Mr. VINSON. How could you collect that from the employer? Mr. KENT. I never have heard a satisfactory answer to that question, Mr. Vinson.

Mr. McCORMACK. Mr. Harrison, do you intend to include tips? Let us get to the point.

Mr. HARRISON. There is no intention of including tips, and I do not think the language does.

Mr. KENT. I so assumed, but I cannot agree, so far as the language is concerned.

Mr. McCORMACK. You ought to be able to adjust that easily. Mr. HARRISON. If you will look on page 5, paragraph (b), I think you will see that it is only the compensation that is paid by the employer.

Mr. VINSON. Of course. It could not be any other way.

Mr. HARRISON. It says [reading]:

The tax imposed by this section shall be collected by the employer of the taxpayer by deducting the amount of the tax from the compensation of the 'employee as and when paid.

Mr. COOPER. Mr. Chairman, with Mr. Kent's indulgence, may I ask Mr. Harrison a question? I am a little bit confused on the other point that Mr. Kent has been raising here.

The rate of tax under the Social Security Act and the rate of tax under this bill are different. That is true, is it not?

Mr. HARRISON. Yes. Under the Social Security Act it commences at 1 percent and under this bill it commences at 234 percent. It runs to a maximum of 3 percent under the Social Security Act and under this bill it runs to a maximum of 334 percent.

Mr. COOPER. As the rates under the Social Security Act and the Railroad Retirement Act are different, how would an employer know what to withhold from an employee, if he did not know whether it was taxable under the Social Security Act or under the Railroad Retirement Act?

Mr. HARRISON. I presume the only answer to that question is he would not know.

Mr. COOPER. Do you not think it is in the interest of the program that we try to get that certain, if we can?

Mr. HARRISON. I think so. And when the railways and the employees, with the aid of the Retirement Board, which has been administering the Retirement Act for 2 years, undertook to draft this provision, we did the best job our experience permitted us to do. Mr. VINSON. And they certainly had that in mind.

Mr. HARRISON. And if there is any possibility of making it any more definite and certain than we have it, I am sure we should be glad to see the language that would make it. Certainly we would have no objection. But in drafting this section we drew on existing law. For instance, the language that the gentleman from the Treasury is talking about may be found almost word for word in the Interstate Commerce Act as to "directly or indirectly controlled by carriers."

Mr. COOPER. On that point, Mr. Harrison, do you not see that a regulatory act might not require exactly the same degree of definite and certain treatment that a taxing act would require?

Mr. HARRISON. I can see that all right. But, as I say, if the gentleman from the Treasury can improve it

Mr. COOPER. Oh, I agree with you there.

Mr. HARRISON. We certainly would have no objection.

Mr. COOPER. As I see the situation, there probably would not be any difficulty about your railroads. That is the real industry that is dealt with here. But these so-called odds and ends, other industries that are sought to be included in the same status of the railroads, as to them I can see how there might be some uncertainty with reference to these other companies or industries that are sought to be placed in the same status as the railroads. I think that would be the only phase of it with respect to which we reasonably could expect to anticipate any difficulty, because we do not know-at least I do not know just what they may be. But I do think we ought to do the best we can to try to make it as definite and as certain as possible so that the tax levied may include a degree of certainty which will cause no trouble.

Mr. HARRISON. I remember Mr. Kent mentioned at one time that he might have some amendments to offer to clarify some of the language and we very readily said at the time that if he had any language that would do the job better and make it more definite and certain, we would have no objection to it. This was the best we could do with it.

Mr. COOPER. I think you have done a good job. But I think at the same time there might be some improvement desirable, if it can be worked out. Of course, I do not know whether it can be or not. Mr. HARRISON. That is the point. We would have no objection to it.

Mr. LAMNECK. Mr. Harrison, let me illustrate by a case to see if I understand this. Suppose a railroad company owned a grain elevator. Would that come under the act, according to your understanding, or not?

Mr. HARRISON. It would.

Mr. LAMNECK. Suppose they owned 25 percent of the stock of a grain elevator; would that come under the act?

Mr. HARRISON. That would be a matter of what the facts were, as to whether the railroad company controlled it. What we had in mind was this. There are two ways of determining that. One, what is the personnel of the board of directors? Are they the same. men that are officers or directors of the railway company? And, does the block of stock in fact give them control so far as the matter of determining the officers and the policy of the company?

Mr. LAMNECK. Would not this be a fact, though, that unless the railroad actually owned a majority of the stock you could not claim. that they controlled it?

Mr. HARRISION. Oh, yes. Most of the railroads of the country are controlled by a minority of the stock.

Mr. KENT. I think I would not disagree with Mr. Harrison on that, but I may point out here what the practical utility of such a prima-facie presumption as I have suggested in the statute would be. Let us take that case of 25-percent stock ownership. Suppose the statute itself provided that the ownership of 25 percent of the stock should be prima-facie evidence of control within the meaning of the statute. Now, prima facie, that elevator is taxable under the Carriers Tax Act. If it files its return and makes no protest

under the Carriers Tax Act, that is in effect an admission that control does exist within the meaning of the act.

On the other hand, if it protests any tax under the Carriers Tax Act and insists that it is entitled to file its return under the Social Security Act, the Bureau is at once put on notice. There is no danger of the statute of limitations running against our collecting a tax on one or the other of the acts. The Bureau is at once put on notice, and proceeds to make the necessary investigation to determine what are the facts.

Mr. VINSON. And make a decision similar to thousands that you are called upon to make every year in collecting taxes.

Mr. KENT. I do not know of any cases under the income-tax law at the present time that turn upon de facto control.

Mr. VINSON. I am not confining it to that. I am talking about this problem. Is this problem any more difficult so far as a decision with regard to the matter of control is concerned, than is involved in a thousand other cases that the Bureau has to handle?

Mr. KENT. No. Some problems are not susceptible of certainty, of course, by their very nature. Agricultural labor, under the Social Security Act, for instance, we will have plenty of trouble with that. Mr. VINSON. As a matter of fact, you are never certain of the proper decision, even though the Supreme Court may pass upon it. They may change their minds.

Mr. KENT. But I would still observe that that is no reason for not giving us as much certainty as the character of the subject matter permits.

Mr. VINSON. I do not believe anybody is objecting to having the clearest possible language that can be put into the bill.

Mr. KENT. I do want to make it clear, in fairness to the Department which I represent, that we have not come up here and pulled these criticisms out of the bag at the last moment. We did all that we could to get some of these ideas, some of these suggestions, written into the bill before it was introduced. But we were informed that the two major groups that were interested in the bill had had their meeting, had agreed upon this as the bill which they would want to have introduced, and that almost any changes might necessitate a reopening of their negotiations and delay the introduction of the bills, and, of course, they were very anxious to get the bills before Congress. Under those conditions there was nothing more that we could do. But I felt that it was my duty in appearing here this morning to call the committee's attention to these inadequacies in draftsmanship which we sincerely feel do exist. Part of them are based, gentlemen, upon the experience that we had in drafting regulations under the present Carriers Tax Act, where we had no opportunity to cooperate or to make suggestions regarding the form of the act.

I am informed by the people who drafted those regulations that they did not know, on a great many questions, whether they were afoot or horseback.

Mr. VINSON. It seems to me it would have been an advantage if you could have had an amendment drawn up so the committee could have seen what you had in your mind.

Mr. KENT. I had been informed some time ago that the bill would probably be considered by the legislative draftsman, and many of

these things are matters which could be better worked out in conference with the draftsman.

Mr. VINSON. You mean in conference with the committee in executive session?

Mr. KENT. I mean the propositions can be informally worked out and submitted for the consideration of the committee.

Mr. HARRISON. Mr. Chairman, I would like to make this observation. It is true that the gentlemen from the Treasury Department suggested after we had drafted the bill, that the duty of setting forth what particular companies would come within that language should be lodged with the Interstate Commerce Commission.

We said we thought that was all legal because that was a duty that properly belonged to the agency that was going to collect the tax. Mr. VINSON. At any time did they suggest any language to incorporate in the bill to carry out the purposes suggested?

Mr. HARRISON. So far as I know, drawing on my memory, I think that was the suggestion made by the Treasury.

Mr. VINSON. Did they present language other than that?

Mr. HARRISON. Other than that, I do not have any recollection. I think that is right, is it not, Mr. Kent?

Mr. KENT. If no language was submitted, it was because after a conference, a representative of the retirement board and I concluded, and I think justifiably so, that it was useless to attempt to do anything further. Numerous suggestions as to needed changes were made informally.

Mr. VINSON. You never submitted that language to the chairman of the committee?

Mr. KENT. No, sir.

The CHAIRMAN. The Chair would like to make this suggestion. that you proceed with your general observations, without reference to such an amendment, and then after you have discussed the amendment with other interested parties we can finish that in executive session.

We are wasting a lot of time and getting nowhere, which we might obviate by your having a conference.

If agreeable, the Chair would suggest that you proceed with your general observations in reference to rates and the suggested amend

ments can be considered in executive session.

Mr. KENT. I have only one other observation to make, Mr. Chairman. Section 11 of the act as now drawn provides that the provisions of this act are in substitution for the provisions of the act of August 29, 1935, "which is hereby repealed."

As we see it, there is the possibility that the act, if adopted— that is, this bill, if adopted in its present form, may be open to attack, so far as the employer's taxes are concerned, on the ground that Congress is imposing a retroactive excise tax back to the first of the year.

If the substance rather than the form is looked to, that contention is of doubtful merit, but I feel that it should be brought to the attention of the committee, because of the great sensitiveness that the court has displayed when there is anything resembling retroactivity in the imposition of an excise tax.

Mr. VINSON. It also occurs to me that the language in substitution. might not be particularly appropriate on account of certain things that have gone on before in connection with the old act. Is there any point to that?

Mr. KENT. I think there is some point in that. I understand, as to the reasons why the representatives of the railroads are favorable to the present provisions, that their representative will explain those reasons, I assume, when he appears.

We have drafted an amendment after consideration, which we feel would avoid any objection on the ground of retroactivity. It is not an easy job.

I am frank to say that the amendment as drawn is a rather cumbersome one. But I feel that this is a point that should be brought to your attention for your consideration.

Mr. VINSON. My point was not with reference to the retroactivity of the tax.

Mr. McCORMACK. Will you give us the history of section 11? Tell us what that does apply to.

Mr. KENT. Section 11 applies to the act which is now in force, which went into effect, or was enacted on August 29, 1935, and which thereby became effective on March 1, 1936. It was those taxes which were extended by the joint resolution which was passed by Congress in February to the end of the 1938 fiscal year, the negotiations at that time still being in progress between the representatives of the railroads and the representatives of the brotherhoods, in an effort to find something upon which they could mutually agree.

Mr. MCCORMACK. I am acquainted with that. What money was raised? What is the status from the tax angle?

Mr. KENT. The status from the tax angle is this, that under the provisions of this bill that act is repealed, but this act, by way of substitution, takes its place from January 1, 1937, on.

In other words, there will be no tax paid from March 1, 1936, to January 1, 1937, and the bill provides for the refund of any tax, the amount of which was small, of course, actually collected during that period, and the abatement of the liabilities which had accrued during that period which were never paid.

Mr. McCORMACK. How much was collected?

Mr. KENT. About $229,000.

Mr. McCORMACK. In other words, they did not pay the tax?

Mr. KENT. No; the great bulk of it was tied up by the injunction which was granted by the Federal district court here in the District of Columbia.

Mr. McCORMACK. So that the amount that the Treasury has of taxes paid under the 1935 act is about $229,000.

Mr. KENT. That is up to January 1; that is the approximate

amount.

Mr. Mr. CORMACK. The purpose of section 11 is to have the tax provided for in this bill retroactive to January 1, 1937? That is the question you have addressed yourself to previously.

Mr. KENT. Yes.

Mr. McCORMACK. And I assume as to the constitutionality.