cates. Obviously this would cause considerable work and the checking of records in a busy period could be an insurmountable task. If, however, when an exemp tion certificate was filed it could be relied upon until revoked, the problem would be alleviated somewhat. To eliminate withholding of tax on dividends payable to tax-free organizations, individuals not subject to tax, etc., it would be necessary for corporations, or their agents, to segregate or otherwise clearly mark their stock bookkeeeping records to show that no withholding is to be made. This would be an enormous task when considered with all of the other purposes for which records are presently used. (2) Withholding on nominee accounts.—For over 40 years the use of nominee registrations for stock has been widely used by banks and trust companies in handling the securities for the account of fiduciaries, custodian accounts, and other customers. Payments of interest and dividends are now made in the name of the nominee, and the bank or broker allocates the payment properly to its customers. When withholding is required on foreign items, the bank or broker effects the necessary withholding and makes the proper filing with the Internal Revenue Service. The use of this latter procedure is not large in number, and presents additional, but not unsurmountable, work. However, if withholding were applied to all accounts, it would increase the work necessary by nominees to effect the proper allocation to its accounts, and would present quite a problem in the handling of securities held for foreign accounts. The bank or broker in many cases may not know the name of the actual owner nor his address when held for a foreign bank. In addition, the use of nominee registration has facilitated the transfer and delivery of securities in the market. If withholding is enacted, the use of a nominee would have to be adjusted and could very well destroy this method of handling securities. In view of the substantial benefits now derived from the use of nominees, this would be very unfortunate. (3) Nonresident aliens.-In the case of nonresident alien individuals, and nonresident foreign corporations doing business in the United States, payer corporations and their agents are already required, under the present law, to withhold a certain amount of tax at the source. This rate of withholding differs, depending on the country involved and the treaties entered into between the United States and the particular country. The rates vary from the 20 percent now recommended and present many problems including a legal problem which must be resolved. This item must receive careful consideration if it is to work. Exemption item 6 on page 68 seems to exempt withholding on foreign corporations and nonresident aliens and in view of this it seems appropriate that pages 64 and 65 should include dividends as being exempt from withholding when paid to foreign corporations and nonresident aliens. (4) Receipts for tax withholding.-We understand the proposed withholding would be on a straight 20-percent basis, without any receipt being given to the person receiving the dividend and interest. If, however, it is required that a receipt be given to the recipient of the dividend or interest, many problems would arise. Systems used by payers of dividends or interest differ in many respects and it might mean a complete revision of many systems. This takes considerable time, requires the purchase of additional equipment which may not be readily available, and could be very costly. Provision for the preparation of additional forms on equipment used by many would cause considerable problems, cost, and expense. Those corporations which use automatic data processing equipment will no doubt be in a less difficult position and while they will have problems they I will not be as numerous as those corporations which use different systems. Further, with present equipment in many cases it will require two runs of the material with much delay in processing. If a receipt were required, after preparation it would then have to be matched to the dividend check and may have to be enclosed by hand, losing the benefit of mechanized equipment now in use for this purpose. This would slow up the processing of dividends and would require more time to be allowed the paying agent and would certainly require additional clerical help. Even if a receipt were only required yearly it would still present many problems. A record would have to be kept of dividends paid during the year and collated at the end of the year for the preparation of the necessary form. This presents a storage problem as well as a clerical problem. It could not be controlled with the usual run-of-the-mill help but special qualified people would have to be used. If mailed at the end of the year, separate from the last divi dend check, it still would create an additional expense to the payers, for envelopes, postage, and the cost of doing the service. After the close of the taxable year when every payer corporation or its agent will be preparing all of the tax forms and information returns required, in such a volume as to put a serious strain on the personnel doing the work, there will be a considerable number of requests received from individual taxpayers asking for duplicates of the receipts which they have lost or misplaced. These requests will come at a time when personnel is less able to find time to send out the duplicate receipts. Failure to receive them as soon as expected may prompt many individual taxpayers to request extension of time for filing their own returns. In addition, stockholder relations will certainly be strained in such situations. (5) Costs. Although we have no way of determining at present the cost of withholding on dividends and interest, both to the payer corporation and to the Bureau, it is clear that the total cost to the payer, to the Bureau and the Government itself will amount to many millions of dollars. The net revenue gain from dividend withholding would be considerably offset by the extra costs to the Treasury of processing the multitude of refund claims and the possibility of having to pay &-percent interest on delayed refunds. In addition, revenue might actually decrease in some cases if the taxpayer tends to assume that the amount withheld from dividends is the correct amount due. (6) Dividends in kind.—Withholding proposal indicates that certain dividends in kind are subject to withholding. However, this seems to present quite a problem. Take the case of a large corporation (over 100,000 stockholders) which pays a taxable dividend in kind each year. The stock is mailed to stockholders of the company on the day prior to the payment date. The value of the stock distribution is based on the average of the high and low prices of the stock on the date of distribution. Holders later receive a notice from the company advising them of the value for tax purposes. In such a situation, how can this be handled if the distribution is subject to withholding? (7) Taxpayers' account numbers.-There appears to be general recognition of the desirability, from the standpoint of the Treasury Department, of the numbering accounts of taxpayers, particularly in making effective use of electronic processing equipment being purchased by the Treasury. However, the introduction of such a requirement will impose a tremendous clerical burden upon corporations and reporting agents. It is obvious that in endeavoring to have a stockholder furnish a number, a great amount of correspondence will be required, with constant delays in receiving replies which will necessitate a great number of followup letters. After the number is received it will require that records be appropriately adjusted to show the number. In many cases it will mean a revaluation of systems in use and, in many cases, a changing of systems to enable this function to be performed. Those companies on the borderline, which are considering electronic data processing equipment, may be forced to this method, with a tremendous cost of equipment which is not readily available. Disregarding the tremendous expense to which corporations will be put, the use of numbers should not be mandatory for payers of dividends for at least 5 years after the enactment of the proposed statute. Prior to such date compliance should be on a voluntary basis. The corporation should not be a party to any sanctions. Experience dictates that most stockholders will voluntarily comply with the law. The failure to comply will be evident from forms 1099 filed with the Internal Revenue Service, and a followup after a reasonable period from the Treasury Department should be most effective. Continued failure to submit the information could be followed by an audit of the taxpayer. Until the use of numbers becomes universal, transfers of stock will be presented for transfer without a number being given and the transfer agent may be legally forced to effect the transfer. In such cases it would be necessary that a form be sent to the stockholder requesting that a number be furnished. This seems simple but again it means a time-consuming adjustment to the records. If appropriate authorization is given for the use of numbers, it seems to us that the Treasury Department would then have a means of checking on all taxpayers to determine whether a tax return should be filed without the necessity of withholding, and avoid the inequities and problems which will exist should withholding be enacted. Our comments with respect to the use of account numbers were filed with the Under Secretary of the Treasury in January of this year and were also given at prior meetings in Washington. In view of these considerations the association is opposed to any legislation which requires the extension of withholding of Federal income tax from dividend and interest payments. These conclusions have been reached after extensive consideration of the many facets of this proposal which seems to indicate the price is not proportionate to the benefit to be derived. It may be said to all this that our association is erecting bogymen, that the expressed concerns are without foundation in view of the way the bill will be presented a straight 20-percent withholding with no complications devolving upon the payers. But is it not natural that rules and regulations will follow enactment? The fact that the Government can't take care of all of the complications may well result in the rules and regulations shunting them to the payer or his agent. We think there is a great possibility of this. Very truly yours, EDWARD S. TRAVERS, Chairman, Executive Committee. AMERICAN RETAIL FEDERATION, Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, U.S. House of Representatives, House Office Building, Washington, D,C. DEAR MR. MILLS: The American Retail Federation is strongly opposed to the administration's request for authority to require withholding on dividends and interest. The Treasury has claimed that significant amounts of revenue are lost through the nonreporting of dividend and interest payments, either intentionally or inadvertently. It has, however, presented no real evidence that the problem is so serious as to require the drastic action of compelling those who make the payments to withhold a first-bracket tax percentage. Nor has it shown that additional amounts of revenue obtained through withholding will prove to be significant in comparison with the burdens, and potential burdens, on those who pay out dividends and interest, and on many taxpayers who will have amounts far in excess of their tax liability. As suggested later in this statements, there are other methods at hand, including better procedures which are now available if this problem is really substantial. According to the Secretary of the Treasury's statement before this committee, 71 percent of nonreported dividends were received by persons with incomes in excess of $10,000. A smaller, but still substantial percentage of nonreported interest was also received by this group, according to Treasury statements. (Parenthetically, it might be remarked that if the Treasury and Internal Revenue Service can come up with figures of this sort, showing the distribution on nonreported payments, by income groups, they should be able to do something about it without resorting to such drastic solutions as withholding. Indeed, action of this sort can be likened to "choking all the angels to kill one devil.") However that may be, and assuming that the figures are correct, it seems very doubtful whether the problem on nonreporting by this income group would be solved by withholding. To the extent that nonreporting is deliberate, people in this income class group will continue to fail to report, since it will be to their advantage to have 20 percent withheld at the source rather than report and pay a higher effective rate on the full amount. To the extent that the nonreporting is inadvertent. withholding probably will not prove successful. Thus, if enacted, the Federal Government will be acquiescing to nonreporting in order to obtain a portion of the taxes justly due. Withholding of dividends and interest also entails a burden on the companies making the payments-potentially a very serious burden. The plans submitted by the administration have been sugar coated to make withholding palatable, by providing that these companies need not identify names of those from whom amounts are withheld, but simply make one withholding payment to the Treasury This, perhaps, would cause more trouble for these companies than is anticipated. since many would feel obliged to make reports to stockholders and interest recipients. In addition, there would be many requests for information as to what had been withheld, etc. However, the immediate burden is not as alarming as the potential burden. Since, in all probability, withholding would not end the problem on nonreporting, the next step would involve individual reports of names and amounts withheld from individual stockholders and interest recipients. This is a burden which industry fears-and rightly fears would add intolerable costs. Thus the remedy must be sought elsewhere. Reports of interest payments, now limited to payments in excess of $600, could be required for a far lower figure, comparable with the present requirements on dividend payments. Better auditing procedures could be effected, with the use of electronic data computing machines, etc., as already contemplated. Two further arguments against withholding suggest themselves strongly. First, the effect on the small taxpayer and second, the problem arising from failure to request refunds. Small taxpayers, particularly retired taxpayers, will feel a far greater impact from withholding than is equitable. Retired couples, or individuals, whose income is largely from dividends and interest will have a small tax liability, and accordingly cannot qualify for quarterly refunds. They will have their incomes reduced, over the year, by one-fifth, whereas their tax liability may easily prove to be as little as one-tenth of the amount withheld. In the case of small payments, particularly on small savings accounts, many taxpayers will not go through the mechanics of requesting a refund. Savings accounts of $100 or $200 are very common, and in many cases are a taxpayer's only savings. Such taxpayers use, and are encouraged to use the shortest forms, and may easily decide that the amount of the refund is not worth the trouble of filling out the long form. In this case, the Federal Government will, in effect, be keeping funds to which it is not rightfully entitled. It is requested that this be made part of the record. ARTHUR STURGIS, Jr. STATEMENT BY THE NATIONAL RETAIL MERCHANTS ASSOCIATION IN REGARD TO THE PRESIDENT'S TAX PROPOSALS ON WITHHOLDING OF TAX ON DIVIDENDS AND INTEREST The President proposes that the payment of intereest and dividends be subject to withholding at the source at a rate of 20 percent. It is contended that an estimated $3 billion of this type of income is unreported each year which results in large-scale losses of tax revenues. The failure to report this type of income cannot be justified on any ground. During the past several years payers of interest and dividends have cooperated with the Treasury Department in a voluntary campaign to educate the recipients. of this form of income on the necessity of including the amounts received in taxable income. The President's message concedes that this program has "appreciably lessened" the amount of unreported income of this type. We suggest, therefore, that an additional period of time be allowed to test the results of this voluntary program. If approximately the same results can be achieved without imposing the additional costs, inequities, and difficulties inherent in the withholding system for both payers and taxpayer-recipients, then it would appear that the voluntary system would be a more preferable basis of insuring the reporting of this type of income. Respectfully submitted. JOHN F. WOOD, Assistant Controller of the J. C. Penney Co. and Chairman of the NRMA AMERICAN HOSPITAL ASSOCIATION Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, U.S. House of Representatives.. Washington, D.C. DEAR MR. MILLS: The American Hospital Association is writing with respect to the proposal made to your committee to authorize withholding taxes on interest and dividends. The association is the representative of approximately 5,800 hospitals, the great majority of which are institutions exempt from Federal taxes. We are, therefore, concerned with the impact that the proposal would have on institutions which would ordinarily not be obliged to pay a tax on interest and dividends. We understand an exploration of the possibility of providing an exception for tax-exempt institutions has indicated that it is not administratively feasible. If this is the case, and authority for withholding is enacted, then we strongly urge the adoption of the proposal which Secretary Dillon made for an offset provision in his testimony before your committee. This would enable organizations which are tax exempt to offset the amounts withheld from interest and dividends against the amounts they withhold from their employees for income and social security tax purposes. We believe that this offset proposal is workable so far as hospitals are concerned. Hospitals make monthly deposits for the amounts they withhold from employees' income for income and social security taxes. It would be comparatively simple for a hospital to total the amount withheld on dividends and interest and to credit it against the total amount the hospital withholds for income and social security tax purposes. In most cases, the amount of dividends and interest due would not exceed the amount of payroll taxes, so that no application for a refund for any excess due would be necessary. In our view, the offset proposal has the advantage of making the amount of the withheld dividends and interest available to a hospital at approximately the same time as it would have been received from the corporation or institution paying the dividend or interest. Thus an exempt institution would not be delayed in the use of money due it. In this respect the offset proposal is superior to a procedure which would require an institution to apply for a refund of moneys withheld at quarterly intervals. Aside from delay, a refund procedure would impose a bookkeeping burden upon the institution. For these reasons we urge that, if your committee decides to recommend withholding of taxes on interest and dividends, and does not except tax-exempt institutions, it should include the offset proposal suggested by Secretary Dillon. Sincerely yours, KENNETH WILLIAMSON, Associate Director. STATEMENT BY Ormond F. LYMAN, EXECUTIVE VICE PRESIDENT, ILLINOIS STATE CHAMBER OF COMMERCE, ON BEHALF OF ILLINOIS STATE CHAMBER OF COMMERCE, CHICAGO, ILL Recommendation: Do not extend tax withholding to dividend and interest income. Explanation: Income taxation is founded upon the principle of self-assessment with an examining agency to assure proper self-assessment by the relatively small segment of taxpayers who do not appropriately assume the burden. The self-assessment principle should be retained. It has been said that substantial amounts of dividend and interest income are now escaping taxation. The basis for that statement is not clear; it appears to be an assumption based upon a comparison of dividend and interest payments with reported income, taking into account some assumptions concerning amounts which need not be reported. In view of the substantial increases in investments by nontaxable investment funds, it is reasonable to expect that an increasing portion of dividend and interest income is truly nontaxable. An intense effort has been made in the last year by dividend and interestpaying entities to inform recipients of the taxability of the income. and it is too early to typify those efforts as failures if indeed there are substantial amounts of improperly unreported income. Results of the efforts which have been made recently are not in and they should not be prejudged. The withholding proposals relieve paying agencies from burdens which were visualized when the proposals first received publicity, but substantial effort would still be involved for those agencies in the aggregate. Further, the proposals would add heavily to the work of the governmental agencies-additional bookkeeping, additional refunding, and additional clerical checking of returns. We oppose expansion of Government services and costs. Taxpayers also would have an additional burden not only in return preparation, but in securing refunds. Taxpayers entitled to refunds would, for a time at least, be deprived of funds which are properly theirs and should be available for their use. The additional burden upon the economy would not be negligible and should not be imposed. |