cost of doing this would involve an out-of-pocket cost to us of several thousand dollars per year, assuming that there would be no reimbursement on the part of the Federal Government. It scarcely seems fair to burden the banking industry with such a terrific load. I can also foresee that there will be a great deal of resentment by depositors, which in large measure would be taken out on the teller at the savings department window and possibly some feeling against the bank itself. There would also no doubt be a great many interviews requesting assistance in securing refunds.

There are included in our savings accounts many hundreds of accounts of minors and others who actually pay no income tax after taking into consideration the normal exemptions. There are millions of elderly people whose come tax returns result in rather minor income tax liability, and the withholding of funds which they vitally need would undoubtedly cause definite hardship in many, many cases.

The following is an excerpt from a letter received from Mr. F. R. Schneiter of Muncie, Ind.:

I have some suggestions which might be used as a starter to more realistic taxation of the corporate structure:

(1) Dividends could be considered the same as interest, made fully taxable, but allow the corporation to deduct them from the net profit the same as they are allowed to do with interest. This might result in additional dividends being paid, and thus bring in more tax than otherwise. It seems the main objection to paying the tax on a dividend is that it represents money on which an enormous tax has already been paid.

(2) Another idea would be to raise the corporate tax slightly, say 30 percent on the first $25,000 as at present, 40 percent on the next $100,000, 50 percent on the next $500,000 and 60 percent on anything over $625,000 and eliminate the tax dividends.

The CHAIRMAN. Thank you, Mr. Harvey.

Mr. HARVEY. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Hellenbrand.

Mr. Hellenbrand, you, too, have appeared before the committee on other occasions and you participated in the panel discussions in the fall of 1959. We appreciate having you back with the committee. You are recognized, sir.

STATEMENT OF SAMUEL H. HELLENBRAND ON BEHALF OF THE ASSOCIATION OF AMERICAN RAILROADS

Mr. KEOGH. Mr. Chairman.

The CHAIRMAN. Mr. Keogh.

Mr. KEOGH. I notice a difference.

Mr. Hillenbrand is listed as such

on the list of witnesses, but I think that he should be known by his correct name. Is it not Hellenbrand?

Mr. HELLENBRAND. That is right.

The CHAIRMAN. It is H-e-1-1-e-n-b-r-a-n-d.

Mr. KEOGH. A well-known New Yorker, Mr. Chairman.
The CHAIRMAN. Yes, thank you, Mr. Keogh.

You are recognized, Mr. Hellenbrand.

Mr. HELLENBRAND. Mr. Chairman and members of the committee, my name is Samuel H. Hellenbrand. I am director of taxes of the New York Central Railroad Co., with offices at 466 Lexington Avenue, New York City, and I appear here today in behalf of the Association of American Railroads. The Association of American Railroads is a nonprofit trade association having in its membership pracically all the class I railroads of the United States; that is, railroads having annual gross income of $3 million or more.

I am here today to talk about a technical, but very important problem involving the proposal for withholding of tax on dividends and interest. If provisions for such withholding should be adopted, I respectfully urge that care must be taken to provide adequate safeguards so that, in the effort to cure one problem, hardship and inequity are not created in other areas where problems of compliance and enforcement do not presently exist.

The problem which I want to discuss is that presented by the withholding of dividends and interest payments to corporations which have deficits for Federal income tax purposes. The statement of the Secretary of the Treasury filed with your committee on May 3, indicated that corporations generally will be permitted to credit amounts withheld from dividend payment against their estimated income-tax payments.

But this provision fails completely to take care of the situation in which the corporation, by reason of deficits, has no Federal income tax to pay and hence no estimated payments to make.

The proposal we are making is conceptually sound and is consistent with the system of exemptions and credits proposed by the Treasury Department. We propose that such corporations be permitted to credit the tax withheld from both dividend and interest payments against any amounts collected by such corporations for payroll and other Federal taxes.

More important, however, it is a measure desperately needed by a large segment of the railroad industry. As I am sure most of you know, the Nation's railroads, especially the large trunklines of the Northeast, have experienced severe financial setbacks in recent years through a combination of circumstances which need not be repeated here.

Many have sustained large deficits for Federal income tax purposes for several years and large carryover losses have developed. Losses have continued into the first months of 1961 and there is for practical purposes no prospect that these companies will be paying Federal income tax within the near future.

There is every hope that aggressive leadership and enlightened governmental policies, as well as an upturn in business, will restore these railroads to a sound financial and competitive status within a few years. Meanwhile, however, every economy must be observed and every asset carefully guarded.

Adverse economic conditions have depleted working funds to a dangerously low level. Faced with meager or nonexistent earnings from operations, many railroads are dependent upon income from investments made in more prosperous periods for their current payroll and other working capital needs.

A 20-percent decline in this revenue, through withholding, even if temporary, would be a serious setback to the railroads' recovery program since it would further deplete their working capital. They must, therefore, be reimbursed for these withheld funds as quickly as possible in order to prevent the unfortunate consequences which might otherwise result.

The proposal we are advancing here is consistent with the credits proposed by the Treasury Department in related areas. It is precisely

the same as that proposed by the Treasury Department itself for tax-exempt organizations.

In the statement before your committee, referred to above, the Secretary stated:

Government and tax-exempt organizations, such as pension trusts, charitable foundations, educational institutions, would be withheld on. Such organizations, however, would be allowed to offset currently the amounts they withhold from their employees for income and social security tax purposes. Where credits would be insufficient to offset the amounts withheld on interest and dividends, a quarterly refund would be allowed upon claims.

A similar provision was contained in the 1951 revenue bill as it passed the House. The report of your committee accompanying this bill, commented upon the provisions as follows:

These arrangements will reduce to a minimum the extent to which taxexempt organizations will be out of pocket on account of the withholding system applied to interest, dividends, and royalties under this bill.

The proposal we make here is simply a logical extension of the credit the Treasury Department proposes to grant to corporations in a taxable status. The Treasury proposal would limit the credit to income-tax payments.

Our proposal would extend it to all Federal taxpayments. Corporations which, because of temporary economic setbacks, are not subject to the Federal income tax are nevertheless Federal taxpayers to a substantial extent. Again, using the railroad industry as an example, the carriers of the Northeast States which are suffering the heaviest losses at the present time, are currently providing hundreds of thousands of jobs.

The carriers' share of railroad retirement and unemployment taxes on the compensation of their employees amounts to millions of dollars each year, more than sufficient to absorb the tax withheld on their investment income.

In addition, they pay as withholding agent many more millions of dollars of taxes, in the form of income tax withheld on salaries and wages and excise tax on the transportation of persons. It would not distort the Treasury's proposal to extend it to any Federal tax for which the taxpayer might be liable.

The credit we propose is also necessary to avoid unequal treatment among taxpayers. The profitable corporations will be reimbursed for withheld taxes almost immediately, claiming credit against their estimated taxes.

Unless the loss corporations are permitted to reimburse themselves in a similar manner, by a credit against other Federal taxes, they will be compelled to file refund claims, a procedure which is costly and time consuming, both to the taxpayers and to the Goverment.

Any delay in the process of refund claims, and delay is inevitable, would widen the gap between loss corporations and profitable corporations, and this would further weaken the loss corporation and worsen its competitive position and might result in lose of jobs. Further, we understand, the Treasury Department does not intend to pay any interest on the refunds.

It should be borne in mind, also, that withholding of tax on intercorporate dividends and interest is in many respects anomalous. First of all, problems of compliance and enforcement which exist in other

situations are not necessarily present in the areas of corporate recipients of dividend and interest payments.

This is particularly true in the case of railroad corporations, whose accounts are strictly regulated by the Interstate Commerce Commission. Secondly, in the case of intercorporate dividends, the withholding rate is grossly excessive. Intercorporate dividends are taxed at a maximum rate of 7.8 percent, whereas the withholding rate is 20 percent.

It is apparent, therefore, that intercorporate dividends should actually be exempt from withholding. That they are not so exempt, can be justified only on the premise that the withholding system must be kept as simple as possible from the viewpoint of the withholding agent, and that requiring them to distinguish between corporate and individual holders of their securities would unduly complicate the process.

However, uniformity and simplicity of administration, though important, are not worth the price of a serious depletion in the working funds of many of the Nation's corporations, particularly in those cases where the need for current cash is so pressing. The proposal which we have advanced here today will not complicate the withholding process and yet will provide adequate relief in a situation where such relief is sorely needed.

Should the President's proposal regarding withholding be adopted, it must be noted that an additional burden, as well as an additional expense, will be imposed on the involuntary withholding agent. If withholding is justified in order to avoid large-scale evasion of income taxes, it can only be on the basis that the additional receipts will greatly exceed the cost. Whatever benefits result accrue to the general taxpayer, not to the corporation required to be the agent of the Treasury for this purpose.

you

Therefore, the cost should be borne by the general taxpayer and not by the withholding agent. Accordingly, I recommend that include a provision for reimbursement to the corporation for the expense it would incur in connection with the withholding of tax on dividends and interest.

The CHAIRMAN. Mr. Hellenbrand, we thank you, sir, for this suggestion and your appearance before the committee.

Are there any questions?

Mr. KEOGH. Just one, Mr. Chairman.

The CHAIRMAN. Mr. Keogh.

Mr. KEOGH. Does your suggestion for reimbursement of the expense contemplate that that would be an actual reimbursement, or a flat allowance to all taxpayers?

Mr. HELLENBRAND. I had not reached that point, since there had not been enough discussion on this, and we thought it worthwhile to raise this point, so that it would be something about which the committee might develop some views if enough interest developed. Mr. KEOGH. Thank you.

The CHAIRMAN. Mr. Byrnes.

Mr. BYRNES. You raise the question of the working fund problem that this would create, particularly as it relates to the railroads. Can you give us any ideas as to how much money we are talking about here at any particular time as it relates to the railroads?

Mr. HELLENBRAND. In one company that I know something about there would be a million and a half dollars withheld from the company which is not paying Federal income taxes, and I might go just a little farther.

I am not at all clear from the technical memorandum which the Treasury supplied what the refund process would be. I am not all clear, for example, whether the quarterly process would operate or not. I can imagine, however, that if the usual process takes place, the claim for refund will have to be filed after the next Federal tax return is filed, and it will take the usual time for refund and the corporation may be out this money considerably in excess of a year, and this will have a serious impact upon the cash of many companies who are presently using this cash to keep going.

Mr. BYRNES. In one company you say it would amount to at least a million dollars?

Mr. HELLENBRAND. Yes, a million and a half dollars, and I know of another company where it would be substantially in excess of that. Mr. BYRNES. But you have not made any effort to total it up as far as the members of your association are concerned?

Mr. HELLENBRAND. No, I have not. I do know all the members in the northeast particularly who are suffering severe losses for tax purposes and who have fortunately at the moment dividend and interest income will be very adversely affected.

Mr. BYRNES. I had understood also, as far as the interest aspect is concerned, that some of the railroads' debentures had some clause in them they could not withhold or something to that effect. What is that all about?

Mr. HELLENBRAND. You refer to tax-free covenant bonds, but the Treasury Department in its technical memorandum recognized the existence of that problem just as the House recognized that problem in 1951, and the Treasury Department has proposed to exempt those bonds from withholding.

Mr. BYRNES. But you do have a situation there where a person who has bond interest coming in has to distinguish between the two, in making his own income tax return and the calculation of what has been withheld and what has not.

Mr. HELLENBRAND. You are quite right, sir.

Mr. BYRNES. That is all.

The CHAIRMAN. Mr. Utt.

Mr. UTT. Mr. Hellenbrand, is it your understanding under the Treasury proposal that there would be withholding of dividends to a holding company?

Mr. HELLENBRAND. My understanding is that there will be withholding of all dividends due to any corporation except dividends paid from one member of a consolidated group to another member of a consolidated group; that is, in corporations which file consolidated income tax returns, there would be no dividend and interest withholding for payments within that group, but dividends received from corporations other than the members of the consolidated group would be subject to withholding.

Mr. UTT. Let us take the Allegheny Corp. When the dividends are coming into the Allegheny Corp., are they being withheld by the parent corporation?