become necessary for business reasons to have meals with business prospects. This, the administration's proposals appear to recognize. It may be impossible however to have such meals at a restaurant for any number of perfectly valid reasons. Thus, the ability to provide such meals when necessary at a club is highly desirable. We would certainly not deny that there may have been abuses with respect to deductions of certain club dues. Here again, we suggest that the proper way to handle the problem is to require detailed substantiation with respect to the business relationship of all or a part of the claimed deduction for dues. Foreign business.-As we have noted above, one of the significant shortcomings in these recommendations is the complete unawareness of the problems of American business abroad, as well as an apparent general unfamiliarity with business requirements at home. Here again, social custom and tradition in many foreign lands is such as to require entertainment of foreign business contacts when they visit this country, in return for their hospitality to the American businessman abroad. Conclusion For the reasons given above, we are opposed to the President's recommendations for extensive legislative restriction on the deductibility of travel expenses and exclusion on the deductibility of entertainment expenses. We suggest that abuses in this area can be best handled administratively by solutions which are designed specifically to deal with the particular abuse in question, rather than the overall meat-ax approach being urged by the administration. We would like to venture two additional observations at this point. The administration recommendations included as a supplement the report by Internal Revenue Service Commissioner Caplin required pursuant to the provisions of Public Law 86-564. The Commissioner dealt at great length with administrative problems in the administration of travel and entertainment expense deductibility. He cited determination of facts in individual cases as the primary problem in administration. It seems apparent that the way in which to handle the problem cited by the Commissioner is by new regulations on procedures-perhaps including a requirement for greater documentation-rather than the broad legislative changes being suggested by the administration which, in our view, do not come to grips with the problem faced by the Internal Revenue Service. We are also constrained to note the apparent failure of the administration in formulating these recommendations to take into account the opinion of tax experts from outside the Government. For example, this committee held extensive panel discussions in 1959 on current tax problems, in which tax experts from industry, labor, agriculture, the legal profession, the accounting profession, and academic life participated. Included was an excellent panel discussion of this particular problem which is reported in the compendium and the printed hearings released by the committee. It was notable that none of the participating experts on the business expense panel advocated legislative changes in the travel and entertainment expense area. There was some disagreement concerning the extent of abuses in this area, but all concurred in recommending that there be no additional legislation. In view of this, it might be appropriate to inquire of the Treasury whether it has fully considered the suggestions and comments made by these panelists. This concludes our statement on the administration's proposals respecting the tax treatment of travel and entertainment expenses. If we can provide any further information regarding this statement or our position in this area, please let us know. Respectfully, CHARLES W. STEWART, President. STATEMENT OF THE RUBBER MANUFACTURERS ASSOCIATION, INC., ON THE TREATMENT OF EXPENSE ACCOUNTS AS PROPOSED IN THE PRESIDENT'S TAX MESSAGE The proposals are an arbitrary invasion of business management's decisions of what is "ordinary and necessary" to the successful conduct of a business. On this subject, let us state our conviction that adoption of the proposal to establish by legislation fixed limits on amounts of deductible business expenses would constitute a dangerous precedent of governmental interference with decisionmaking processes in industry. It is conceded that instances can be found where abuses have crept in. However, this same condition exists in practically every other area of the tax structure. Such abuses should not serve as an excuse for imposing limits which, in effect, would usurp the right of management to make the required decisions for conducting normal business transactions. It should be remembered that the great majority of expenditures in the "expense account" category are motivated by sound business reasons. Arbitrary governmental regulation would cause irreparable damage to the entire concept of a free economy. If Government were to legislate how much a businessman is allowed to spend on meals and lodging in seeking to earn income, doesn't it follow that, as a next step, the Government could legislate how much money may be spent to maintain and furnish an office, purchase an automobile for business, advertising, et cetera? If arbitrary Government standards were adopted in the expense account area, this could be a precedential step toward the substitution of Government edict to take the place of the "ordinary and necessary" concept of business decisions in other areas. STATEMENT BY THE NATIONAL RETAIL MERCHANTS ASSOCIATION IN REGARD TO THE PRESIDENT'S TAX PROPOSALS ON EXPENSE ACCOUNTS We would support the President in any reasonable efforts designed to eliminate the abuses that have occurred through the improper use of expense accounts. It is a fact that some taxpayers have used the device of the expense account as a vehicle for charging personal expenses as business expenses of their employer and the effect has been to pass on to the Federal Government a portion of this cost through deductions from taxable income. The difficulty of developing a statute to deal with this problem is clearly recognized. Any attempt to catalog the various types of expense categories which would be disallowed or limited as an "ordinary and necessary business expense" will test the skill and ingenuity of the legislator. The Secretary of the Treasury in his statement setting forth the detailed proposals for restricting travel and entertainment deductions merits serious consideration and study. As a general observation, however, we believe that exception might be taken to the concept of disallowing per se certain types of expenses either because of the nature of the expense or because the expense exceeds a prescribed minimum (over $10 in the case of gifts). For example, the Secretary's proposal would disallow entertainment expenses as defined in their entirety. Various types of entertainment are, within prescribed limits, legitimate tools for promoting the activities of taxpayers engaging in ventures for profit. We believe, therefore, that with proper safeguards which would eliminate the personal nature of such expenses, the right to deduct entertainment expenses as an ordinary and necessary business expense, should be retained. STATEMENT OF MANUFACTURING CHEMISTS ASSOCIATION, INC., WASHINGTON, D.C., ON TRAVEL AND ENTERTAINMENT EXPENSE We believe that it would be unwise for Congress to adopt the President's recommendation to disallow costs of business entertainment and entertainment facilities and to restrict the deductibility of expenses incurred on business trips. On the basis of statistics submitted by the Treasury, it is apparent that abuses have occurred most heavily in the use of resort facilities, yachts, and hotel suites. In our opinion, abuses in these types of expenditures do not justify the enactment of restrictive legislation which would cover all traveling and entertainment expenses and all businesses. Rather than imposing broadly restrictive legislation, we believe that what is needed is more effective audit in these areas of demonstrated abuse. Substantial expenditures for lodging and meals in connection with business travel are not necessarily abuses of the business expense deduction and many companies control this element of cost as a matter of good business. Certainly in many businesses current profit margins neither warrant nor allow excessive expenditures of this nature. The suggested limitation of $30 a day for meals and lodging while traveling away from home would be arbitrary and under some conditions inadequate. The limitation would ignore substantial differences in hotel and restaurant prices in various parts of the United States. The business of many traveling employees requires that they obtain facilities which will accommodate a conference, and business is transacted through mealtime, requiring more expensive arrangements. Under such circumstances, a $30-per-day limitation would be inadequate, and a higher expenditure could be shown to be ordinary and necessary from a business standpoint. STATEMENT IN BEHALF OF THE ELECTRONIC INDUSTRIES ASSOCIATION ON EXPENSES FOR TRAVEL, ENTERTAINMENT AND BUSINESS GIFTS The President's proposals are intended to eliminate the abuses in the use of expense accounts. Whether legislation is needed in this area is a question which, we believe, should be left to the sound judgment of Congress. However, we urge that Congress take action at this session on a related issue-namely, the enactment of proposed legislation to allow deductibility of all lawful expenditures incurred in connection with legislative activities. As properly stated in House Report 2077 (86th Cong., 2d sess.) of the Ways and Means Committee commenting on H.R. 7123, the application of the existing law has resulted in discouraging businessmen from advising and assisting their Representatives in Congress in formulating legislation notwithstanding the fact such legislation may vitally concern their businesses. Unrestrictive participation in the formulation of legislation affecting the interests of business is vital to effective citizenship in a democratic society. There are at least 10 bills now pending in Congress to remove this undemocratic restriction on freedom of expression concerning legislative issues. One of these bills is H.R. 640, introduced by Representative Hale Boggs. This bill is now pending before the House Ways and Means Committee and we strongly urge its enactment at this session of Congress. L. BERKLEY DAVIS, President. STATEMENT OF THE NATIONAL LICENSED BEVERAGE ASSOCIATION ON EXPENSE ACCOUNTS Mr. Chairman and members of the committee, the representations made herein are in behalf of the National Licensed Beverage Association. The members of our association are located in 28 States and the District of Columbia and number in excess of 40,000. We are proprietors of taverns, restaurants, bar cafes and small independently owned hotels. As retailers of foods and beverages for consumption on the premises, many of us depend to a large extent on the customer who is allowed to deduct expenses for entertainment from his gross income. It is believed that the proposals of the Secretary of the Treasury to carry out the President's tax recommendations would not only jeopardize a continuation of business but would cause a loss of tax revenue and unemployment. The fact that entertainment is essential to business has been recognized for decades as a proper, ordinary, and necessary business expense. To destroy this benefit would create a restaurant recession and put many of our members in a distressing situation. In turn, many other industries would be affected. The labor force in restaurants would be reduced in proportion to the patronage. Musicians and entertainers would be set upon the streets to seek unavailable work. In fact, all of the allied industries that do business with the food and beverage industry would be affected. The enactment of a law to prohibit any entertainment expense would stifle business promotion. It would cause many of our members to forgo our annual convention-but it is at these conventions that restaurant proprietors extend their knowledge of their business and are kept abreast of industry developments. Consequent thereto, the Government would lose the tax on transportation, this being a most serious tax loss. Abuses in claiming entertainment expenses should be corrected by administrative efforts of Internal Revenue Service. More legislation is unnecessary. need not burn the house down to roast the pig. We The proposals that a businessman be allowed but $30 a day for expenses of meals and lodging while on business trips would be a detriment to our economy and seriously impair the restaurant-beverage trade. Company exectuives often need advisers present when discussing business deals. But the new tax plan allows but one deduction. Again, the businessman in the distant city may need to conduct his meeting in a hotel suite which would accommodate a dozen or more persons. He is usually expected to furnish meals to those in attend ance. To further attack this proposal as being unrealistic is to belabor the well known. The new plan to impose a daily limit of $4 to $7 per person on deductions for food and beverages purchased at a business meeting is likewise unrealistic. While this limitation may be sufficient for some, it is inadequate for others. Where a private dining room is used in a restaurant, a charge for rent is usually added to the cost of the meal. To require a businessman to make such a delicate accounting would add another hazard to our industry. Our organization does not endorse the policy of a social club which flagrantly invites the public as its guests. However, many of our members find it expedient to good business to maintain membership in a social club and feel that dues paid to such club are a legitimate tax deduction. A restaurant operator may not have adequate facilities within his own operation for business discussions. In this case, access to a social club is a necessary supplement to good business. We conclude, therefore, that further restrictive legislation is not only unnecessary but harmful. We believe these new plans would cause a loss of tax revenue and cause a serious recession in the retail food and beverage industry. We think it unfair to keep the whole class after school because one bad boy shot a spitball at the teacher. Ferret out those guilty of abuse and mete out punishment according to existing law. We urge the committee to leave undisturbed the present law permitting a deduction of ordinary and necessary business expenses from gross income. Respectfully submitted. LEONARD FELCMAN, Chairman, Governmental Affairs Committee, National Licensed Beverage Association, Racine, Wis. AMERICAN WATCH MANUFACTURERS ASSOCIATION, INC., Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, Washington, D.C. Washington, D.C., June 8, 1961. DEAR MR. MILLS: I am writing on behalf of the American Watch Manufacturers Association and the American Watch Association. The American Watch Manufacturers Association now has two members, Hamilton Watch Co., and Elgin National Watch Co. The American Watch Association includes in its membership all the principal importers of jeweled watches except the Bulova Watch Co., which is also a domestic manufacturer. Bulova Watch Co. also concurs in the views I shall express. Therefore, this statement has the support of the entire American jeweled watch industry. The jeweled watch industry does not oppose the request for some limitation upon deductions for business expenses. We do strongly oppose the specific suggestion for a $10 limit on deductions for all gifts to employees, unless there is an exemption for awards to employees for long-term service or special achievement. As every member of the committee knows, all American business enterprises have a substantial interest in the loyalty and diligence of their employees. It has long been the custom of corporations to honor lengthy service or special achievement of their employees by some gift. Frequently the gift is made as part of an honorary dinner or a convocation of fellow employees. A survey of some 1,000 of the most prominent companies in the United States in 1959 showed that 84 percent of the large U.S. companies give some form of award for long-term service, 30 percent give some award for safety achievement, and 26 percent give an award for sales achievement. Of those giving awards, 58 percent give watches for long-term service, and 7 percent give watches for safety or sales achievement. Many corporations give over 1,000 such awards each year. Awards in recognition of long-term service of employees are now almost traditional in American business life, and the fine watch has become the traditional gift. Another recent survey among employees demonstrated that over 80 percent of the employees valued such recognition by their employers and appreciated this awareness of human values in business. As a result, the sale of watches to employers for use as gifts to employees has become a substantial part of the total sale of watches. The proposed limit of $10 upon deductions for gifts to employees would destroy completely this tradition, which has been valued by employers and employees alike. It would also destroy completely a substantial portion of the regular business of the watch industry. We do not believe that the Treasury Department intended to wipe out this worthwhile custom. The Treasury proposal is aimed at abuses of the deduction for business gifts, not at recognized valuable uses. For example, the explanation of the recommendations submitted by the Secretary contemplates exceptions for employee athletic activities, picnics, and other social functions which have become customary employee benefits. It would be only reasonable to suppose that Treasury would also willingly include within this exception awards to employees for long-term service and safety or sales achievement. The very basis for such awards would exclude the possibility of abusing the exception through repetitive gifts. We therefore respectfully request the committee to except from any dollar limitation it may recommend upon deductions for gifts to employees the cost of gifts made in recognition of long-term service and special achievement. Very truly your, PAUL F. MICKEY, Vice President. STATEMENT OF AMERICAN TRUCKING ASSOCIATIONS, INC., ON THE PRESIDENT'S TAX RECOMMENDATIONS INTRODUCTION By way of an additional statement on the President's tax message to supplement our expression of views on the tax incentive program and the handling of capital gains on sale of depreciable business property we wish to comment on the matter of the deduction of business expenses: Erpense accounts Industry should be permitted to deduct legitimate expenses which are ordinary and necessary to the conduct of its business. This should include such items as advertising, trade association dues, entertainment and convention expense which, in many cases, are more vital to business than other items about which there is no question of deductibility. This does not mean that abuses should be condoned. However, to penalize all businesses because of excesses of a few is unfair to those who are conscientious in deducting legitimate business expenses. We believe that the problems which now exist in this area can be controlled under existing law. We believe that any expenditure by an American business concern, which expenditure is otherwise lawful, should not be disallowed as an item of ordinary and necessary business expense merely because the expense arises from efforts of the firm to influence legislation. Internal Revenue Service interpretations to the contrary are, in our judgment, unsound and violative of the constitutional rights of free speech and petition. Hon. WILBUR D. MILLS, SMALLER BUSINESS OF AMERICA, INC., Chairman, Committee on Ways and Means, House Office Building, Washington, D.C. DEAR MR. CHAIRMAN: Permit us to present resolution for inclusion in the printed hearings relative to the message from the President of the United States concerning our Federal tax system, presented to the Committee on Ways and Means, House of Representatives, Wilbur D. Mills, Chairman. "EXPENSE ACCOUNTS "Resolved, We oppose any change in the present law. The present rules provide for the allowance of all legitimate business expenses. We believe that the Commissioner of Internal Revenue has sufficient authority to disallow any improper or excessive expenditures without any fixed limitations being imposed by Congress." Respectfully submitted. S. R. CHRISTOPHERSEN, |