a steady weekly use of broadcasting and to continue it for at least a year. Newspapers use the same device, more or less, for the same reason. Will you be good enough to include this letter in the record? Respectfully, AMERICAN ASSOCIATION ADVERTISING AGENCIES, BRIEF ON BEHALF OF THE BEAUTY AND BARBER SUPPLY INSTITUTE, INC., OF NEW YORK, N. Y., WITH RELATION TO PASSAGE IN ITS PRESENT FORM OF SECTION 2402 OF THE PROPOSED REVENUE BILL OF 1941 To the honorable the Chairman and Gentlemen of the Senate Finance Committee of the United States: In the matter of H. R. 5417, revenue bill of 1941. A. PRELIMINARY I. The petition This brief is submitted respectfully to induce the Senate Finance Committee to adopt and the Senate to pass section 2402 of H. R. 5417, the revenue bill of 1941, in the same form as that section was passed by the House of Representatives. II. Section 2402 As passed by the House of Representatives, section 2402 (a) of H. R. 5417 levies a retail excise tax of 10 percent on all toilet preparations and section 2402 (b), which is the immediate concern of this brief, provides that the tax imposed by the previous subsection shall be based upon the total amount of toilet preparations used during any month by the beauty shop, barber shop, or similar establishment, and the total amount so used shall be considered as sold at retail, the tax to be based upon the fair retail price of the amount of toilet preparations so sold, as such price shall be determined by the Commissioner of Internal Revenue. Section 2402. (b) as passed by the House reads as follows: "SEC. 2402. (b) For the purposes of subsection (a), if any person operating a barber shop, beauty shop, or similar establishment, uses any article described in subsection (a) in the treatment of any customer or patron, the total amount so used during any month shall be considered as sold at retail by such person during such month, and the fair retail price of such amount, as determined by the Commissioner, shall be considered to be the price at which so sold." III. The purpose of this brief The undersigned believes that the tax as imposed by section 2402 of H. R. 5417 creates an equitable tax which will present no enormous difficulties in collection and will so far increase the revenues to be obtained by the Federal Government as to make any additional difficulties involved in its collection minimal. This brief is further dedicated to the proposition that to change this tax into a manufacturer's excise tax or to require that the manufacturer or distributor be made the agency for the collection of this tax would create great inequalities, would impose upon the manufacturers a burden which should properly belong to the barber shop and the beauty shop and would reduce the revenues most necessary at this period of national defense to an amount far below that which would be yielded by the passage of the bill as it now stands. B. ARGUMENT IV. The beauty and barber shops which would be required to pay the tax in section 2402 of the proposed bill would not suffer as a result of such taxation 1. It is, of course, a matter of common knowledge that the many thousands of beauty and barber shops throughout the country are more or less one- or twoman establishments operated in the main as unincorporated businesses, or at the most as partnerships. These business establishments, it is commonly realized, do not and have not for many years maintained a strict system of account ing. As a matter of fact, it is true that such organizations are extremely haphazard in keeping books and in maintaining records. The effect of this haphazard nature of doing business is to deprive the Federal and State Governments of a large source of revenue which they might otherwise realize. Moreover, this indifferent way of keeping books and record creates an inequality which results to the favor of the beauty and barber shops and to the detriment of such other retail organizations as chain groceries, clothing stores, and the like. The imposition of the present tax upon the beauty ard barber shops and the requirement that they make the necessary monthly returns would as a matter of course require a stricter method of accounting and a strict attention to the keeping of books and records which would redound to the benefit of the State and Federal Governments not only in the matter of this excise tax here under consideration, but also to the general question of income taxes which could not be evaded if a strict system of bookkeeping were maintained. 2. In addition to the fact that the imposition of the presently proposed tax would in a financial way be beneficial to the various taxing units involved, it should be pointed out that the present state of national emergency creates a patriotic duty to which the beauty and barber shop must respond as have all other units of the national economy. The mere fact that the beauty shop and the barber shop is a small unit of the total national economy, when taken singly, is no measure of the real importance of the beauty and the barber shop when regarded as a whole and as part of the Nation's business. It is a matter of common knowledge again that many hundreds of millions of dollars are yearly spent in these shops throughout the Nation and thus far these organizations have escaped the direct taxation which has been imposed on other types of businesses lacking the over-all gross income of this line of business. V. Revenue Two other methods of imposing this tax are feasible apart from that proposed by section 2402 as it presently stands. A manufacturer's excise tax on toilet preparations might be imposed which would be similar to the tax now existing under the Internal Revenue Code. Such a tax would then be payable by the manufacturer and based upon his selling price. This tax at 10 percent would yield no more than is presently being yielded by the tax now on the statute books and consequently reenactment of such a tax would not only defeat the purpose of Congress in revising the revenue bill, but would in addition lighten the burden of the manufacturer when compared with the new burdens being imposed on other manufacturers in other lines of business. The second alternative for section 2402 in the proposed bill is to make the manufacturer the agent for the collection of the retailer's excise tax and require the manufacturer to pay the tax and collect from the retailer. Such an alternative errs on the other extreme. It imposes burdens upon the manufacturer which he should not be asked to assume. It makes the manufacturer bear a proportion of tax far beyond that which other manufacturers in other lines of businesses are being asked to pay. It requires the manufacturer to make a cash outlay month by month which would go far in many instances toward making it impossible for the manufacturer adequately to function. To illustrate the unfair and inequitable burdens which such a substitute for the present section 2402 would create, the following example may be used. Suppose that the manufacturer makes a bottle of tonic which the beauty or barber shop would sell or use and which the Commissioner of Internal Revenue might decide had a fair retail price of $1. The cost to the manufacturer of this item is 35 cents, and his selling price to the wholesaler is 45 cents. If the manufacturer were to be required to collect and pay the 10-percent retailers' excise tax based on the fair retail price as established by the Commissioner, the manufacturer would have to pay to the Federal Government on this item which costs him 35 cents a tax of 10 cents which would be an approximate increase of 33% percent over the manufacturer's own manufacturing cost. This increase of 33% percent would have to be paid monthly by the manufacturer to the Government and in many instances such payment would have to be made prior to the actual collection by the manufacturers of this amount. The manufacturer would thereby have perforce to make an additional investment in his produce of 33% percent which would in many instances prove uncollectible and in all instances prove a great burden since the manufacturer in the industry has not and has never had to any great extent direct contact with the retailer. It should also be pointed out that the imposition of the tax on the manufacturer directly or as agent of the retailer would in every instance result in a greater burden upon the public because, in the natural process of distribution, were the manufacturer to pay the tax, the wholesaler and the retailer would pass the tax on to the public and not in the exact amount by which it has been imposed upon the manufacturer but in larger sums. On the other hand, if the retail beauty and barber shops were to be required to pay the tax as they will be so required under the terms of section 2402 as it now stands, the retailer will pass this tax on to the public in the exact amount which the retailer is required to pay. VI. Collection 1. The argument has been advanced from many quarters that to impose a tax upon the beauty and barber shops such as that proposed in section 2402 would be to create a problem of collection which would be burdensome to the Internal Revenue Department and excessive in cost. This argument ignores the remarks made in IV above, and it further ignores the fact that the increase of revenue to be expected from such a tax would more than offset any increased cost to the Internal Revenue Department in the collection of such a tax. Furthermore, it should be remembered that the tax as proposed in section 2402 will be administered by the Commissioner of Internal Revenue and that it is perfectly feasible for the Commissioner to issue regulations which will so facilitate the collection of this tax by standardizing the methods of making returns and simplifynig the forms upon which returns are to be made, that it is extremely doubtful that the collection of the tax from the beauty and barber shops will be more expensive in any way than the collection of the tax from the manufacturers. 2. Another argument which has been employed by those who advocate a revision of proposed section 2402 is that the tax as there imposed will provide many opportunities and possibilities for evasion. The mere statement of this argument is its own refutation. Our own Internal Revenue laws have since 1916 afforded many opportunities of evasion, but the sound administration of these laws by the Internal Revenue Department and Congress' vigilance have closed up the gaps where such opportunities lie with the result that the opportunities which now exist for evasion are small, if they actually exist at all. C. CONCLUSION VII. Revenue bill of 1941 (H. R. 5417) section 2402 should be recommended to the Senate by the Senate Finance Committee and should be passed by the Senate as it presently stands Because of the arguments advanced above, the honorable chairman and gentlemen of the Senate Finance Committee, Senate of the United States, are respectfully urged to direct their attention to the admirable provisions of section 2402 of the revenue bill of 1941 (H. R. 5417) and to recommend to the full body of the Senate that this section of the new revenue bill be passed as it presently stands, since such a tax would be fair and equitable, would call into play the legal and patriotic duties of a large segment of this Nation's business, would not prove unduly difficult in its administration, would create no striking possibilities of evasion, and would, most importantly, yield far larger revenues than any alternative which has been suggested without at the same time unfairly burdening any other group in the industry. Respectfully submitted. BEAUTY AND BARBER SUPPLY INSTITUTE, INC., By JOSEPH BYRNE, Secretary. WALTER C. B. SCHLESINGER, Counsel. (Thereupon, at 1:15 p. m., the hearing concluded.) (The following statement and memoranda were subsequently sub mitted by Senator Connally :) STATEMENT OF HON. TOM CONNALLY, UNITED STATES SENATOR FROM THE STATE OF TEXAS Mr. Chairman, I would like to present a memorandum regarding the Finance Committee's action proposing to disregard the community-property system of legal and beneficial ownership of income and property. The hasty action of the Senate Finance Committee in adopting an amendment directed at the community-property system of marital property is unfair, unwise, and illegal. 1. It is unfair, because the community-property States, while perfectly willing to rely on the presentation made on the House floor with respect to the universal mandatory joint return, had no notice whatever of any prospect that the Finance Committee would abandon that proposal and in effect single out the community-property States for discriminatory taxation. Indeed the Assistant Secretary of the Treasury, Mr. Sullivan, specifically testified before the Ways and Means Committee as follows: Mr. REED. I was just wondering how much consideration you have given to this complexing problem that has faced the committee for a long time, known as community-property taxes. Mr. SULLIVAN. I think that later in the year there will be a bill in here containing many revisions to the code. I thought that that might be a more appropriate place to consider that question than in this bill. Mr. REED. I say, have you been considering that question of the amount of revenue that it will produce? Mr. SULLIVAN. Yes, sir. Mr. REED. About how much revenue do you figure that you might gain? Mr. REED. Wili you put that in the record? Mr. SULLIVAN. Yes; I will. (The estimate referred to follows:) Estimated increase in individual income taxes under the suggested Treasury surtax schedule if taxpayers in community-property States are required to allocate community-property income to its actual recipient Certainly this statement amounts to an admission that the bill expected later this session is "a more appropriate" place for consideration of the community-property question. Certainly community-property States Representatives were led to believe that the question would be considered on its own merits in this later bill and that they would then have opportunity for full hearing. Certainly the present last-minute action of the Finance Committee has taken unfair advantage of them, and the committee should reverse its action and permit the question to come up for hearing in connection with the later bill. 2. The action is unwise because it means that for revenues which amount to less than $15,000,000 on the high Treasury surtaxes, the passage of the revenue bill including the excise taxes will be indefinitely delayed. The intense feeling in the community-property States regarding their system of marital property may be difficult for common-law States to understand, but it is there nevertheless; and the citizens of those States are as intent upon its preservation, and the recognition of its consequences, as they are upon the rights of free speech and liberty. The attempt to impose a different system or to ignore an actual constitutional and statutory scheme of marital property ownership in those States arouses the utmost resentment; and Senators and Representatives from those States have no alternative but to fight it to the last ditch. Long and arduous debate will plainly be involved, particularly in view of the lack of any public hearing by the committee on the subject. It is not unlikely that the Treasury will lose four or five times as much from the resulting delay in enacting the excise taxes as they will gain from this provision even if finally adopted. 3. The proposal to single out the citizens of community-property States to compel them to pay tax on income belonging to their spouses is certainly violative of due process under the fifth amendment to the Constitution. The Supreme Court of the United States in a series of carefully prepared and presented cases held that one-half of the community income belonged to the husband and one-half to the wife, that it was actually owned by them in these proportions, and therefore taxable to them in such proportions (Poe v. Seaborn, 282 U. S. 101; Hopkins v. Bacon, 282 U. S. 122; Bender v. Pfaff, 282 U. S. 127; Goodell v. Koch, 282 U. S. 118). The sixteenth amendment gives Congress authority to tax income, but it does not give it authority to tax the income belonging to one person to another. Those incidents of ownership, legal and beneficial, established by State law have always been recognized as governing by the Federal courts and by Congress. The very incidents, legal and beneficial, of ownership by husband and wife in community income which the Supreme Court held made one-half of it taxable to the husband and one-half to the wife are also governing as to the power of Congress to tax one spouse with the income of the other. None of the "grantor" cases, "trust" cases, or "income gift" cases has any bearing on this question. Indeed, it is to be noted that in interpreting exactly the same language of the revenue act under which the Supreme Court has held that the income of various trusts and transferred items were included in the grantor's and transferor's income the Supreme Court expressly decided that community income belonged and was taxable one-half to the husband and one-half to the wife. In other words, the Supreme Court has drawn the line directly between unreal technical transfers attempting to avoid taxation of income to its real owner in these cases and the real incidents of ownership, legal and beneficial, to community-property spouses. The line thus drawn is valid constitutionally as well as for purposes of statutory construction. These "grantor" "transferor" cases therefore give no support to the power of Congress to tax the husband or the wife with the income belonging to the spouse. Such action by a State was held unconstitutional in Hoeper v. Tax Commission (284 U. S. 206) as violative of the due-process clause of the fourteenth amendment. The same dueprocess clause is equally applicable to such action by Congress under |