deductions were itemized, her gross income could be much larger before a tax would be due. THE RECIPIENT OF THE DIVIDEND MAY NOT BE THE ONE FROM WHOM THE TAX IS DUE In the case of salaries and wages, the one from whom the tax is withheld is the one who must pay the tax on the income and gets the credit for the tax withheld. There are numerous exceptions to this rule where the payment of divid ends is involved. Many individuals maintain accounts with brokerage houses. In such instances, the stock is held in the broker's name and he receives the dividend which is taxable to the stockholder. It is the practice of corporate fiduciaries to carry stock in the name of a partnership nominee. Yet, one dividend check payable to a nominee may actually represent income taxable to hundreds of individuals. Actual ownership of such stock may also include charitable and pension trusts which are fully tax exempt. Dividends paid to an estate or trust, in most instances, are taxable to the beneficiaries and not to the estate or trust itself. In the case of a common trust fund operated by a bank or trust company none of the income is taxable to the trust itself. The ultimate beneficiaries who must report the income in their returns in order to get credit for the tax withheld, in many instances, would be individuals from whom no tax is due. Where stock is sold near the record date for payment of a dividend, the seller frequently gets the dividend to which the purchaser is entitled, because the stock is not transferred in time for the new owner to receive it. PROBLEMS OF THE DIVIDEND DISBURSING AGENT It would not be too difficult for the corporation paying the dividend or its dividend disbursing agent to issue each dividend check for 80 percent of the amount that would otherwise be due, and turn the remaining 20 percent over to the Government. Presumably, the dividend check would indicate that 20 percent had been withheld and, as at present, the Government would be furnished with information returns showing to whom the dividend had been paid. In his message to Congress, however, President Kennedy states that steps will also be taken to avoid hardships for recipients who are not subject to tax. It is here that troubles would begin for the withholding agent. The President gives no hint as to what he has in mind. Does the President mean recipients who are fully tax exempt, such as charitable organizations and qualified employee benefit trusts, or would he include individuals whose income is not large enough to make them liable for a tax? What about stock held in a common trust fund where participants include both those subject to tax and those not subject to tax? It would seem that the result would be that each corporation or its transfer agent would have to maintain two stockholder ledgers. One ledger would be for stockholders subject to withholding and the other for those not subject to withholding. The maintenance of these ledgers would be no easy task, as each time a new stockholder appeared, it would be necessary to ascertain to which class he belonged. Furthermore, two types of dividend checks would be required. WITH HOLDING ON INTEREST Perhaps one of the biggest gaps in reporting arises out of the cashing of U.S. savings bonds. Some of the failure to report the increment in value is undoubtedly due to ignorance or forgetfulness, while some is intentional. To withhold the tax at the time the bonds were cashed would not be too difficult if no exceptions were made; but what would be done about the taxpayer who had elected to report his increment in value each year? Furthermore, many of the holders would not have sufficient income to subject them to tax. If there were withholding on savings bonds this could have a serious effect on the sale of these bonds. With inflation and 20 percent withholding they might not be a popular investment. Not to withhold on savings bonds and to do so on other types of interest would be inequitable. Soupons from corporate bonds are ordinarily deposited to an individual's checking or savings account, the same as checks. However, withholding could result in the handling of coupons as collection items, thus entailing additional Unless there were withholding in every case, the paying agent for the expense. coupons would not know until they were presented whether to withhold. In many instances coupons are not presented for months or even years after they are due, thereby adding to the problems of the paying agent. In this country, there are innumerable savings accounts of minors on which the interest credited each year is negligible. What should be the policy on withholding with respect to such accounts? THE GAP IN REPORTING MAY NOT BE AS LARGE AS INDICATED President Kennedy states that it is estimated that about $3 billion of taxable interest and dividends are unreported each year. Taking into consideration such income received by individuals over the age of 65 and by minors which is not sufficient to require the filing of a return, it could well be that this estimate is much too high. The use of nominees by corporate fiduciaries could be another factor in overestimating the amount of unreported income. As indicated above, a substantial portion of dividends paid to nominees is actually taxable to individuals not required to file returns, or whose tax would be much less than the amount withheld. THE ADDITIONAL TAX COLLECTED WOULD NOT BE WORTH THE COST There is no question but that a substantial amount of income is unreported each year. However, there is considerable doubt that the cost of a withholding program would be worth the additional tax that would be collected. No matter what system were devised, innumerable additional income tax returns would be filed and would have to be processed for refund claims. It would also be well to remember that 52 percent of the expense to which corporations would be put in complying with the withholding requirements would, in effect, be borne by the Government. THE HONEST TAXPAYER WOULD BE PENALIZED FOR THE ACTS OF THE TAX EVADER It would seem to be a fair statement that at least a substantial majority of American taxpayers are honest in reporting their income. To inconvenience and penalize these taxpayers by withholding amounts for taxes that actually are not due, in order to catch the tax evader, is not fair to them. To put corporations to the substantial expense involved in any system allowing exceptions to withholdings is also not right. The amount of money it would take to support a system of withholding on interest and dividends, could better be used to employ additional agents and to install more equipment for the automatic processing of information returns, which should go far toward bringing about the desire result of taxing income which is now unreported. A continuation of the present educational program in which corporations are cooperating would also be helpful. Additional publicity of tax evasion, and the use of newspaper and billboard advertising calling attention to reporting requirements might even be considered. Respectfully submitted. RALPH D. COWAN. DAVIS BUSINESS SERVICE, Phoenix, Ariz., June 5, 1961. Subject: Withholding of tax on dividends and interest. Chief Council, House Ways and Means Committee, GENTLEMEN: I would like to have this statement written into the record of the hearings now being conducted on the President's tax message. My name is Hazel Davis, address 2425 East Thomas road, Phoenix, Ariz. I would like to speak for the benefit of all taxpayers, not any one particular group. I feel very strongly that this is one of the areas that hurts many taxpayers, particularly the older people, since they are seldom aware of the difference this can make on the tax they will owe. Some form of withholding is a must on this type of income to help relieve the hardship of taxes to the moderate income group, the elderly, and people with growing families who, with the high cost of living, have no choice but to spend the moneys they receive as it comes in and frequently are forced, then, to borrow money for the additional taxes on income without withholding. I would like to see an addition to the President's proposal whereby withholdings need not be made on amounts paid under $50, as this would lighten the burden of withholding on the payers of interest and dividends and at the same time, simplify the recordkeeping for the individual, many of whom lack the knowledge of proper methods at the present time. This, then, brings the only other exception I can take to the President's proposal on this subject, that it not be necessary to furnish the recipient with a withholding statement. This, in my opinion, is as needful as the withholding itself for the benefit of the taxpayer who has come to rely on withholding statements on earnings and to appreciate the value to themselves as well as giving a method of checking to IRS as to whether all such income is reported on individual returns. This could easily be added to the present form 1099. Thank you for furnishing me the opportunity of presenting my opinions. Respectfully submited. HAZEL DAVIS, VENABLE, BAETJER & HOWARD, ATTORNEYS AT LAW, Baltimore, Md., June 7, 1961. Re proposed legislation providing for withholding tax on corporate dividends and taxable investment type interest. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, New House Office Building, DEAR REPRESENTATIVE MILLS: This letter is written on behalf of the trustees of the Walters Art Gallery, a municipal institution, of whose board I am a member and vice president. My purpose in writing on behalf of the trustees is to set forth two reasons, one specific, the other general, which should lead to an exemption for organizations like the trustees of the Walters Art Gallery from the proposed withholding tax on dividends and investment type interest. The trustees of the Walters Art Gallery is a corporation formed by a special act of the Maryland Legislature chapter 217 of the acts of 1933, as amended by chapter 457 of the acts of 1959. The act has also been supplemented by ordinances of the mayor and City Council of Baltimore, codified as article 2, sections 3-14 of the Baltimore City Code (1950 ed.). The Walters Art Gallery and the preeminent collections which it houses were devised and bequeathed "to the mayor and City Council of Baltimore, State of Maryland, for the benefit of the public" by Henry Walters, who died November 30, 1931. Mr. Walters' will also created an endowment fund of which the Mercantile-Safe Deposit & Trust Co., of Baltimore, Md., is the trustee. The income therefrom is directed by the will to be paid to the mayor and City Council of Baltimore for the purpose of maintaining the Walters Art Gallery. The trustees of the Walters Art Gallery administer the generous gift of Henry Walters on behalf of the city of Baltimore. In this capacity, the trustees of the Walters Art Gallery receive the income from the aforesaid endowment fund. The endowment fund is invested almost entirely in corporate securities, to which the proposed withholding tax would apply. The income from the endowment fund is the principal and only substantial source of revenues available for the operation of the Walters Art Gallery. The specific reason favoring exemption from the proposed withholding tax which I wish to call to your attention is the consideration that the trustees of the Walters Art Gallery is an agent or subdivision of the State of Maryland and of one of its municipalities. As I am sure you know, substantial constitutional questions arise if the Federal Government endeavors to impose the withholding tax on a State or municipality. The consideration that the tax imposed and collected will, after a period of time, be refunded upon application of the trustees of the Walters Art Gallery does not appear to me to answer the constitutional objection stemming from the famous phrase of Chief Justice Marshall in McCulloch v. Maryland: "The power to tax is the power to destroy." The loss of the use of 20 percent of the income for the period until refund is made would impose a serious burden on the trustees of the Walters Gallery. This leads me to the second, and more general, consideration which I should like to bring to your attention. It has application to private charities as well as to governmental bodies, throughout the United States. The circumstances of the Walters Art Gallery provide a particularly clear illustration of how burdensome the withholding tax provisions will be for organizations exempt from Federal in come taxation, notwithstanding that ultimately refund will take place. I will not set forth at length the history of the Walers Art Gallery's problems occasioned by the extreme wealth of its collections and the gross inadequacy of the space in its present building. I can say, however, that its budgetary problems are severe and that the institution counts on all revenues from the endowment fund in planning its operations. Even without any reduction such as that which would result from imposition of the withholding tax, the endowment fund income is already insufficient to permit payment of adequate salaries to the staff of the gallery, let alone to increase its size, so that the enormous tasks of inspecting, classifying, cataloguing and exhibiting of the gallery's treasures may be carried on in a more comprehensive manner. The expansion needs of the Walters Art Gallery are so critical that anyone familiar with the Baltimore scene is well aware of them. Any reduction in the income of the trustees of the Walters Gallery can only further exacerbate an already truly galling situation. The loss of 20 percent of the gallery's income, even for a year, will be a substantial and damaging blow. May I, therefore, respectfully suggest that any legislation providing for a withholding tax on corporate dividend or investment type interest contain a specific exemption reading somewhat as follows: "Provided, That the tax hereby levied shall not apply to, and shall not be withheld in the case of, any income paid or payable to any State or any municipality of any State, or to any political subdivision, agency or instrumentality thereof. Any such recipient of income may establish its exempt status by filing with the corporation which otherwise would be charged with the withholding duty such document or documents indicating its status as may be provided for in regulations promulgated by the Secretary. Upon such filing, the corporation shall thereafter pay to the recipient the income to which it is entitled without withholding the tax hereby imposed." Your consideration and the consideration by your committee of the matters herein set forth will be greatly appreciated by the trustees of the Walters Art Gallery. Very truly yours, FRANCIS D. MURNAGHAN, Jr. STATEMENT CONCERNING RECOMMENDATIONS OF PRESIDENT KENNEDY FOR AMENDMENT OT THE INTERNAL REVENUE CODE WITH RESPECT TO WITHHOLDING OF TAX ON DIVIDENDS AND INTEREST-SUBMITTED BY GENERAL PUBLIC UTILITIES CORP. This memorandum is submitted by General Public Utilities Corp., New York, N.Y. (GPU), a registered public utility holding company owning all the common stocks of four electric power companies operating in the United States and a fifth, Manila Electric Co. (Manila), operating in the Philippine Republic. GPU has more than 72,000 stockholders, of whom nearly 60 percent own 100 shares or fewer. The GPU stock appears to be held largely as a conservative stock for security of income. It can be reasonably assumed that many such small holders are retired persons over 65, with large personal exemptions. In view of the number of small holders, it is probable that large portions of the amounts withheld under the proposal would be required to be refunded at the end of the year. The results will be that many GPU stockholders will be deprived of small (but to them significant) amounts of income for a period, GPU will incur the considerable expense of making the withholdings and the Treasury will bear the expense of refunding them. The expense to GPU of computing and making the deduction with respect to small dividend checks (of which there are over 40,000 each quarter) will be large in proportion to the dividend and the amounts withheld. GPU now reports dividends paid and the recipients thereof as do other corporations. In view of the fact that the Internal Revenue Service is in the process of organizing large data processing centers, it would appear that the Service will in the future be able to correlate the information filed by GPU with that filed by its stockholders. Thus, without burdens to GPU's stockholders or GPU. tax evasion can be adequately dealt with directly by the Service. GENERAL PUBLIC UTILITIES CORP., By A. F. TEGEN, President. 70510-61-pt. 3-60 THE COLUMBIA GAS SYSTEM, INC., Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, House of Representatives, Washington, D.C. MY DEAR MR. CHAIRMAN: This letter is being sent to your committee to record our opposition to the proposal now being considered by your committee to impose a withholding at the rate of 20 percent on dividends and taxable investment-type interest. The Columbia Gas System, Inc., is a holding company owning, with minor exceptions, all the outstanding securities of a group of companies engaged in all phases of the natural gas business. These companies serve directly at retail and indirectly at wholesale approximately 3,400,000 customers in the States of Kentucky, Maryland, New York, Ohio, Pennsylvania, Virginia, West Virginia, and the District of Columbia. The Columbia Gas System, Inc., as of December 31, 1960, had outstanding in the hands of the public 30,184,905 shares of common stock and $588,602,000 principal amount of debentures. The common stock was held by 199,689 registered owners; 184,848 of these registered owners were individuals who held over 67 percent of the outstanding common stock. Many other individuals are beneficial owners, their shares being held in the names of brokers or nominees. At the end of 1960 over 103,000 of the registered owners of common stock owned less than 100 shares each. Over 81,000 of these owned 50 or less shares, and 20,500 owned 10 shares or less. Failure of some individuals to report on their income tax returns all of their taxable income, including dividend and investment-type taxable interest income, cannot be excused. It is important, however, to view this matter in perspective. A program of withholding on dividends and interest would be particularly harmful to many persons in the low income group who have little or no income tax liability. This hardship would fall on many who rely on dividends and interest for their daily needs. They would find themselves deprived of the current use of a part of every dollar of such income. Retired persons, widows, etc., would be particularly hard fit. Columbia's annual dividend in 1960 was $1.02 per share, so that approximately 20,000 stockholders received $10 or less in dividends. With regard to this category of stockholder, the withholding would be $2 or less per stockholder, but a significant 20 percent of a relatively small dividend payment. We think that this withholding will be a real burden upon these small stockholders from the standpoint of necessary current income and bookkeeping. While it has been represented to your committee that provision for quick refunds would be made, there would be many thousands of cases of nonrecovery of excess taxes withheld because the individual would not know how to go about recovering them. The Secretary of the Treasury, Mr. Dillon, in his presentation to your committee, also stated that quarterly claims for refund would be permitted only for withheld tax on $10 or more of dividends and interest received during the previous 6 months. Many thousands of stockholders who would owe little or no tax receive less than $10 in dividends in any 6 months' period. While this corporation pays regular quarterly dividends, during 1960 approximately 10 percent of our stockholders received less than $10 in dividends and 16 percent less than $10 in a 6 months' period. Many of these stockholders would owe little or no income tax, yet could only obtain refunds of the amount withheld once a year. These are the people who need their current income the most and upon whom the greatest hardship from a withholding on dividends and interest would fall. Tax-exempt organizations would also suffer financial hardship as the result of withholding of taxes on dividends and investment-type taxable interest income. It is proposed that provision be made with respect to these organizations permitting them to offset currently the amounts withheld, against amounts withheld from employees for income and social security tax purposes. Despite this, pension funds, charitable, educational, medical, and religious institutions would have millions of dollars withheld over and above the offsets proposed. Loss of this income for a period of time would curtail their important activities. The proposed procedures for withholding, as presented by the administration, admittedly would cause a minimum of added burden and expense to corporate payers. However, these corporate payers would be faced with indirect burdens |