NATIONAL COUNCIL OF SALES MEN'S ORGANIZATIONS, INC., Mr. WILBUR D. MILLS, Chairman, House Ways and Means Committee, DEAR MR. MILLS: The National Council of Salesmen's Organizations, composed of 24 member sales clubs and 8,000 individual wholesale salesmen, wishes respectfully to register its strongest possible protest against the inequities implied in the proposal now before your committee concerning certain changes in the internal revenue laws. The $30 limit on individual deductions claimed for food and lodging on business trips away from home is intended to curb excesses an abuse by those who use the expense account as a cover for personal expenditures. The salesman who works strictly for commission and who is not reimbursed at all by his employer for incurred expenses cannot afford to live "high on the hog" while on business trips. He will spend no more than he has to, but so long as his expenditures can be documented by hotel receipts and similar evidence of expenditures for meals, we believe that he is entitled to full deductibility. To do otherwise would be to tax the salesman at a rate higher than that being assessed against his fellow citizens for he would be spending some of his net (after tax) dollars to handle purely business outlays. During the period of price control, it was evident that by setting maximum prices, the effect created was one of also establishing minimums. Discounting was not heard of and manufacturers tended to charge their posted maximums. It is not at all unlikely that by permitting prices to seek their own levels, inflationary forces would have lost out to the normal attrition of competitiveness. I draw this parallel because I feel that to set a $30 figure as a maximum for food and lodging expenditures will serve to encourage those who might not have to spend this amount to do so or to claim it, while others will not be able to live within the confines of the figure. The solution, it seems to us, lies in proper enforcement and in the requirement of reasonable documentation of expenditures. We do not see how the Government can arbitrarily set limits on these things without, at the same time, regulating how much a hotel may charge for a room, or a restaurant for a meal. Can one regulate just a part of business without sooner or later having to regulate all of it? In some countries, it is the law to chop off the hand of a man who puts it into someone else's till. But we know of no place where a neighbor's hand is amputated to teach the offender a lesson. The $30 limitation being considered by the Congress would, if enacted, punish the hard-working, taxpaying, noncheating commissioned salesman for the sins of some of his fellow citizens. There are many sound reasons for opposition to this proposal but we are qualified only to speak for our membership and the effects it would have on salesmen throughout the country. We would welcome an opportunity to be heard on this matter but, if time will not permit, we should like to submit this letter for the record and, along with it, may we register our earnest hope that after due consideration your committee will not report favorably on the $30 limitation. Respectfully, MARVIN LEFFLER, President. STATEMENT OF AMERICAN FEDERATION OF MUSICIANS, AFL-CIO, BY HENRY KAISER, GENERAL COUNSEL On behalf of the over 250,000 members of the American Federation of Musicians, AFL-CIO, we urge that this committee enact tax reform legislation without destroying the jobs of thousands of musicians and other artists and workers in the entertainment and hotel industries. Specifically, we are deeply concerned about the disastrous consequences of adopting the proposal sharply to reduce the deductibility of expenses for business entertainment. At the outset we wish to make clear our wholehearted agreement with the President's proposals to eliminate inequities and to use the tax system to promote economic growth. We especially endorse a feature of his program which will substantially further both these objectives-the limitation on exclusion of earned income of American citizens who reside abroad and the termination of foreign tax havens for American firms. These proposals will not only put an end to an unfair tax advantage enjoyed by a favored group of citizens, they will further employment in the United States by removing the incentive for "runaway" projects which would otherwise be carried out in this country. Most significant, for musicians and all other theatrical talents and skills, is the notorious, taxmotivated flight of film companies and personalities. The proposal regarding entertainment expenses differs radically from these welcome recommendations. It will do little toward equalizing taxes; indeed, it will discriminate against legitimate business expenditures. But more important, it will deprive the entertainment and related industries of their principal source of revenue, thus jeopardizing the livelihood of hundreds of thousands of our citizens. The denial of this deduction would not shift the expenditure from the taxpayer to the businessman, as the Treasury seems to suggest. It would, rather, stop it completely and, with it, the industry and the jobs. Needless to say, this industry pays taxes, and it buys countless products on which taxes are paid. While exact calculations on the unemployment which would be caused are impossible, related experience suffices to demonstrate its harsh severity. At the last session Congress reduced the inequitable "cabaret" tax from 20 to 10 percent. The federation has recently conducted a survey on the effects of that reduction. Some 650 AFM locals scattered throughout the United States were requested to forward the actual statistics on cabaret-type engagements both for the quarter beginning November 1, 1960 and for the same months of the previous year. Reports were received from 426-approximately two-thirds— of the federation's locals, including all the major population centers. This partial return shows an increase of 8,715 engagement nights per week for professional musicians, a payroll of approximately $2,265,900 per quarter. Projected over a year, the total in additional earnings for musicians is $9,063,600-this, in the face of economic distress in many parts of the Nation. A projection of employment of associated employees by an independent research organization conservatively estimates that 5% to 6 others are employed for each musician and shows an additional annual payroll of approximately $36 million. If a change in tax of 10 percent can have such dramatic effects in improving business and employment, it is readily inferable that a change of 30 to 40 percent in the opposite direction would be utterly disastrous. We do not, of course, have figures on what percentage of expenditures on entertainment have been deducted, but the Treasury's presentation suggests that it represents a large percentage of the total expenditure. The Treasury also implies that these deductions are mainly taken by corporations in the top (52 percent) bracket, or by individuals in even higher brackets. Thus, our 30 to 40 percent estimate is quite conservative. Indeed, one of the sources relied on by the Treasury asserts that "lights would go dim along the strip in Las Vegas and chorus girls would be unemployed from New York to Los Angeles if it were not for that great modern invention, the tax deduction" (Ex. V, pt. 4, p. 59, H. Doc. 140, p. 237). We pass over the unfair innuendo of "evil" sought by the reference to Las Vegas with the simple observation that the same consequences would be visited upon the theaters, symphony and concert halls, restaurants and hotels throughout the country and upon the great artists, the culturally invaluable talents and the hundreds of thousands of decent American families those enterprises nourish. Moreover, reasonable tax deductions are no more "modern" and no more an "invention" than taxes themselves. Taxes are, to be sure, a vital means of attaining desired and desirable ends. But they are not ends themselves, and even less, is it their chief purpose to ease the burden and improve the lot of the tax collector. are. We believe that this proposal ignores these elementary truths. It does not state that entertainment expenditures may be deductible only if they are legitimate business expenses but quite candidly denies their deductibility even if they This is a drastic change in the philosophy of the income tax which should not be adopted by Congress without the fullest consideration of its implications. In the past, Congress has been exceedingly careful in curtailing deductions for actual business expenses. Only payments which in themselves violated public policy, like bribes, have been disallowed. Even normal expenses of dubious morality such as professional rebates have been held deductible and Congress has not changed this rule. Unless, therefore, all entertainment expenses are now deemed inherently so evil as to be separated out like bribes and other expenditures contrary to public policy, the adoption of the Treasury's proposal would significantly change the philosophy of the income tax system. We submit that despite the moral overtones in the President's speech and in some of the materials relied on by the Treasury there is nothing inherently immoral or improper in business entertainment. It is, and for decades has been, part of the fabric of our society. Without going into the matter in excessive length we think it is, if anything, healthy for executives to be able to perform some of their functions outside the pressures of their offices. Moreover, such informal contacts are very often a practical necessity. We do not, of course, suggest that exorbitant or fraudulent expenditures be allowed. But we submit that the opposite extreme embodied in this proposal is hardly the answer. To exclude entertainment expenses entirely and to reduce food and beverage allowances to Government per diem rates (and to disallow even this pittance when the object is to gain good will) is thoroughly unrealistic and fails to make the adjustments which are the prerequisites of an equitable system. Indeed, it seems that it is precisely the task of making such adjustments at which the Treasury now boggles. It sets out at some length the difficulties that the Commissioner has had in administering this aspect of his duties. It complains about the effects of the Cohan case, which held that a taxpayers' failure to keep books of his expenditures does not authorize their total disallowance. In the first place, the Cohan case, decided by the highly respected Judge Learned Hand, in 1930, has been followed ever since as a characteristically wise approach to a complicated problem. In two complete revisions of the code, Congress left it undisturbed. Moreover, Judge Hand expressly left the Commissioner free to place the burden of establishing the deduction on the taxpayer who did not keep his books. Thus, the Treasury could, under that case, substantially protect itself by regulation against the administrative difficulties which beset it. Most certainly, the difficulties arising out of the Cohan case for taxpayers who do not keep their books hardly justify the punishment of those who keep their accounts accurately. The administration of our income tax is based on the application of broad and equitable rules to the facts of individual situations. These inevitably create problems of administration and interpretation in borderline cases. As Judge Cardozo said in this precise context "Life in all its fullness must supply the answer." To simplify is to cut the Gordian knot. It sacrifices wisdom and justice to the attractive but frequently false god of "administrative convenience." The historic fact that the hotel, restaurant, and entertainment industries have been built up in reliance on these tax laws is also strong ground against making a change. Many industries have been affirmatively subsidized by the Government or by special allowances in the tax system. It is now proposed to give similar incentives to other industries. The removal of such subsidies has been resisted largely on the ground of the hardship consequent on change in a system which had been relied on. We do not here urge affirmative aid; we ask only that the status quo not be altered to the destruction of these industries and, thereby, of the hundreds of thousands of jobs. NATIONAL ASSOCIATION OF ENGINE & BOAT MANUFACTURERS, Subject: Yachts, deduction for business use of. Chairman, Committee on Ways and Means, DEAR CONGRESSMAN MILLS: The purpose of this letter is to very respectfully, albeit emphatically, record with your committee and the Congress our opposition to that part of the President's tax message which recommends to the Congress that all expenditures for the operation of a yacht as a business facility be disallowed in full as a tax deduction. (We use the term "yacht" to denote those self-propelled craft not built primarily for commerce or war.) Our opposition to this recommendation is submitted on behalf of our member companies who build all sizes and types of yachts, manufacture all types of marine motors and engines, and all manner of marine equipment which goes into or on yachts, as well as the dealers who sell such yachts, engines, and equipment. The boating industry in the United States knows that it is building, manufacturing, and selling an end product which has markedly changed the family recreational habits of 40 million Americans today. The industry also knows that the growing popularity of "going afloat" has changed some business habits in this country, in addition to recreational habits. For many years businessmen have been allowed a tax deduction for the cost of doing business in such facilities as private automobiles, private airplanes, a company-owned hotel suite, apartment, or railroad car. These deductions have been allowed under the "ordinary and necessary" rule. Prior to the recent growth of boating, a relatively few businessmen with larger types of yachts, were aware of the value to their business of these craft and they were also allowed to deduct the cost of their use in connection with the business. As is perfectly natural, with 8 million pleasure craft of all sizes in use today in this country, many more businessmen have come to appreciate that a boat on the water is an even better place to conduct legitimate business than a plane in the air, an automobile on the road, a hotel suite or apartment, or a railroad car on the rails. This realization by businessmen has provided a new outlet for the product of the boating industry and quite frankly we feel it is a perfectly legitimate market and wish to retain it. Suddenly, however, we are told that what for many years has been considered a perfectly proper "ordinary and necessary" business expense when only a few yachts were used for business purposes-has now become a "lavish expenditure" and a "luxury" and the Congress is urged to legislate a complete disallowance of all expenditures connected with yachts for business purposes. And this comes at the very time when such expenditures are much more "ordinary and necessary" than ever before in our history. It seems to us that one would have considerable difficulty rationalizing the position that something which floats on water is so different from other types of movable facilities which fly in the air or run on roads or rails that it should ipso facto be classed as a "luxury" and be subject to a newly devised "luxury facility" rule. We submit that such a distinction is specious, discriminatory, and completely illogical. Additionally, we say very sincerely that we do not believe the members of the Ways and Means Committee and the Congress will fail to recognize that a basic and fatal defect exists in this proposal concerning yachts. The basic defect is that the proponents of this recommendation for a complete disallowance of any expenditures connected with yachts have not maintained the burden of proving their case. In short, they have failed to show that the need exists for the extreme action they are asking from the Congress. Put another way, they have not built a firm foundation in fact, sufficient to justify such extreme action. Let us briefly examine what sort of a foundation the proponents have erected for their proposal. A study of the President's message, Secretary Dillon's statement, and his detailed explanation with exhibits, examples, etc., reveals the following statements and conclusions which summarize their case: (1) Such a measure will "strengthen the moral fiber of our society." (2) It "will be welcomed by the American people." (3) "We have encountered extreme difficulty in applying" (the Cohan rule). (4) "These examinations (of present returns) are time consuming for both the taxpayer and the Service, and tend to create a poor public image of the Service." (5) "At the present time entertainment and travel expenses are the most frequent issues in informal conferences held by the Service on field audit cases. In office audit informal conference cases, these rank second to dependency questions." (6) "Eight hundred and eighty-one returns claimed deducations totaling $2.6 million for yachts or boats. Five hundred and twenty-eight of these returns (60 percent) were adjusted, resulting in the disallowance of claimed deductions totaling $873,000 (33 percent)." (7) "It is impossible to accurately delineate between business and nonbusiness expenses." (8) Many taxpayers fail to maintain adequate records to support their claimed deductions. (9) "Tighter enforcement of present legislation will not suffice." Obviously, to make a statement does not make that statement factual nor does the setting forth of a conclusion make that conclusion sound. We are perfectly willing to admit, however, that the Service has a very difficult job, that many taxpayers fail to maintain adequate records, and that examinations of returns are time consuming for both parties. But to successfully make a case of administrative difficulties and headaches and then jump all the way to the conclusion that the proper cure is to legislate a complete disallowance for any expenditures connected with the use of yachts for business purposes is either shockingly naive or deliberately punitive. Obviously, if the proponents of this recommendation to establish a "luxury facility" rule and put yachts under that rule have as their ultimate objective some type of social reform, as distinguished from sound and reasonable tax law, then we can understand the absence of a firm foundation for the recommendation. We feel confident that this omission will be recognized by the Ways and Means Committee and the Congress. We also are perfectly willing to admit that there are undoubtedly abuses with respect to claimed deductions for the business operation of yachts, as with many other facets of our tax laws. But we view the Service agents as law-enforcement officers and, as such, they should be fair, but tough. We feel that if an agent is doing his job properly he will never win a popularity contest, and to worry about the "poor public image of the Service" because agents may vigorously enforce the tax laws seems to us a misconception of their function. In our opinion, if an individual or a company does not maintain proper and adequate records to substantiate the legitimate claimed deductions for the nongovernmental business use of a yacht, those claimed deductions should be denied. In other words, abuses should not be tolerated; they should be effectively eliminated by tough enforcement action. Perhaps some standards of reasonableness would assist such enforcement action, but we cannot support the present position of the Service that they be allowed to throw up their hands and walk away from the problem by simply outlawing all expenditures for yachts, because theirs is a difficult task. If this were permitted, perhaps they will ask the Congress to disallow all claims for dependents, which they say is their biggest conference problem. Actually, as every Member of the Congress knows, the Service has only recently begun to take proper and effective administrative action in this whole field of expense accounts and deductions. On April 4, 1960, the Service announced a new enforcement program, and questions relating to the use of yachts were included in the 1960 income tax return forms which, in the case of corporations, first became due on March 15, 1961, and, in the case of individuals, on April 15, 1961. Despite the fact that this new program of enforcement was just becoming effective in March and April of 1961, the Service says in part 2 of its report dated March 14, 1961, that it cannot enforce existing law, even though the burden of proof is on the taxpayer and without even waiting for the results of the information sought in the 1960 returns for the first time. This request to the Congress by the Service is so patently premature and unsound that we feel the Congress can take judicial notice of the fact that no real case has been made for the extreme legislative action presently requested regarding deductions for yachts. A word concerning the attempt to categorize yachts as "luxury facilities." Unquestionably, to many people any kind of pleasure boat or yacht is a luxury. We think it is equally clear that an automobile is a luxury to a person without one, likewise an air-conditioned home or office, and a suite at the Waldorf to the man who lives at the YMCA. We submit that to carve out a category of facilities and label it "luxury facilities" is more in the nature of some kind of social reform than sound tax law. It takes no great amount of imagination to foresee, as the next step, a category of "semiluxury facilities" into which would be put Cadillac automobiles, for example, and a company or a person being told that they could only deduct for compact cars, etc. We believe the average American person who works for a living has ambition and aspirations, and desires to get ahead and obtain the things he feels he would like and needs for his family and/or his business. We think this is as it should be. If a man feels he needs to buy an airplane or Cadillac for his business, we |