say fine. We also happen to feel that same man should be allowed to get a yacht if he wishes, use it in whole or in part for legitimate nongovernmental business purposes, and deduct the reasonable cost thereof and not be told by his Government that there is something so sinister and lavish about a yacht on the water, that the moral fiber of our society will be strengthened by not allowing him to deduct any legitimate expenses for that yacht. Moreover, we think it not only perfectly proper, but most enlightened, for certain high ranking members of the executive branch of our Government to have yachts, fully manned and maintained at all times for their personal use either business or pleasure. We do not believe that the American people wish to apply a "luxury facility" rule to those yachts, and require those officials to pay for them out of their own pockets. Nor do we accept the unsubstantiated conclusion that the American people would welcome their Government enacting a measure to preclude any other American from using a yacht for business purposes and deducting the reasonable cost thereof from his taxes as a cost of doing business. In conclusion, we ask only one thing of the Ways and Means Committee and the Congress-to be treated fairly and not be discriminated against. More specifically, we submit that expenditures for yachts for business purposes should be treated exactly the same as those for any other movable business facilities such as automobiles, airplanes, railroad cars, and buses. The Congress should reject the proposition that a boat on the water is any different in principle than a plane in the sky or a car on the road when used for legitimate business purposes. We have purposely omitted reference to the boats we build for the Navy, the Armed Forces' use of yachts in wartime, the small business nature of the industry, the effects upon employment, etc., in order to stick to the issue at hand. Your sympathetic consideration of our position is solicited. Respectfully submitted. Hon. WILBUR D. MILLS, JOSEPH E. CHOATE, Secretary. Chairman, Committee on Ways and Means, DEAR CONGRESSMAN MILLS: Your committee has been asked to single out several specific facilities often used for business entertainment and to disallow the use of such facilities as a tax deduction under any circumstances. Specifically, we refer to the proposal to bar the deduction of the use of yachts as a legitimate business expenditure. It has been asserted that "widespread abuses have developed through the use of the expense account." Even conceding for purposes of discussion that this is true, we still actively urge that this proposal with reference to the use of yachts be turned down as unfairly singling out a particular business expenditure. Logic and equity would seem to dictate that as used for legitimate business purposes for the entertainment of clients or otherwise, yachts fall into no different category than private and country clubs, fancy restaurants, theaters and the like. The question is not whether any or all of these have been subject to abusealthough in any event the proposed remedy is certainly an example of "throwing the baby out with the bath water." (Also, there has as yet been no experience with the efficacy of the special informational items added to tax returns for the first time this year.) What is involved is the justice of treating all business expenses on a par. While our own members do not manufacture pleasure craft usually considered to be in the class of "yachts," as a matter of principle we do wish to make our views known to you. In this connection we have reviewed the comments of the National Association of Engine & Boat Manufacturers on this subject and wish to indicate that we wholeheartedly subscribe to the fundamentals of their letter to you of June 7, 1961. Your careful consideration of our views is respectfully requested. Very truly yours, GUY W. HUGHES, Executive Director. BULOVA WATCH CO., INC., Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, DEAR MR. MILLS: I am writing to you on behalf of Bulova Watch Co., Inc., and particularly to make known to you our views with respect to that portion of the Treasury Department's recommended tax bill which would (except for certain specific exclusions) place a $10 limit on deductions for gifts. The language of the particular section relating to these gifts could certainly be construed, if it were not in fact intended, to apply to gifts which an employer makes to employees, either for length of service or for special recognition. The gift by an employer to his employee of a watch, upon his having achieved 10, 15, or 25 years of service, or to a retiring employee, has become almost traditional in our American business way of life, yet this proposal, if enacted, could certainly destroy, not only that tradition, but also it could serve to stifle an instinct, an expression of appreciation and the esteem for a prize possession— all of which I feel certain was not intended when this section was proposed and submitted. The exception recommended for employees' recreational and social activities clearly indicates that it was intended by the referred-to Treasury Department proposal to recognize and except from disallowance worthwhile employee activities. It would seem that awards, the traditional and customary method of rewarding employees for outstanding services, safety or sales achievements are similarly not abuses of business deductions, but a legitimate item of expense. We respectfully urge upon the committee that, in its consideration of the dollar limitation to be placed upon gifts "to individuals," it specifically exempt gifts which are made to employees in recognition of their service, contribution, retirement or any other special occasion which the gift is intended to commemorate. Respectfully yours, SOL E. FLICK. STATEMENT ON BEHALF OF THE UNITED STATES INDEPENDENT TELEPHONE WE FAVOR CORRECTION OF BUSINESS EXPENSE ABUSES My name is Clyde McFarlin and I am president of the Montezuma Mutual Telephone Co. of Montezuma, Iowa. This statement is on behalf of the United States Independent Telephone Association, the national trade organization representing the independent telephone companies of the country. There are 3,300 such companies which serve 10,705 cities, towns, and rural communities. These companies are those which are not affiliated with the Bell System. Independent companies are responsible for rendering telephone service in more than one-half of the geographical area of the United States, and their telephones total approximately 11,500,000. We approve and support President Kennedy's proposals that the abuses of business expense deductions should be eliminated in the interest of fair and honest business practices. Our independent telephone companies have always been ready to assume their fair share of tax support for the Nation's economy and agree with our President that this should not be diluted or eroded by abuses in the area of unjustifiable business expense deduction. STATEMENT OF COMMITTEE ON TAXATION, NEW YORK CHAMBER OF COMMERCE, ON THE PRESIDENT'S PROPOSALS RELATING TO EXPENSE ACCOUNTS We share the concern of the President, and the administration, that abuses have grown up around the use of expense accounts. As a basic principle, we believe all citizens have an equal obligation to support the Government through taxes, and we deplore the fact that some individuals may be evading their just and equitable share of the tax burden via the expense-account route. In our judgment this is a problem which can and should be met through more intensive enforcement. We think it would be most inadvisable for the Congress to endeavor to set statutory limits on the amount of business expenses which might be incurred either on a per diem basis as is now being proposed, or through the establishment of maximums for specified outlays. We hold no brief for chiselers, and we will encourage and support strictly enforced administration of present laws to root out and eliminate expense account abuses. But we are opposed to the enactment of detailed statutory limitations which, we believe, could lead to perhaps unintended, but nevertheless harmful, consequences for the economy. A STATEMENT ON EXPENSE ACCOUNTS BY MAXWELL A. H. WAKELY, C.P.A., BOSTON, MASS. My name is Maxwell A. H. Wakely. I am a certified public accountant, a partner in the firm of Mount & Carter, certified public accountants, New York, and I am the parner in charge of the Boston, Mass., office for the firm. Although I am chairman of the Committee on Taxation of the Massachusetts Society of Certified Public Accountants my statement is my own and is not to be construed in any way as a reflection of the opinions or statements of that committee or of any professional committee or society of which I am a member. During the past 2 years I have done a considerable amount of research and have by invitation made several talks and lectures before professional and university groups and others on the subject of expense accounts. I welcome this opportunity to express my thinking on this subject to your committee. In November 1959, you invited tax experts to testify before your committee on the subject of business expense deductions-more specifically on travel and entertainment expenses. During the current hearings before your committee you have received or will receive a considerable volume of testimony and prepared statements on the same subject. The opinions, reasons, arguments, and recommendations are and will be multiple and varied. It is quite probable that most of the opinions will in general be in harmony with those expressed by the tax men who appeared before your committee by invitation in November 1959, none of whom recommended the drastic legislative action proposed by the Secretary of the Treasury on May 3, 1961, and most of whom presented forceful and cogent arguments for an aggressive and enlightened enforcement program by the Treasury Department in the area of business expense deductions. I am not going to recite again the great number of arguments which others have and most probably will include in their testimony and statements before your committee. I am quite familiar with and have evaluated most of the more significant arguments and reasons. Many of them are forceful and impelling. Some of them are spurious or self-serving. This statement will submit only one argument in opposition to the Secretary of the Treasury's recommendations for immediate legislative action on expense accounts. In my opinion this one argument transcends all others and is basic and fundamental to intelligent thinking on the subject of controlling the deduction for expense accounts. An explanation of and the underlying facts supporting this single argument are as follows: THE ARGUMENT Not sufficient time has passed since the commencement of the aggressive educational and tax return analysis program by the Internal Revenue Service in 1960 to enable the Service to pass judgment intelligently on the results of such program or to afford the Service an opportunity to initiate an even more intensive educational and administrative expense control program within the framework of the present Code. In fairness to the general taxpaying citizenry, all of whom, except a culpable minority, are honest and anxious to preserve our self-assessment "system of taxation by confession," and in justice to the Service and the Congress, the Congress should not be asked to consider the enactment of legislation which will deny or limit the deduction of legitimate business expenses until the full results of the Service's present expense control program and the initiation and results of a much needed even more aggressive and enlightened educational and enforcement program can be appraised intelligently and objectively. 70510-61-pt. 3 THE FACTS The Code, section 162, allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses, meals, and lodging while away from home in the pursuit of a trade or business. The regulations, section 1.162–17(d)(2) refer to entertainment expenses as one of the business expenses which are to be substantiated by the taxpayer's records. In December 1959 the Internal Revenue Service initiated an aggressive educational and enforcement program when it released TIR No. 198 which was followed by the release of TIR No. 221 in April 1960. During 1960, the then Commissioner of Internal Revenue made several public talks before professional and other groups during which he touched upon TIR No. 198 and TIR No. 221 and related announcements. Business tax returns for 1960 included several new questions and the request for additional information concerning travel and entertainment expenses. The deadlines for the filing of such returns were no earlier than March 15, 1961 and April 15, 1961. The Commissioner's representations contained in parts I, II, and III of a report filed with your committee by the Secretary of the Treasury on May 3, 1961 were based for the most part (and necessarily so) on studies made before the results of TIR No. 198 and TIR No. 221 could possibly be ascertained and in many instances relate to situations which occurred before the publication of these releases in late 1959 and early 1960. In part II of this report filed by the Secretary of the Treasury on May 3, 1961, the Commissioner's position was that the Service could not enforce the existing law. Query: How could the Service take such a position before the results of even the first stage of the Service's recent educational and enforcement programs are known and evaluated? CONCLUSIONS It is incontrovertible that ordinary and necessary business expenses are proper deductions against taxable business income. A study of business and legislative history indicates the full acceptance of ordinary and necessary travel and entertainment expenses paid or incurred in the carrying on of a trade or business as proper business deductions. In very recent years, beginning in late 1959, the Internal Revenue Service has initiated an aggressive educational and enforcement program to control the abuses in the claims made by a minority of the taxpayers for travel and entertainment expenses. Professional men who assist and counsel taxpayers in the preparation of tax returns and the professional groups of which they are a part have lauded and are cooperating with the Service in its efforts to implement and evaluate its new educational and enforcement programs. Until the results of this new program of the Service can be properly and fully measured and evaluated and until an even more aggressive and enlightened educational, administrative, and enforcement program is initiated and measured, there can be no impelling urgency or defensible argument for legislation to deny or limit the deduction of legitimate business travel and entertainment expenses. MINNEAPOLIS-HONEYWELL REGULATOR CO., Subject: President Kennedy's April 20, 1961, message on taxation, expense accounts. Hon. WILBUR D. MILLS. Chairman, Committee on Ways and Means, House Office Building, Washington, D.C. DEAR MR. MILLS: My name is Paul B. Wishart. I am president of MinneapolisHoneywell Regulator Co., on whose behalf I am submitting the following remarks concerning the expense accounts section of President Kennedy's April 20, 1961, message on taxation. Legislative limitations on travel, entertainment, and meal expenses would be an unwarranted interference in the taxpayers' method of doing business. It would increase the total outlay for such expenditures. The President's recommendations with respect to an attempt to cure by statute what are described as "widespread abuses in the use of expense accounts" would penalize a very large number of taxpayers in order to stop abuses by a limited number. We are sure that most large publicly held companies and most well-run smaller companies now provide adequate control to prevent abuse of the expense account. Such companies recognize an obligation to deal fairly and honestly with their stockholders as well as with the Federal Treasury. It would seem grossly unjust to set the same dollar limitations on hotel and meal costs for an employee sent to New York City on company business and another one sent to Annandale, Minn. The vast majority of our employees who travel on company business now spend less than the proposed $30 limit. Our experience indicates that the fixing of a specific dollar limitation will result in present lower expenditures increasing toward the dollar limit. We believe our total expenditures for travel expense would increase under the proposal. We urge your committee to let any expense account problem that exists be handled by the Internal Revenue Service through proper administration of present laws rather than through adopting stringent new laws that would penalize ordinary and necessary business expenses. Very truly yours, PAUL B. WISHART. STATEMENT OF PRICE WATERHOUSE & CO. ON PRESIDENT'S MESSAGE on Taxation, EXPENSE ACCOUNTS This statement presents the views of Price Waterhouse & Co. as an independent accounting firm engaged in service to clients throughout the United States and most countries of the free world. A substantial part of the firm's services to clients in the United States consists of preparing tax returns for all types of taxpayers, and advising these taxpayers of the accounting records which must be maintained for determination of taxable income under the Internal Revenue Code. Our statement is submitted in the public interest and not in the interests of any particular client, or of our clients as a whole. It is based upon our experience with the problems involved in this as well as other sections of the President's message on taxation. The President's message asks for legislation pertaining to expense accounts, stating that this subject is a matter of national concern affecting not only revenues and fairness but also respect for the tax system because of "widespread abuses" and deduction for tax purposes of personal living expenses. No oneleast of all those whose profession helps make the tax laws work-could be unconcerned about such abuses or improper deductions. This problem, however, has been previously considered by the Congress, and the Internal Revenue Service was required by the Tax Rate Extension Act of 1960 to make a study of this and related areas of tax administration. It is most disappointing that the President and the Secretary of the Treasury propose to deal with the problem in ways which would create serious new problems and inequities. Clarification of the law does not require drastic provisions The Secretary presented, and the press has publicized, examples of expense deductions approved by the courts and allowed by the Service which may well appear to the public to be extraordinary and unreasonable both in character and amount. The administration complains that the courts have supported the taxpayers in deducting elements of living expenses in the guise of business expenses. To the extent that the Congress considers that these court decisions misinterpret the intent of the statute, or that the statute needs amendment to avoid the results indicated, it would seem entirely in order that necessary statutory corrections be made. However, this purpose can be accomplished without the drastic and arbitrary provisions proposed by the administration. The present provisions of the Internal Revenue Code provided for allowance as a tax deduction of ordinary and necessary expenses incurred in carrying on a trade or business. Although the meaning of this seems quite clear, perhaps court rulings of the type cited would be overcome by a further statement in the |