and expenses. Many inquiries would be received, such as why the payments were less than expected, and requests to verify for the recipients' records the exact amounts withheld. Each of these inquiries would have to be researched and individually answered. Many corporations might well find it necessary to give individual advices, particularly to the recipients of dividends, as to the amounts paid and the amounts withheld with each payment, either because this would result in the least overall burden and expense or because it would be necessary in order to maintain favorable stockholders' relations. The Secretary of the Treasury, in his presentation to your committee, pointed out that only an estimated 11 percent of nonreported dividends were received by taxpayers with $5,000 or less of income. Therefore, a withholding at the rate of 20 percent would not cover all of the taxes due on dividends received by the remaining 89 percent of taxpayers who do not fully report their dividends. As apparently many taxpayers for one reason or another do not now report all of their dividend income, there is no reason to believe that these same taxpayers would not continue to report only a portion of their total dividend income. Until such time as such taxpayers know that their returns will be matched by the Government against all Federal information returns, they will undoubtedly continue their present practices. The Internal Revenue Service is now proceeding with plans to install an automatic data processing system which will provide for such matching. This system should solve the problem not only in the dividend and interest area, but wherever there may be missing income. We, therefore, urge that this letter be filed as part of the records of your committee in opposition to this proposal. Sincerely yours, C. E. LOOMIS. EDISON ELECTRIC INSTITUTE, Hon. WILBUR MILLS, Chairman, House Ways and Means Committee, DEAR MR. CHAIRMAN: In lieu of an appearance before your committee, it is respectfully requested that this letter be entered in the record. It briefly records the views of the Edison Electric Institute's Special Tax Policy Committee on one of the subjects covered in the President's tax message, now pending before your committee. We agree in principle with the statement of the American Bankers Association as to the withholding of tax on dividends. The program of the Revenue Service is showing good results and will improve with the institution of automatic data processing system. This will provide a good means of assuring better collection of taxes. Our committee will be pleased to assist your members or your staff with any information or statistics that we have or can develop on the above subject. Very truly yours, D. S. KENNEDY, Chairman of Edison Electric Institute Special Tax Policy Committee. P.S.-We submit also our views on: (1) Investment tax credit, (2) dividend credit and exclusion, (3) cooperatives. SAN FRANCISCO, CALIF., May 10, 1961. Mr. LEO H. IRWIN, Chief Counsel, House Ways and Means Committee, Washington, D.C. DEAR SIR: In connection with hearings on current tax legislation I submit the following: 1. Walter D. Manning, CPA, 605 Market Street, San Francisco, Calif., practicing certified public accountant with own practice. 2. Subject and basic points: Withholding tax on dividends and interest. Any system of withholding on dividends and interest would be unwieldly, cumbersome, and impossible to administer without huge administrative costs to the Government and to the withholding agent. It would create chaos in offices of public accountants and offices of stockbrokers. The auditing of clients' records to ascertain the correct amount of withholding would be very costly. Many people would report the net amount of the check received rather than the gross amount of the dividends. Form 1099 is available to Government auditors for auditing tax returns of taxpayers, and it could be that a more liberal use of that form by the Internal Revenue Service could result in more tax collections from dividend and interest income. I request that my written statement be printed in the record. Yours very truly, WALTER D. MANNING, CPA. STATEMENT Any system of withholding on dividends and interest would be unwieldly, cumbersome, and impossible to administer without huge administrative costs to the Government and to the withholding agent. It would create chaos in offices of public accountants and offices of stockbrokers. The auditing of clients' records to ascertain the correct amount of withholding would be very costly. Many people would report the net amount of the check received rather than the gross amount of the dividends. Form 1099 is available to Government auditors for auditing tax returns of taxpayers, and it could be that a more liberal use of that form by the Internal Revenue Service could result in more tax collections from dividend and interest income. LEO H. IRWIN, Esq., WALTER D. MANNING, CPA. CHICAGO, ILL., June 7, 1961. Committee's Chief Counsel, Committee on Ways and Means, House of Representatives, Washington, D.C. DEAR SIR: Attached hereto please find three copies of a written statement in reference to withholding of tax on dividends and interest. The undersigned is an attorney at law and a certified public accountant, and for many years has been an active member of the American Bar Association, section of taxation. Very truly yours, EDMUND A. SPENCER. WITHHOLDING OF TAX ON DIVIDENDS AND INTEREST Withheld taxes are hidden taxes, nevertheless the intent of these provisions is praiseworthy. However, in spite of the comparatively simple procedure as far as the payor is concerned, it throws further burden on business as well as give a possibility of abuse by it. It could also damage numerous recipients, usually those least informed, who, in the final analysis, may very well pay a tax for which they are not liable and through ignorance would obtain no recovery. Theoretically, the Federal Government is receiving the tax on such income currently through the method of filing declarations. Actually there is undoubtedly considerable evasion. However, it seems that machinery is presently available to stop evasion to nearly its full extent. The requirement for the filing of information on payments should be extended to all amounts on which withholding is proposed (except on payments of interest on bearer bonds, where the withholding provision should be applicable) and should be strictly enforced by having revenue agents inquire into the reporting required from business houses. This is seldom done at the present. The penalties for noncompliance should be more severe. Last, but not least, the forms prepared by the payor, with the aid of the proposed account numbers, should be used by the Internal Revenue Service, which presently is done insufficiently only. In the 1930's when admittedly there was less business, less taxpayers, but also less employees and equipment in the Internal Revenue Service, records of dividends and interest paid were associated with the returns, and the information was fully used by internal revenue agents. Today this information and payments made does not appear to be much utilized by the Internal Revenue Service. Certainly with the media for classification presently available through machines, enough information could be made available to the Internal Revenue Service that properly administered a large proportion of such avoidance would be known, could be reached, and could be stopped. The further advantage of such procedure would be the undoubted discovery of other evasions and then with newly imposed penalties perhaps the wholesale disregard of the law would be discouraged. Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, House of Representatives, Washington, D.C. PHILADELPHIA, PA., June 9, 1961. DEAR MR. MILLS: As a former participant in hearings to improve the Federal income tax system I shall appreciate it if you include in the record of the present hearings my suggestions and recommendations on the subject "Withholding of Tax on Dividend and Interest Income." 1. The withholding of tax on dividends paid by corporations is very desirable and should be provided for without further delay. 2. The withholding of tax should apply only in the case of dividends paid to individuals or partnerships. 3. Recipients of dividends should be permitted to file withholding exemption certificates in case they would not owe any income tax because their total taxable income does not exceed their exemptions. 4. It is entirely unnecessary to apply tax withholding to payments made to corporations, trusts, estates, regulated investment companies, personal holding companies, tax-exempt organizations, institutions, and governmental bodies or agencies. 5. This withholding system should be as simple as possible and avoid the necessity of increasing the millions of refunds made each year because of overwithholding of tax. One of the great injustices of the Federal income tax system is the retention by the Government of hundreds of millions of dollars which have never been refunded to the taxpayers because they have died or cannot be located. 6. Unnecessary withholding of tax only creates complications, confusion, and a waste of manpower, resulting in unnecessary costs to the taxpayers and the Government. 7. The same system of withholding should apply to interest income, that is, tax should be withheld in the case of individuals and partnerships only, the claiming of exemptions against such income should be permitted, and the system of withholding should include savings bank accounts and payments by other financial institutions to individuals and partnerships. 8. For the purpose of simplification corporations paying dividends should classify their stockholders into groups for those individuals and partnerships that are subject to withholding, and those not subject to withholding, such as corporations, trusts, estates, etc. 9. Included in the group not subject to withholding would be those individual and partnership stockholders who filed withholding exemption certificates claiming that their exemptions exceeded their income. 10. In the case of savings accounts in banks or other institutions regulations should provide that withholding may apply in the event the account is closed out, but if the account continues the withholding may be effective when the accumulated interest reaches a certain amount, such as $50. But when an account is closed out the tax on the accumulated interest income may then be withheld if it is at least $5. 11. With regard to the cashing in of U.S. savings bonds, it would be possible for the paying bank or agency to withhold the tax if it is at least $5, or an information form to report the transaction could be prepared when payment for the bond is made. I should be pleased to present further details on the suggestions and recommendations presented above if it is desired. Respectfully submitted. JOSEPH A. SCHAFER, Certified Public Accountant. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, U.S. House of Representatives. HOUSE OF REPRESENTATIVES, DEAR CHAIRMAN MILLS: Enclosed is a copy of a letter I have recently received from Mr. William J. Hickey of Quinby & Co. in Rochester, N.Y., regarding the tax proposal now under consideration by your committee. Quinby & Co. is the originator of a unique investment program known as the Quinby plan, through which thousands of residents of the Rochester, N.Y., area have for years invested on a periodic basis in the securities of several of the country's leading corporations. (The Quinby plan is the forerunner of the New York Stock Exchange's monthly investment program.) I should like to request that Mr. Hickey's letter be made a part of the official record of your hearings on the President's tax proposals and that his views be given every possible consideration by the committee. Very sincerely yours, Jessica McC. Weis, MAY 17, 1961. Representative JESSICA M. WEIS, New House Office Building, Washington, D.C. DEAR JUDY: You will recall our conversation at Nazareth College in which I mentioned some of the ramifications affecting our company if the proposed law requiring dividend withholding is enacted. In order that the committee studying this matter will have all the details of our plan at their disposal, I am enclosing a copy of our prospectus. More copies will be made available if requested. The Quinby plan not only makes it possible for investors to purchase shares of six companies by the "dollar's worth," but it also provides for the automatic reinvestment of all dividends, both large and small, at once in the same underlying securities. It is in this area of dividend reinvestment which is handled by the custodian, Lincoln Rochester Trust Co., that the proposed law would bring about serious consequences. The following is a list of general problems which would affect the approximate 7,000 people using the Quinby plan: 1. Many planholders are retirees and people of modest means who are eligible for a tax refund. 2. We have a large number of accounts registered in the name of tax-exempt organizations: (a) Churches. (b) Scholarship funds of various educational institutions and others who qualify under section 501(c)3 of the 1954 code. This market is so important that we make special provisions for it in our prospectus. 3. We have established a very substantial number of accounts under the Uniform Gifts to Minors Act. Refunds would have to be made to all or most of these accounts for years to come. Proper accounting for such refunds would be extremely burdensome-we shudder to think of how to handle this. At any event, on the national level hundreds of thousands of refund forms would have to be made out just to cover these accounts alone. Specifically the work of our internal accounting and that of the custodian bank might be doubled. 1. The reports of transaction covering reinvested dividends would have to be redesigned and presumably both gross and net dividends received shown. 2. The same is true for semiannual reports mailed to all subscribers. How to show the information on this form can be a very great obstacle since planholders for years have used it in computing their tax returns; it has become a basis for innumerable letters and telephone calls between our main office and our subscribers; there is no doubt but that we would have to show results upon both a net and gross basis. 3. Many other control and summary records would be similarly affected. 4. Compulsory withholding might seriously impair the basic effectiveness of the Quinby plan. (a) Individuals who eventually got refunds would probably not take the extra time and effort to deposit such refunds to their accounts. To this add the fact that dividend withholdings lying in a Government escrow account for as long as a year waiting for a refund are funds which could have been invested by our subscribers and deriving benefits therefrom. (b) Our entire scheme of bookkeeping, sponsor and custodial charges, etc., are based upon deposits in round amounts of $25 or a multiple thereof-how could we accommodate these small and odd amounts that might be deposited and how to separate them from current (either net or gross) dividend receipts. (c) Ultimately both sponsor and custodial charges to the subscriber would undoubtedly have to be increased. I feel some of these difficulties are a little short of being tragic, since all subscribers would be penalized in one form or another. Our custodian bank has been reporting dividend receipts in excess of $10 for each subscriber in addition to the same report filed by the paying corporation. It would seem to me the solution to bringing in full taxable revenues lies with the Internal Revenue Service and its agents in verifying the accuracy of each individual's tax report. It does not lie and should not lie in the province of penalizing the conscientious taxpayer who year after year files an accurate and complete tax return. Nor should any law add any further bureaucratic obstacle and added expense to private enterprise and individual initiative which can only destroy one of the most important principles on which this country was built-that of saving money in order to provide the necessary capital for continued expansion of our economy. Judy, it will be a sad day indeed when bureaucracy embraces our economy with so many shackles as to stifle the hopes and ideals which all of us have. If you would like any further information which would be pertinent to the problems imposed by the law under discussion, let me know. In conclusion, may I say that I feel you are doing a great job with the monumental task with which you are faced. Cordially yours, Bill. WILLIAM J. HICKEY, Jr. STATEMENT OF KAISER INDUSTRIES CORP., WASHINGTON, D.C., REGARDING WITHHOLDING OF DIVIDENDS AND INTEREST PAYABLE TO Loss CORPORATIONS OR CORPORATIONS HAVING NO INCOME TAX LIABILITY We are gravely concerned with the hardships and inequities which are inherin the overwithholding which in some cases will inevitably result from the adoption of the proposal to withhold on payments of dividends and interests as set forth in the message of the President of April 20, 1961. In a statement made before your committee on May 31, 1961, Samuel H. Hellenbrand, who testified on behalf of the Association of American Railroads, pointed out that in case of corporations having a loss for the taxable year there would be a serious requirement of additional working capital resulting from the withholding whereas there would be no ultimate tax liability with respect to the dividends and interest payments made. We share Mr. Hellenbrand's concern and believe that this hardship of additional working capital should be eliminated. However, Mr. Hellenbrand referred only to corporations having no taxable income. The hardship is equal in situations where a taxpayer may have taxable income during the year but for other reasons under the Internal Revenue Code may have no actual tax liability for such year. Further, even in the case of corporations having taxable income, there will inevitably be a requirement of additional working capital under the President's proposal. This arises by virtue of the fact that the proposal permits a credit of the amounts withheld only against amounts due with respect to installments of income taxes. In the case of a taxable corporation the 1st installment with respect to its current taxes is payable in the 9th month of its taxable year, and the 2d is payable in the 12th month. Patently taxes with respect to the dividends and interest received in the early part of the year will be prepaid and, therefore, require additional working capital. We believe that the requirement of additional working capital is an unjust requirement to impose and that this result is not necessary in order to effectuate the President's proposal. |