess supply of sound recordings, and that a

reasonably predictable percentage of them will be returned in

the following year, tax accounting does not now permit an

offset in the year in which the sound recordings were sold.

The result is a distortion of income for federal tax purposes.


B. Explanation of H.R. 5161


H.R. 5161 is designed to remedy an identical

distortion of income problem for magazine distributors and

publishers. Its purpose and effect is to more properly
reflect the income of members of the periodical industry by

reducing the impact of this inequitable and unjustified

aberration from Generally Accepted Accounting Principles.


The bill provides that, in the case of sales of

periodicals for "display purposes," an accrual method taxpayer


-3-






67


may elect not to include in gross income the revenue

attributable to the sale of any periodical which is returned

within two-and-a-half months after the close of the taxpayer's

taxable year. A sale is for "display purposes" if it is made

in order to permit an adequate display of the periodical and,

if at the time of sale, the taxpayer has a legal obligation

to accept returns of the products.


This legislation can readily be administered by the

IRS. The taxpayer's election is subject to IRS consent.

Furthermore, once an election is made, it is effective

prospectively until the IRS consents to its revocation.



C. The Provisions Of H.R. 5161 Should Be Extended
To The Sound Recording Industry


Like periodical vendors, distributors and

manufacturers of records and tapes sell far more copies of a

sound recording than it is anticipated will ultimately be

resold to customers. The volatile nature of the recording

industry, in which the artist and his recorded repertoire rise

and fall with astonishing rapidity, underlies the need for

such intentional overstocking, as part of the industry's mass

merchandising and advertising techniques. When a recording


- 4 -






68


is released, no one knows whether it will become an overnight

sensation or a dismal failure. But retailers must be provided

with an adequate supply for display purposes in anticipation

of the hoped-for demand.

In light of this merchandising technique, it has

become standard, industry-wide practice for sound recordings

to be sold for resale with full return privileges. And, in

fact, the percentage of records returned is high. A 1974

survey of the industry by the Cambridge Research Institute

disclosed that returns on all records averaged 21 percent of

gross sales.


It is apparent that the merchandising of sound

recordings is closely parallel to, if not identical with, that

of periodicals. Both industries sell their products with a

guaranteed right of return, and both experience a high

percentage of returns. Abrupt declines in sales occur

frequently in both businesses, such as when radio stations
stop playing a song or when the next issue of a magazine is

released. Demand for the product is transient, for the life

cycle of a sound recording, like a magazine, is brief, and

consumer demand typically cannot be restimulated by price

decreases. Thus the product, once returned, usually has


- 5-






69


little more than scrap value; the vast majority of sound
recordings returned to the manufacturer are destroyed. (The

few thought to have any market appeal are redistributed by the

manufacturer, usually with physically altered covers, at a

fraction of their prior cost.)

In spite of the long-standing and well-documented fact

of returns in the business, members of the sound recording

industry are barred from reducing their income for tax

purposes, even though they are required to do so for financial

accounting purposes. The result is an unfair distortion of

income for federal tax purposes. In some cases, this

distortion of income may have a substantial and adverse impact

on cash flow, particularly on the smaller manufacturers,

distributors and rack jobbers. Thus, the sound recording

industry is in essentially the same situation as the

publishers and distributors of periodicals, and should

similarly be afforded the relief provided for in H.R. 5161.

The cost to the federal government of correcting this

inequity is relatively inconsequential -- a one-time deferral

of approximately $18 million. Moreover, since the procedure

described in H.R. 5161 constitutes a change in accounting

method, it is reasonable to assume, as suggested in the House


- 6 -






70


Committee Report, that the IRS will require the resulting
adjustments to be spread over a 10-year period. Thus, the

revenue loss may diminish to $1.8 million annually, for 10

years.


D. Conclusion

In conclusion, it is respectfully urged that the

benefits of H.R. 5161 be extended to the sound recording

industry, because its marketing practices directly parallel

those in the periodical business and because it suffers

similar distortions of tax income. Such legislation will help

to eliminate the inequity and cash flow problems of income

distortion, and yet will have a relatively small revenue

impact.


-7-










Appendix A

The following amendment to H.R. 5161 is suggested to

extend to sound recordings the proposed rule for the inclusion

in income of magazine sales for display purposes.


Amend H.R. 5161 as follows:


On page 1, line 7, after "Magazines," insert

--or sound recordings --


On page 1, line 9, after "of," insert

-- sound recordings or --


On page 2, line 3, after "any," insert

-- sound recordings or --


On page 2, line 9, before "periodical" insert

-- sound recording or --


On page 2, line 13, after "the" (first

occurrence) insert

-- sound recording or --


On page 2, line 15, after "such," insert

-- sound recording or --


On page 3, line 6, after "of" insert

-- sound recordings or --










73



TO

COMMITTEE ON FINANCE

UNITED STATES SENATE
















STATEMENT ON BEHALF OF WINE INSTITUTE

IN SUPPORT OF H.R. 8283





AUGUST 24, 1976


JOHN DE LUCA-
_President, Wine Institute
165 Post Street
San Francisco, CA 94108
Tel: (415) 986-0878


ARTHUR H. SILVERMAN
Washington Counsel, Wine Institute
#538 Pennsylvania Building
Washington, D.C. 20004
Tel: (202) 347-3101











STATEMENT IN SUPPORT OF H.R. 8283


My name is Arthur H. Silverman. I am Washington Counsel for Wine Institute,

the trade association of the California wine and brandy industry. However, I

speak for the entire domestic wine industry in urging the passage of H.R. 8283.


An important segment of the wine industry is composed of special natural wines,

such as vermouth, sangria, and other flavored wines, which are produced on bonded

wine cellar premises. The Internal Revenue Code provides that natural flavors

must be used in the production of special natural wines. For many years, the

Bureau of Alcohol, Tobacco and Firearms and its predecessors have recognized

that said statute permitted the use of trace quantities of other flavors in order

to replace the effect of flavor lost in the processing of fruits. Although the

quantity of such flavoring has consisted of less than 1/10 of one percent of

the flavoring material, its use is essential in most such wines in order that

the finished flavor have the characteristic taste of the fresh fruit from which

the flavor is made, i.e., that a strawberry flavor tastes like a fresh strawberry.


Trace amounts of other flavorings in alcoholic beverages have been used in Europe

and other foreign countries over a long period of time, and in most cases, in

greater quantities than the trace amounts American producers use. It is the

worldwide consensus of opinion of winemakers, enologists, and flavor manufacturers

that a satisfactory flavor, for use in most flavored wines, is difficult, if not

impossible, to produce without the addition of these trace amounts of other flavorings.


The provision of the Internal Revenue Code which we are seeking to amend,

26 USC 5386(a), does not apply to wines produced in other countries. It applies

only to wines produced in the United States.


26 USC 5386(a) deals only with the production of special natural wine on bonded

wine cellar premises. It does not concern itself in any way with the labeling of wine.







75


-2-


However, a recent change in the regulations for the food industry by the

Food and Drug Administration, 21 CFR 1.12, effective June 30, 1975,

established a highly restrictive definition of the term "natural flavor".

Since the manufacture and distribution of flavoring materials falls within

the jurisdiction of these FDA regulations, flavor manufacturers are required

to state on the containers of flavors shipped to their customers that any

flavor, even though it contained less than 1/10 of one percent of other

flavorings, would have to be labeled as a "natural and artificial" flavor.


The significance of the Food and Drug requirement dealing with labeling is

that the American wine producer, unlike the producer of similar foreign

products, cannot continue to produce on bonded wine cellar premises vermouth,

sangria, and other flavored wines of the quality to which its customers have

become accustomed. Flavored wine producers would be forced to establish a

distilled spirits plant at great cost and pay an additional rectification

tax of thirty cents per proof gallon, in addition to the applicable wine tax,

with the resultant higher cost to the consumer. However, foreign producers

would not be confronted with these problems and would continue to pay only the

applicable wine tax even though their product may contain greater quantities

of other flavorings.


BATF, because of its long history of recognizing the high quality of these

products, is cognizant of the plight of the American wine industry and has

agreed to language that would amend 26 USC 5386(a) to continue to permit trace

amounts of other flavorings in the production of special natural wines on

bonded wine cellar premises.


The Department of the Treasury has interposed no objection to the enactment

of this legislation, which is intended to permit the continuation of the







76



-3-



production of special natural wines on bonded wine cellar premises. Said

legislation is not intended to be determinative as to how these products

will be labeled.


In fact, we know of no objection to the enactment of this legislation.






77


August 24, 1976


STATEMENT OF DONALD STEVENS
VICE PRESIDENT, JEWEL COMPANY
OF AMERICA, 25 HOLDEN ST., PROVIDENCE,
RHODE ISLAND 02908, IN SUPPORT OF
H.R. 8656
AT HEARINGS BEFORE THE
SENATE FINANCE COMMITTEE





Outline of Mr. Steven's Remarks on
Behalf of the Jewel Company of America
in Favor of Enactment of H.R. 8656


I. H.R. 8656 should be enacted because:

(a) it will remove an anomaly in the U. S.
Tariff Schedules which discourages the use
of American labor in the linking of crystal
used for chandeliers;

(b) the duty-free entry of loose glass
prisms would create an incentive to estab-
lish a competitive U. S. chandelier indus-
try and would create new jobs for U. S.
workers.

II. Brief outline of U. S. chandelier industry.

A. Glass prisms for chandeliers have never
been a U. S. made product.

B. Relevant import statistics for the years
1973-75 of items in TSUSA Nos. 545.5700 and
653.3720.


75-946 0 76 6






78


ii -


III. Reasons for absence of a U. S. chandelier industry.

A. Modes of production and lower wage levels
in European countries.

B. The anomalous U. S. tariff structure with
built-in disincentives.

C. Present loophole in the Tariff Schedules.

D. Canadian decision to give loose glass prisms
a duty-free preference.

IV. H.R. 8656 will create new jobs for U. S. workers
and a U. S. chandelier industry.

A. Duty-free entry will not adversely affect
any domestic industry or its workers.

B. Immediate creation of jobs for linking
operations in U. S.
/
C. Creation and expansion of U. S. production
of chandelier frames and new jobs associated
therewith.

D. Available domestic labor-intensive tech-
nology could be immediately employed in linking
operations.

E. U. S. manufacturers would become increasingly
competitive against imports.

F. Increased sales of domestic chandeliers
could result in reduced costs of U. S. chan-
deliers to American consumers.

V. The Departments of Treasury, State, Commerce and
Labor, together with the AFL-CIO, have all ex-
pressed support for H.R. 8656.






79


STATEMENT OF DONALD STEVENS, VICE PRESIDENT
OF THE JEWEL COMPANY OF AMERICA, INC.


My name is Donald Stevens. I am Vice President of

the Jewel Company of America, Inc., which is located in

Providence, Rhode Island. Our company is a major importer

and user of loose glass prisms.

I appreciate this opportunity to testify in support

of the enactment of H.R. 8656, the bill to amend the Tariff

Schedules of the United States to provide for the duty-free

entry of loose glass prisms used in chandeliers. I support

this bill because it will remove an existing anomaly in

the Tariff Schedules which presently discourages the

employment of American labor in the production of chan-

deliers. The bill would provide the necessary economic

incentive to.establish a U. S. based chandelier industry

and thereby create new employment opportunities for U. S.

workers at a time when wide-spread unemployment is of

vital concern to us all. Before addressing our specific

reasons for supporting this legislation, I will outline

briefly the state of the U. S. chandelier industry.

I. THE U. S. CHANDELIER INDUSTRY

Crystal chandeliers, over the years, have been

very popular in the United States, not only for residential






80


-2-


but for commercial use. Glass prisms for chandeliers have

never been an American made product. They have been

imported primarily from Austria, Germany, Italy, Japan

and Czechoslovakia, the traditional centers for the pro-

duction of crystal. American manufacturers import linked-up

(assembled) rather than loose crystal for use in chandeliers.

The great majority of chandelier frames, however, are im-

ported since most frames used with crystal are of cast bronze

or brass, also a specialty of European craftsmanship and

technology. Available statistics attest to the outflow of

U.S. dollars for the import of these items.

For example, combined U.S. imports of loose and

linked-up glass prisms and finished chandeliers in chief

value of crystal glass amounted to approximately 12 million

dollars in 1973, 11 million dollars in 1974 and 7 million

dollars in 1975 (TSUSA No. 545.5700). Loose glass prisms

account for a very small proportion of these imports, the

balance representing linked-up ornaments and finished chan-

deliers. In addition, imports of chandeliers and lighting


*/ The low 1975 figure reflects the general decline in U.S.
imports in 1.975.






81


-3 -


fixtures designed for permanent indoor installation in chief

value of brass, many of which employ glass prisms, amounted

to approximately 12 million dollars in 1974 and 7 million

dollars in 1975 (TSUSA No. 653.3720).

II. REASONS FOR THE ABSENCE OF A U. S. CRYSTAL
CHANDELIER INDUSTRY

The fundamental reasons for the lack of the

development of a U. S. based chandelier industry, apart from

the obvious fact that crystal ornaments are not produced here,

are (1) traditionally lower wage levels in European countries

and, in particular, (2) the current U. S. duty structure

which has a built-in disincentive for U. S. concerns to

undertake domestic linking of glass prisms for chandeliers.

A. The European Situation

Since Western and Eastern Europe have been the

major production centers of crystal prisms, a whole industry

was opened to jobbers or manipulators of crystal who, very

economically, through the use primarily of many home

workers, housewives, children, etc., were able to furnish

linked crystal chains of varying lengths to U. S. importers

and manufacturers, thereby reaping substantial profits and

work for their communities. Because of higher labor costs






82


-4-


and the fact that such homework is effectively precluded by

widespread collective bargaining agreements in the United

States, American chandelier manufacturers never became in-

volved in the pinning or linking of glass prisms. Since the

wages of U.S. workers continue to be higher than those paid

by the European jobbers, who farm out their work to home-

workers, American chandelier manufacturers still remain in a

non-competitive position vis-a-vis European final-pinned

crystal.

B. The Anomalous U.S. Tariff Structure

There is little doubt that the current U.S.

duty structure applicable to loose glass prisms is the chief

obstacle to the establishment of a domestic chandelier in-

dustry. At the present time, the duty rate on loose prisms

is exactly the same as that for linked-up (assembled) orna-

ments. Under TSUS No. 545.57, both items are subject to

a 12% ad valorem duty. Since a great deal of the work of

linking glass prisms, as previously noted, is done in European

countries with low-labor cost, homework operations, there

clearly is no price advantage to U.S. concerns to utilize

an American linked article.

The net result of this anomaly has been a complete

lack of enthusiasm by the lighting industry to develop a






83


-5-


competitive American industry. Moreover, the same 12% duty

rate is also applicable to a completely finished chandelier,

fully assembled and trimmed with glass ornaments, where the

*chief value of the finished chandelier consists of glass.

However, for chandelier parts or even finished chan-

deliers, fully assembled and trimmed with glass ornaments,

where the main value consists of metal, for instance, a brass

frame, the duty rate under TSUS No. 653.37 is only 9.5% ad

valorem.

It is not surprising, therefore, that most of the major

chandelier distributors in America are not interested in

developing chandeliers of their own design for manufacture in

this country since they can take advantage of this "loophole"

in the Tariff-Schedules which permits the importation of a

completely finished chandelier at an extremely favorable

duty rate. The dollar value of imports of finished chan-

deliers, in chief value of brass, as noted on page 3, bespeaks

of the attractiveness of this loophole to American importers.

I would like to point out that a similar anomaly was

also present in Canada's tariff structure. After a complete

review of its duty rates, the Canadian Government in 1973

decided to permit loose glass prisms a duty-free preference






84


6


until October 31, 1974 in order to encourage the manufacture

of finished chandeliers in Canad4. This preference was

renewed for an additional year, and on October 31, 1975, was

extended once again.

It is clear that unless and until the present 12% U. S.

duty rate is completely eliminated on loose glass prisms,

there will be no incentive for U. S. companies to start up

linking operations and begin the manufacture of chandeliers

utilizing these items.

III. H.R. 8656 WILL CREATE NEW JOBS FOR AMERICAN
WORKERS AND A U. S. CHANDELIeR INDUSTRY

The elimination of the existing 4uty rate on loose

glass prisms, by vitiating the present anomaly in the U. S.

Tariff Schedules, will result in the immediate creation of

new jobs for American workers and will foster the beginnings

of a competitive domestic crystal chandelier industry.

I want to emphasize in this regard that duty free

entry of these articles will not, in any way, adversely

affect any domestic industry or its workers for the simple

reason that glass prisms used in chandeliers, as previously

noted, have never been manufactured in America. Thus, the

elimination of duty on these prisms can only inure to the


*/ See appended pages of Canada's Customs Tariff "A", item
32675-1.


(,..






85


-7-


benefit of American workers and manufacturers.

A. New Opportunities for Workers

The elimination of import duty would result in a

.'considerably expanded production of linked crystal by

American labor and thus would immediately improve our com-

petitive position. Many American importers and manufacturers

would readily shift from buying completed articles from

European jobbers and begin doing their own assembly and

pinning operations.

By setting up linking operations, a substantial por-

tion of which is presently done in Europe, in the United

States, we estimate that initially 1,000 new jobs would be

created for U. S. workers. For example, the State of Rhode

Island and, particularly, the Providence area, the traditional

center of the American jewelry industry, has a substantial

number of presently unemployed, experienced and skilled wor-

kers who could be immediately employed in linking operations

for the production of assembled ornaments for use in domestic

chandeliers. The creation of new, productive jobs in this

and other geographic areas of the country attendant with the

passage of this bill is an important consideration in this

period of widespread unemployment.






86


-8-


B. New Opportunities for Industry.

The duty free entry of glass ornaments also Will

stimulate the creation and expansion of domestic produc-

tion facilities for chandelier frames made of cast bronze,

brass, and other metals. This country has the basic tech-

nical know-how, designs, and assembly methods to produce

entire lighting fixture lines to compete with finished chan-

deliers presently imported at a very favorable duty rate.

We estimate, that in addition to the 1,000 jobs as-

sociated with linking activities, another 2,000.Aerican

workers could find employment in new or expanded domestic

production of frames and finished chandeliers.

Moreover, at a time when wide-spread concern has

been voiced about the export of U.S. technology and jobs

to lower labor cost countries, passage of this bill will

enable U.S. firms employing U.S. workers to utilize domestic

technology to produce chandeliers which will compete with

imported ones which have enjoyed a virtual monopoly in the

U.S. market by default. Further, since the best available

technology for linking operations is labor intensive, growing

demand for assembled ornaments will increase the need for and

not displace American workers in this activity.






87



-9-


I would like to point out again that the Canadian

Government has waived all import duty on loose glass

prisms for the very reasons I have noted -- to give Cana-

dian importers and manufacturers the right and opportunity

to compete with foreign imports.

C. Reduced Costs to the U. S. Consumer

While we do not envision that the cost of chan-

deliers will be greatly reduced with the passage of the

bill, it is anticipated that the resulting savings will

enable American manufacturers to be increasingly com-

petitive against imports. An increased volume of sales,

however, should permit a lowering of profit margins which

could result eventually in reduced costs of domestic made

chandeliers to the American consumer. These savings to

the consumer would be matched by a significant increase

in the use of American as opposed to European labor as

demand for domestic articles increases.

IV. THE GOVERNMENT AGENCIES AND THE AFL-CIO
SUPPORT H.R. 8656

The Departments of Treasury, State, Commerce, and

Labor have all expressed support for H.R. 8656. Thus,

in its comments on the bill to the House Ways and Means

Committee, the Department of Commerce noted:






88


10 -


".. (E]limination of the duty on loose glass
prisms would be advantageous in helping to con-
trol production costs and would place the domes-
tic industry in a better position to compete
with foreign manufacturers in supplying crystal
chandeliers to U. S. consumers."

Similarly, the Department of State observed that the

bill "would end the tariff cost burden, and, in so doing,

help to maintain and improve domestic production and em-

ployment opportunities." The comments of the Departments

of Labor and Treasury were to the same effect.

The AFL-CIO commented to the Ways and Means Com-

mittee that the bill "is supported by the glass unions

because no U. S. production of the item is available, and

therefore imports create jobs at this time."

We are aware of no opposition that has been ex-

pressed to this bill.
*

I firmly believe that the present anomaly in the

U. S. Tariff Schedules must be eliminated if this coun-

try is to establish a domestic chandelier industry and

create new opportunities for U. S. workers and manufac-

turers. Accordingly, for the reasons stated herein, I

urge enactment of H.R. 8656 in order to accomplish these

objectives.

















--I t t 9


Reflectors and refractors of glass designed for use with lighting
fixtures, not further manufactured than moulded, when of a
class or kind not made in Canada and imported to be silvered,
aluminized, acid-etched or combined with a spun aluminum
cover in Canada ..................................................................................
(Expires February 28, 1975)

Rectangles of glass, in single sheets, coated with a transparent
electrically conductive material, whether or not equipped with
bus bats,'fot use in the manufacture of doors for refrigerators
and freezers ........ : ............................................................ .................
(Expires June 30. 1975)

Glass pendants, unstrung, for use in the manufacture of trimmings
for lighting fixtures .......................................................................
(Expires October 31, 1974)

Spectacles; eyeglasses, and ground or finished .spectacle or
eyeglass lenses, n.o.p ............. ................ :...................


Free I Free


5 p.c. I 7%p.c.


32669-1







32671-1






32673-1"

(

32700-1






12701-1



2705-1







10,-


05-1



10-1


From February 20, 1973 to February 19, 1974 .................................... 121/3p.c


Shapes of glass or plastic for use in the manufacture of spectacle
and eyeglass lenses:....................................................................
(Expires October 31, 1974)

Contact lenses and anterior chamber implants for the human eye....


.Spectacle and eyeglass frames and parts thereof, n.o.p. ..............

CA TT .................................................................................................


17ap.c.

12Y p.e.


10 p.c.1 12$p.c.


Free


Frog February 20, 1973 to February 19, 1974 .................................. 12%p.c.


Parts, unfinished, for the manufacture of spectacle and eyeglass
frames............................................ .... ............................... Free


Parts, unfinished, for use in the manufacture of spectacle and
eyeglass frames .................................................................................. Free
(Expires October 31, 1974)



End of Group 7.


10 p.C.






30 p.c.



30 p.c.



30 p.c.

30 p.c.



22%p.c.


Free


17%p.c. 20 p.c.


15 p.C.

12%p.c.



5 p.c.



Free


20 P.C.




5 p.C.



5 p.C.


O.C. 13/7/71,
D47-515,515-10





o.C. 13/6/72,
D47-515-0,515-14


O.C. 4/10/7 3,
D47-515-18


4/6/69,
D47-492
20/2/73,
D47-519


,O.C. 4/10/73,
D47-515-18

1S/6/58.
D47-410

19/5/48,
D47-253
3016156,
D48-28-32
20/2/73,
D47-519



26/2/37,
D47-2


O.C. 4/10/73,
D47-515-1 8


* Revised October 4, 1973


.Tw~il
I,..


Gs 416shict.so DA


89


SCHEULEA' 4~ .~Y~IU- ~ ~ Group7
SCHEDULE "A** Page 23
8li Most'-
GoodsP...- Foo od- Go",;r Eloct.. Doao
toil Fro o rt of Memo
T rai4" ,-, Two(#d I


17%p.c








90





SCHEDULE "A" 6j CCr_ v i CAa' k CLth


J~ ~ ~~~G 0, 1rs 4s- eeo
Toriff Goods Subject to 0.1y and Free Goods Pefer- Favoued. Ge.neal Prfor. Effective Dot.
Items *nt al Notion T Teff ..01,| No. of Memo
Toiff Tariff Tariff


Reflectors and refractors of glass designed for use with
lighting fixtures, not further manufactured than moulded,
when of a class or kind not made in Canada and
imported to be silvered, aluminized, acid-etched or
combined with a spun aluminum cover in Canada ..............
(Expires February 28, 1977)

G.P.T. rate from 1/7/74 to 30/6/84 ............


* 32671-11 Expired, 30/6/75, D47-515-14.


Glass pendants, unstrung, for use in the manufacture of
trimmings for lighting fixtures ..............................................
(Expires October 31, 1976)

G.P.T. rate from 1/7/74 to 30/6/84 ......................................


Hollow spheres of glass, 20 to 80 microns in diameter,
for use in the manufacture of explosives ...................
(Ezpires June 30, 1977)

G.P.T. rate from 1/7/74 to 30//84 ......................................


32700-1 Spectacles; eyeglasses, and ground or finished spectacle
a or eyeglass lenses, n.o.p ............ ..... ......................


Free


17!p.c.


From November 19, 1974 to June 30, 1976 ................... I2p.C.

G.P. T. rate from 1/7/74 to 30/6/84 .......................


10 p.C.





















30 p.c.


Free 122% p.c.


17$p.c.

l2Ap. c.


30 p.c.

30 p.c.


Free





















Free










Free













1 1%p.c.


O.C. 13/7/71,
D47-515,515-29

1/7/74,
D47-518-1
















O.C. 4/10/73,
D47-515-18,26

1/7/74,
D47-518-1





O.C. 27/6/74,
D47-515-24,515-32

1/7/74,
D47-518-1







4/6/69,
D47-492
19/11/74,
D47-525
1/7/74,
D47-518-1


" Revised June 24, 1975


Croup 7
Page 30


32669-1


' 32680-1






91


STATEMENT OF ALEN S. YORK

on Behalf of

NEW YORK FOAM SALES CO.

before

U.S. SENATE COMMITTEE ON FINANCE

August 24, 1976



Mr. Chairman, members of the Committee, my name is

Alen S. York. I am the President of New York Foam Sales Co.

I appreciate the opportunity given me to present the views

of my firm with regard to House passed HR 11605, a Bill to suspend

for a three year period the rate of duty on mattress blanks of

rubber latex.

HR 11605 would temporarily suspend, for a period of three

years, the 15% import tariff on latex foam buns used in the manu-

facture of latex foam bed pillows and mattresses manufactured and

sold in the United States. We feel that this would be beneficial

to the consumer from a cost and availability standpoint while

causing absolutely no disruption to American industry.

To review the reason for this legislation, let me go back

to March of 1975. At that time, there existed only one firm in

the United States producing latex foam buns -- Sponge Rubber

Products Co. of Shelton, Conn. This firm had purchased the sole






92


2



latex foam manufacturing facility from the B. F. Goodrich Co.

Then it happened! On a Saturday night in March of 1975, someone

blew up the plant. Result: an end to all production of latex

foam in the United States.

During the last year much talk has occurred concerning

the rebuilding of this manufacturing facility. Thousands of

Connecticut residents were put out of work in an already depressed

labor market. In the meantime, because of contractural agree-

ments and consumer demand, the manufacturers of finished latex

foam products had to look elsewhere for a continued source of

supply. The only practical source was in Canada.

This posed a significant problem: import tariffs of 15%

ad valorem. This tariff caused much disruption resulting in

contracts being cancelled and a declining consumer demand due

to lack of availability. The tariff, by design, was enacted to

protect a domestic industry. Unfortunately, that domestic

industry no longer exists and,therefore, the tariff should be

eliminated.

The domestic manufacturers of finished latex foam products

would be delighted to see another domestic source created -- be it

a rebuilding of the Shelton, Connecticut facility or elsewhere.

Due to this fact we have asked that the import tariff'of 157 be

suspended for a period of three years rather than be eliminated






93


-3-



entirely. We want a domestic source, but we haven't seen any

positive effort being made in this direction. In the meantime,

we must survive as a viable product classification.

As I mentioned, HR 11605 was introduced in the House

of Representatives to eliminate the 15% ad valorem tariff for

a period or three years. Following favorable responses from all

Executive Agencies contacted by the House Ways and Means Committee,

hearings before its Trade Subcommittee, and favorable reporting

of the Bill by the full House Ways and Means Committee, the House

of Representatives passed HR 11605 on May 17, 1976.

With this background presented, I now ask that this

august Committee consider and report favorably HR 11605 to the

full Senate of the United States. Only by your affirmative action

can this product classification be preserved for the American

consumer. The effect of the present situation has had a devasta-

ting effect on our firm and its labor force as well as many other

firms producing finished latex foam filled products and their

employees throughout the United States. Your speedy consideration

will be appreciated by all.

Thank you for allowing me to present my views here today.


75-946 0 76 7






94


-4-




SUMMARY


The total U.S. production of latex foam mattress and

pillows buns was eliminated by a bombing in March, 1975. Manu-

facturers of finished products using latex foam mattress and

pillow buns now must seek the aforementioned buns from sources

outside the United States. The current import tariff on the

affected imports,. found in classisification No. 727.86 of the

TSUSA is 157 ad valorem for Column I countries.

As there is presently no production of latex foam

mattress and pillow buns in the United States, the 15% ad valorem

tariff serves no purpose and is merely an additional cost to be

borne by the manufacturers and consumer.

Because of the possibility that the U.S. production

capability will be rebuilt in the future, we ask only a three-

year suspension. Should the U.S. production capacility be rebuilt

before the end of the three year suspension period, U.S. manu-

facturers would immediately turn to that source of supply because

of the excessive motor freight charges involved in the importation

of the product from Canada.

It is important to make available to the consumer this

product classification at reasonable prices to preclude its

elimination. My firm, New York Foam Sales, is aware of no

opposition to $R 11605.







95



August 24, 1976



statement by Mac Asbill, Jr.
On Behalf of
World Airways, Inc.
Before the Senate Finance Committee
On
H. R. 11997, the Bank Holding Company
Tax Act of 1976



Summary


Congress should promptly enact legislation along the

lines of H. R. 11997, passed by the House of Representatives

on March 15, 1976, which would grant appropriate tax relief

to divestitures certified by the Federal Reserve Board as
"necessary or appropriate" to effectuate the purposes of

the Bank Holding Company Act Amendments of 1970.


Statement


This statement is submitted by Mac Asbill, Jr., a

lawyer practicing in Washington with the Washington and

Atlanta firm of Sutherland, Asbill & Brennan, on behalf of

World Airways, Inc., a Delaware corporation headquartered

in Oakland, California. It advocates the prompt enactment

of H. R. 11997, or its equivalent in purpose and effect.

That bill would grant appropriate tax relief to divestitures

certified by the Federal Reserve Board as "necessary or






96


appropriate" to effectuate the purposes of the Bank Holding

Company Act Amendments of 1970.

Following the Committee's request in its press

release of August 10 that witnesses with common interests

consolidate their testimony, I am authorized to state

that Lykes Corporation of New Orleans, Sperry and Hutchin-

son Co., GATX Corporation, and Powell Lumber Co., each

of which has submitted, or will submit, a statement for

the record, join World Airways in this general recommenda-

tion.

The adoption by the Congress of the Bank Holding

Company Act Amendments of 1970 subjected so-called one-bank

holding companies to the Bank Holding Company Act for the

first time. Generally speaking, these Amendments required

such holding companies to divest themselves of either their

banking or their non-banking assets before December 31,

1980. It was contemplated in 1970 that appropriate tax re-

lief would be provided with respect to such divestitures,

as had been done in the case of earlier bank holding company

legislation. Thus, the report of the Senate Committee on

Banking and Currency, S. Rep. No. 91-1084, provided:

"It is anticipated that the Congress will
follow precedent and will pass a bill
providing companies required to make
divestitures under this legislation with
relief from an undue tax burden as a re-
sult of such divestiture. It would be


-2-