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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- |