|Table of Contents|
Table of Contents
94th Congress }
2d Session I
VARIOUS REVENUE AND TARIFF BILLS
TESTIMONY TO BE RECEIVED TUESDAY,
AUGUST 24, 1976, AND
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
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
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
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
Friedlander, Philip R., Jr., general manager, National Tire Dealers &
Retreaders Association, Inc -------------------------------------179
Goldberg, Sanford J., for the National Association of Recording Mer-
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.,
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,
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
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
Department of Commerce -----------------------------------207
International Trade Commission ----------------------------- 205
Department of the Treasury ---------------------------------211
Special Representative for Trade Negotiations -----------------213
Department of Commerce ----------------------------------- 215
International Trade Commission -----------------------------217
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
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
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
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
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
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.
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
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
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
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
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
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
,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.
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.
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
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
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
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*
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
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
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
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
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
.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
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.
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
14 June, 1976; p. S9136 Introductory Remarks to
Amendment No. 1840 to l.R. 10612 The Tax Reform Act
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
on Behalf of
the Chicago Board Options Exchange
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
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.
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
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
ON BEHALF OF
THE CHICAGO BOARD OPTIONS EXCHANGE
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.
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."
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
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
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
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
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
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
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
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
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.
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
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
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
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-
B. Revenue Effect:
1. No loss of revenue
2. Short term lag in revenue in minor amounts
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
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.
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.
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.
a) Would liberalize export procedures by permitting transfer to
any Customs-bonded warehouse for export.
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.
Provides only for effective date.
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 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
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.
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.
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.
THE ASSOCIATION OF AMERICAN PUBLISHERS
In Support of Extending H. R. 5161
To Mass Market Paperback Books
The Committee on Finance
United States Senate
August 24, 1976
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
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-
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
b. The publications have very short retail
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.
THE ASSOCIATION OF AMERICAN PUBLISHERS
IN SUPPORT OF
EXTENSION OF H. R. 5161 TO MASS MARKET PAPERBACK PUBLICATIONS
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-
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
that taxable income may be overstated during periods of
rising sales, and understated during periods of declining
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
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.
-- 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
-- the publications are often distributed by the
-- the two types of publications are often displayed
at the same retail outlets with the same potential
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
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
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
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
1/ The two-and-one-half month cutoff coincides with the date
on which corporate tax returns are normally due.
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
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
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
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
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
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."
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
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
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
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.
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.
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."
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
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.
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
(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
(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.
(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
tUP__ HLF_ The Super Sell
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.
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
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
"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
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;+ + .
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
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,
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
"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
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
'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
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
STANLEY M. GORTIKOV
PRESIDENT, RECORDING INDUSTRY
ASSOCIATION OF AMERICA, INC.
COMMITTEE ON FINANCE
UNITED STATES SENATE
NINETY-FOURTH CONGRESS, SECOND
75-946 0 76 5
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
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
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 -
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.
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 -
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.
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
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 -
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
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
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 -
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
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
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
-- 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 --
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.
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
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.
August 24, 1976
STATEMENT OF DONALD STEVENS
VICE PRESIDENT, JEWEL COMPANY
OF AMERICA, 25 HOLDEN ST., PROVIDENCE,
RHODE ISLAND 02908, IN SUPPORT OF
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.
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
75-946 0 76 6
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
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
D. Available domestic labor-intensive tech-
nology could be immediately employed in linking
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.
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
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.
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
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
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
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
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
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
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
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
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.
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.
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:
".. (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
--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.
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 .................................................................................................
10 p.c.1 12$p.c.
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.
17%p.c. 20 p.c.
O.C. 4/10/7 3,
* Revised October 4, 1973
Gs 416shict.so DA
SCHEULEA' 4~ .~Y~IU- ~ ~ Group7
SCHEDULE "A** Page 23
GoodsP...- Foo od- Go",;r Eloct.. Doao
toil Fro o rt of Memo
T rai4" ,-, Two(#d I
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 ............ ..... ......................
From November 19, 1974 to June 30, 1976 ................... I2p.C.
G.P. T. rate from 1/7/74 to 30/6/84 .......................
Free 122% p.c.
" Revised June 24, 1975
STATEMENT OF ALEN S. YORK
on Behalf of
NEW YORK FOAM SALES CO.
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
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
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
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
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
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.
August 24, 1976
statement by Mac Asbill, Jr.
On Behalf of
World Airways, Inc.
Before the Senate Finance Committee
H. R. 11997, the Bank Holding Company
Tax Act of 1976
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.
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
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-
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