[Congressional Record Volume 143, Number 30 (Tuesday, March 11, 1997)]
[House]
[Pages H874-H883]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              TIME TO END CORPORATE WELFARE AS WE KNOW IT

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from New York [Mr. Owens] is recognized for 5 minutes.
  Mr. OWENS. Mr. Speaker, it is time to end corporate welfare as we 
know it, and many of the kinds of tax cuts we are talking about before 
for individuals, certainly the capital gains tax on homes, would be 
eliminated or could be eliminated if we were to go after our Tax Code 
and make the necessary adjustments and close the loopholes and end 
corporate welfare. It is time to end corporate welfare as we know it. 
Great injustices have been done over the past 2 years as we have sought 
to cut back on expenditures. We have gone after the poor, we have used 
a microscope and focused it on the weakest and poorest of Americans.
  A great injustice has been done in the welfare cuts. It is estimated 
that as many as 2 million children will go hungry as a result of 
welfare cuts. A great injustice has been done in the immigration 
reform. The cuts that take place as a result of immigration reform are 
elderly people who are not citizens, who in large numbers will end up 
going hungry, and some will starve, you know. And now we have a 
situation where we place a microscope on the poor who receive Social 
Security and

[[Page H875]]

other groups that receive a cost of living index increase from year to 
year, but mostly it is people on Social Security.
  A lot of us worry about tampering with Social Security. Yes, they are 
tampering with Social Security, they have already tampered with it when 
they made a great cut and took away the entitlement for Aid to Families 
with Dependent Children. That is part of the Social Security Act.
  Now the CPI discussion, the discussion about how to change or tamper 
with, sabotage, the Consumer Price Index is another method, another 
tool, for oppressing the poorest and the weakest people in our society. 
The microscope is now on the poor people who receive cost of living 
increases. Most of those people are on Social Security.
  So instead of doing that, you know, why do not we go after the really 
big money? Instead of squeezing the little people, you know the cuts in 
welfare produced small amounts of money because you were dealing with 1 
percent of the total Federal budget. If you go after corporate welfare 
cuts, you are dealing with the really big money. The big money is in 
corporate welfare. The big money is in the Tax Code, the tax giveaways, 
and today I am going to talk about the big money is there because the 
Internal Revenue Service refuses to enforce the Tax Code properly.
  Mr. Speaker, their refusal to enforce the Tax Code properly wastes 
large amounts of money. We can get as much as $70 billion in this 
present year if they would just enforce the Tax Code properly. We can 
realize a $70 billion windfall as a result of enforcing the Tax Code 
properly. That 70 billion or more, I am going to talk about that in a 
minute.
  I wanted to emphasize two important dates. One date is March 12, 
tomorrow, Wednesday, when the progressive caucus will launch the war 
against corporate welfare. We are being joined by members of the Black 
Caucus. There are a number of other Members that do not belong to any 
caucus. We are being joined in launching a full-scale war against 
corporate welfare. That is going to take place tomorrow with a press 
conference to start the process where we will list 15 items, 15 
corporate welfare items, items where large amounts of money will be 
generated.
  Now, we are doing this under the aegis of the Progressive Caucus, but 
we are happy to announce and would like to call the attention to 
everybody that the chairman of the Committee on the Budget, Mr. Kasich, 
is also waging his own small-scale war on corporate welfare. At least 
he is using the right language, but he does not want a real war; he 
wants a few brush fights. We want to go further and lay it out for the 
American people: Yes, your taxes ought to be cut.
  I agree with the substance of what the gentlemen were saying before. 
We ought to cut taxes for ordinary individuals, we ought to cut taxes 
for families. The problem is that the swindle comes when you have had 
over the last 20 years a tremendous increase in the taxes on families 
and individuals while corporate taxes have gone way down. Corporate 
taxes were almost at 40 percent at one time while individual taxes were 
27 percent. Now corporate taxes are down to the level of about 11 
percent, and individual taxes and individual family taxes are up at 44 
percent.
  So one of the days that we want you to watch is tomorrow when we 
launch the war against corporate welfare, and we will lay out the 
details as to where you can get billions of dollars from the loopholes 
that will be closed and the various other programs that will be 
eliminated that constitute corporate welfare.
  We are going to add to that, and part of that list is a step to 
enforce the Tax Code that exists now which does not require any 
legislation.
  The other day I want you to remember, and you cannot forget it, is 
April 15. April 15 is the deadline for filing income tax returns. 
Nobody forgets that. Most Americans, vast number of Americans, the 
great majority, obey the Tax Code. We have more tax compliance in this 
country than we have in most other industrialized nations.
  Americans obey the Tax Code; they respect the law. Individuals and 
families respect the law, and they obey the Tax Code.
  On the surface corporations obey the Tax Code, but if you look 
closely, there are some instances where not only are the corporations 
not obeying the Tax Code, the Tax Code that already exists, but they 
are also not being bothered by the IRS.
  The Internal Revenue Service is not seeking to enforce the Tax Code. 
We are going to talk about that.
  Why is the focus always on the poor and extracting more from the 
poor, and we never seem to see the obvious, and that is that great 
amounts of money are being wasted in the Tax Code. Great amount of 
moneys are not being collected. We are giving a free ride to 
corporations.
  Now I have sent out, and this is complicated. I intend to take it 
slow and submit for the Record, for those who are interested, a number 
of documents that will help you if you want to find out what the 
background is all about. I have sent a letter to my colleagues asking 
all of my colleagues who are interested to sign this letter to the 
Internal Revenue Commissioner. We have sent out a letter to the 
Honorable Margaret Milner Richardson, and we are going to send a letter 
out as soon as we get some additional signatures, and this letter is 
just saying Dear Commissioner Richardson, please enforce the law; 
please read the Tax Code and enforce the law. There is a simple section 
of the Tax Code, Sections 531 to 537 of the Internal Revenue Code, 
which deals with violations related to unreasonable accumulation of 
surplus, and that is the part we want you to enforce, and if you 
enforce that, we will realize a minimum of $70 billion in this year 
because we are talking about the law not being enforced for the past 3 
years.
  If you go back and look at the failure to enforce the law, you will 
find that a number of corporations have violated in large numbers, and 
if you apply a penalty, and it is a pretty stiff penalty, the penalty 
is 39.6 percent. That is a penalty. If you apply the penalty for the 
people who have violated it, it will generate a windfall of $70 
billion.
  This is a letter to my colleagues asking them to sign on, and I hope 
that those who are listening will take a look at the letter to 
Commissioner Richardson and will sign the letter.
  Needless to say, we are preparing detailed proposals for the 
expenditure of this windfall of revenues resulting from enforcement of 
the law and the collection of the penalties. We want to deal with this 
year's budget in the process of balancing off expenditures against 
revenue.
  The progressives and liberals have not dealt with revenue in a proper 
fashion over the last 50 years. We have always been concerned with how 
will the Government take care of the needs of the people in terms of 
expenditures. We have not looked enough at how the revenue side works, 
where the taxes are coming from and what the injustices are there.
  The pattern I have described repeatedly here is that over the years 
because of the fact the progressives and liberals and people who care 
about the majority of Americans have not looked at the tax side, they 
have swindled us by steadily reducing the tax burden of corporations 
while they steadily raise the burden on individuals.
  So I want to call this letter to your attention, and for those who 
are interested I want to submit it in its entirety. Mr. Speaker, I want 
to submit 2 items for the Record. One is a Dear Colleague letter to my 
colleagues in the Congress asking them to join me in this communication 
with the Tax Commissioner, and the other is the letter, the actual text 
of the letter to Internal Revenue Service Commissioner Margaret Milner 
Richardson.
  Now this is part of the opening war against the war that will begin 
tomorrow against corporate welfare. Mr. Speaker, I submit in its 
entirety for the Record, these two documents:

                                                February 12, 1997.
       Dear Colleague: I am writing to request your support and 
     signature for a letter to the Commissioner of the Internal 
     Revenue Service which may immediately generate more than 70 
     billion dollars in revenue. No legislation is required. No 
     new rule-making is required. This effort only requires the 
     Department of Internal Revenue to enforce existing law.
       Please read the attached letter. In summary, it contends 
     that many corporations have been acting in violation of the 
     law. Since these corporations have been purchasing large 
     quantities of their own stock, they have been acting in 
     violation of the ``unreasonable-accumulation-of-surplus'' 
     provisions

[[Page H876]]

     of sections 531-537 of the Internal Revenue Code. At present 
     these violations are accelerating.
       Please read the attached letter thoroughly. Within five 
     days we will be forwarding it to the Internal Revenue 
     Commissioner and we need your signature. To offer your 
     support please call Kenya Reid or Jack Seder at (202) 225-
     6231.
       Needless to say, we are preparing detailed proposals for 
     the expenditure of the windfall revenues resulting from an 
     enforcement of the law and a collection of the penalties. 
     Probably we will propose that one half of all such penalty 
     revenues collected should be used to reduce the deficit. The 
     remaining half should be used for one-time capital 
     expenditures for education, job training and job producing 
     work projects.
       A clearly enunciated, innovative but practical tax and 
     revenue policy is a long overdue need for Progressives, 
     Liberals and all others who represent the Caring Majority in 
     America. Before the completion of the budget and 
     appropriations process we must enunciate such a policy. While 
     a wise, compassionate and practical spending program must 
     remain a priority, we must elevate our advocacy of tax and 
     revenue measures to the same priority level.
       At the center of the Caring Majority's policy must be the 
     commitment to significantly reduce taxes for middle and low-
     income families and individuals in America. To offset such 
     reductions in the overall income tax revenues we must 
     increase income taxes paid by corporations.
       It must be noted that the overwhelming reliance on income 
     taxes is a subject that deserves thorough discussion. It is 
     time to examine more closely the possible revenues that might 
     be derived from selling and/or leasing the spectrum which is 
     owned by all Americans. Greater revenues from the sale and/or 
     lease of other citizen owned property must also be on the 
     agenda of prospective sources. A ``value added'' or some 
     similar big ticket item consumer tax must not be ruled out.
       These are all tax and revenue considerations to be 
     discussed over the next few weeks. The business at hand now 
     is the enforcement of the present tax code. This should be 
     the core of our 105th Congress budget and appropriations 
     program. I look forward to hearing from you.
           Sincerely Yours,
                                                   Major R. Owens,
     Member of Congress.
                                  ____

                                    Congress of the United States,


                                     House of Representatives,

                                Washington, DC, February 12, 1997.
     Hon. Margaret Milner Richardson,
     Commissioner, Internal Revenue Service,
     Washington, DC.
       Dear Commissioner Richardson: My colleagues in Congress who 
     have joined me in signing this letter are very much concerned 
     about a major loss of federal tax revenue resulting from the 
     failure of the Internal Revenue Service to apply against 
     giant corporations the unreasonable-accumulation-of-surplus 
     provisions of sections 531-537 of the Internal Revenue Code.
       We believe that the IRS could--and should--immediately 
     assess section 531 penalties on the more than $275 billion 
     that America's largest corporations have spent to buy their 
     own stock in 1994, 1995, and 1996. These penalties at 39.6% 
     would total over 100 billion dollars. Stock buybacks by 
     America's great public corporations are all the rage these 
     days, according to the financial media. Total buybacks by 
     corporations are reported to have risen from $20-35 billion 
     per year in 1990-93 to $70 billion in 1994, just under $100 
     billion in 1995 and probably over $110 billion in 1996.
       These enormous buybacks demonstrate clearly that America's 
     largest corporations are accumulating profits and earned 
     surplus far beyond the reasonable needs of their businesses, 
     and in virtually every case they are paying dividends that 
     are a very small fraction of their earnings, often less than 
     20%. For example, in the two years 1955-56, IBM earned about 
     $9 billion, or $21.00 plus per share. Of this amount, it paid 
     out common dividends of only about $1.4 billion (2.80 per 
     share). All of the rest--and then some--went to buy its own 
     stock * * * $5.5 billion in 1995 ($4.6 billion common and 
     $870 million Preferred) and $2.3 billion in the first half of 
     1996, with the two-year total probably $10-11 billion. (True, 
     IBM has a multi-billion capital spending program, but this is 
     much more than on amply covered by its huge additional cash 
     flow of $10-12 billion for the two years, from sale of 
     capital assets and from items that are deducted on the 
     earnings statement but do not involve cash outlays, 
     principally depreciation, amortization and deferral of income 
     taxes.)
       We ask you this. Is there not here, and in dozens of 
     similar cases, a clear cut case for immediate assessment of 
     the 39.6% penalty on all amounts used for stock buybacks? Is 
     there any need to get into an elaborate discussion of 
     reasonable needs of the business as envisioned by sections 
     533 and 537?
       To be specific:
       (1) These corporations are paying very small dividends, 
     amounting to a small fraction of their earnings.
       (2) Therefore, since prima facie the surplus they have used 
     to buy their own stock has been accumulated beyond the 
     reasonable needs of the business, the 39.6% penalty should be 
     assessed. Our study of earnings statements, cash flow 
     statements, and balance sheets leads us to conclude that in 
     many cases the 39.6% penalty might reasonably be applied to 
     even larger amounts than the stock buyback amounts. But that 
     would trigger an extended discussion of needs of the business 
     and other considerations.
       It seems to us that our suggestion has the virtue of 
     elegant simplicity: ``You spent a billion dollars on stock 
     buybacks. Your penalty is 39.6% or $396 million.'' We suspect 
     that the Commissioner could do this in a one-page notice * * 
     * or two pages at most.
       We suggest penalties for 1994-96 because it was during this 
     period that public company stock buybacks exploded to 12-
     figure totals. In addition, we are not clear as to whether 
     the statute of limitations would bar these penalties for 1993 
     and earlier years. Even if it does, we suspect that many 
     1993-and-earlier corporate returns are still open while other 
     issues are being discussed and negotiated. In this 
     connection, we ask you to take note of the fact that, while 
     the dramatic surge in stock buybacks began in late 1994, some 
     very large amounts were spent many years earlier.
       Several giant corporations have been buying back their 
     stock for ten years or more.
       As you know, the unreasonable-accumulation-of-surplus 
     penalty provisions have been in the income tax law since it 
     was adopted in 1913. Despite the fact that the statute as 
     originally enacted (and re-enacted a couple of dozen times in 
     successive revenue acts) made absolutely no distinction 
     between publicly-owned and private companies, the practice 
     and the general understanding was otherwise. As Mr. Justice 
     Harlan put it in 1969, quoting (or paraphrasing) Bittker and 
     Eustice, ``In practice, the provisions are applied only to 
     closely-held corporations, controlled by relatively few 
     shareholders.'' (U.S. v. Donruss, 393 U.S. 297).
       However, this de facto moratorium on application to public 
     companies ended abruptly in 1985. Congress in the Revenue Act 
     of 1984 amended the statute by adding section 532(c), ``The 
     application of this part to a corporation shall be determined 
     without regard to the number of shareholders of such 
     corporation.''
       Please understand, Commissioner, that this is a simple 
     request from elected representatives of the American people 
     that your office immediately take steps to enforce the law.
       We look forward to an early response from the Internal 
     Revenue Service.
           Sincerely Yours,
                                                   Major R. Owens,
                                               Member of Congress.

                              {time}  2200

  Mr. Speaker, I am one of those who is not ashamed to be called a 
liberal. In fact, I am proud of it. I am a liberal, I am progressive, 
all of those kinds of things that people seem to shrink away from. Our 
group has not disappeared. Contrary to rumor and some of the talking 
heads on TV, we are alive and well and there are more of us than some 
people think.
  We really represent the majority of Americans. If you care about 
people, if you want to see the wealth of America distributed in a way 
that benefits all Americans, if you want to see our society hold 
together, the society, if it holds together, will protect everybody, 
and the people that have the most to gain from a society that holds 
together are the rich. The rich have the most to lose if our society 
breaks apart as a result of extremism and rampant injustice.
  What is happening now in Albania, the society is about to fall apart 
because the government did not regulate the capitalists. It is as clear 
as that. The Communists had been ruling in Albania for all of those 
years, and finally the poor people of Albania had a break, they had 
democracy, they had capitalism, and they allowed swindlers to come in 
with pyramid schemes that probably most Americans would clearly 
understand. But these people were new to capitalism, and the new 
pennies they had, they put them into pyramid schemes. And they were 
swindled to the point where we had a revolution break out, a violent 
upheaval break out in Albania.
  So it is to the benefit of everybody that the society hold together 
and, therefore, a just system of taxation is very important for that to 
happen.
  The Soviet Union's economy is collapsing because nobody wants to obey 
the Tax Code. When the big corporations stop paying and they cannot 
collect from them, we have chaos. So if they cannot pay the Social 
Security, equivalent of Social Security in the Soviet Union, pensions, 
they cannot pay it, they cannot pay government workers.
  Mr. Speaker, the head of the Soviet Nuclear Science Development 
recently committed suicide because this man who headed a very 
prestigious organization, guided his country into the pinnacles of 
nuclear war weaponry, was a person with great status among other 
scientists with great status, found himself in a position where he 
could not

[[Page H877]]

get his scientists paid, his technicians; the whole establishment could 
not get paid. They were behind many months in pay and they were 
promised that they would be paid. And when the paycheck finally 
arrived, it was 1 month only. He took out a gun and blew out his 
brains. It is that bad in the Soviet Union.
  When you have a complete collapse of a society because there is no 
respect for the Tax Code, no respect for the tax laws, that is what 
happens. There is a great danger, if you let any segment of the society 
ignore the tax laws, there is a great danger that you will get into a 
situation where you cannot enforce any of them. The little guys, the 
people out there who would be rushing to pay their taxes on April 15 or 
before April 15 obeying the law would not like to see the situation 
mushroom that I am going to talk about tonight, and that is a part of 
the Tax Code is being totally ignored and no effort is being made to 
enforce it.
  Mr. Speaker, we are calling on the Commissioner of the Internal 
Revenue Service to enforce the law. We do not need legislation, we do 
not need any hearings, just enforce the law that already exists.
  It is not true, it is a bum rap that liberals have a one-track mind. 
We are accused of wanting only for the Government to spend more. We 
want to end waste, we want to trim the budget, we want to streamline 
government, we want the most efficient and the most effective 
government.
  I am profoundly troubled by our huge deficits and the fact that, 
although they have declined in the last few years, it looks as though 
they will start growing again in the next century. What kind of 
national debt will we leave to our grandchildren? We hear a lot of talk 
about this from the other side of the aisle, but we are all concerned. 
Some wild guesses from the right are that we will leave a $6 trillion 
or maybe even a $10 trillion debt. When these people talk about leaving 
this debt, they do not talk about excesses of the kind that we have 
experienced over the last 2 years where $13 billion was added to the 
Department of Defense budget, $13 billion more than the President had 
requested.
  I think the President had requested too much. The cold war is over, 
but we are still spending at an enormously high rate for our defense. 
We still have the same size operations for the CIA. The CIA budget has 
not been reduced. It is a secret budget, of course, so I cannot stand 
here and say that I definitely know that to be a fact. The budget is 
still secret, which is one more indication of how backward we are. The 
cold war is over, but the CIA budget remains secret.
  We have evidence cropping up all the time, evidence being revealed 
that there is a great deal of waste at the CIA. The people that are 
being paid to spy are selling the secrets of the people they are spying 
on. And as a result, not only are we wasting money, but people are 
dying. Lives are being lost as a result of our inefficient, ineffective 
CIA that will not even reveal its budget to us.
  So we want to end the waste. Liberals want to end the waste. 
Progressives want to end the waste. We need the money in Brownsville, a 
part of my district that is the poorest district, we need the money in 
Flatbush, we need the money in Flatbush, we need the money back in the 
district to rebuild schools. We need the money in 1,000 different ways 
which will benefit the society far more than pouring it down the drain 
through corporate welfare and unnecessary expenditures for the CIA and 
for the Department of Defense.
  Mr. Speaker, I am disturbed and troubled by this, and so are many 
more of my fellow liberals in Congress and elsewhere. But something 
else that disturbs me and troubles me is the view that the entire 
burden of balancing the budget should be borne by children whose 
parents happen to be drawing welfare checks. I am pleased and delighted 
to hear my colleague, the gentleman from Ohio [Mr. Kasich], tell us 
again and again that, if we are going to cut back on aid to dependent 
children, we should go after corporate welfare too.
  I congratulate Mr. Kasich, the Republican chairman of the Committee 
on the Budget. That takes a lot of guts. He is willing to at least 
fight a brush war with the corporate welfare people. That is a 
beginning. With his powerful voice, we hope that he will continue to 
forge forward and begin to listen to what we have to say to him as we 
launch our war against corporate welfare from the level of the 
Progressive Caucus and the Black Caucus and others who want to finally 
see some justice take place in our revenue system.
  In fact, corporate welfare costs the taxpayers much, much more than 
personal welfare. If we add together the amount the Government spends 
for various corporate subsidies and the amounts of revenue that the 
Government loses through all kinds of varieties of tax breaks and 
loopholes for business, the total of corporate welfare takes a much 
larger part of the Federal budget than income support for the very 
small, those people who are under 65 and who need it.

  Also, we might add to that the people who are going to suffer as a 
result of Medicare cuts and Medicaid cuts. If you have the CPI, if you 
bring in changes to the Consumer Price Index, which eliminates or 
reduces the cost-of-living increase, the COLA, for the elderly, we are 
making them suffer unnecessarily, and the amount of money that is 
involved there is far less than the amount of money that is going to 
waste via corporate welfare.
  Mr. Speaker, I am deeply concerned about how much corporate welfare 
is costing the taxpayer. I will be joining with the other 56 Members of 
the House progressive caucus tomorrow, as I said before, March 12. I 
will be joining with them to present a plan for eliminating, or at 
least cutting back, 10 of the most egregious and outrageous budget-
busting corporate welfare programs. I think we raised that number to 
about 15. We are going to add a few items, about 15 items that are 
budget-busting corporate welfare programs that we will describe. We 
will lay out a plan for reducing them tomorrow at the progressive 
caucus press conference to launch our war against corporate welfare.
  Our caucus has been researching and putting together a program to cut 
back on corporate welfare and save the taxpayers billions of dollars in 
1 year and over $250 billion to $300 billion in 5 years. I am proud to 
say that we have now added to our program, as I said, my own corporate 
welfare measure that would save the taxpayers maybe $60 billion to $70 
billion in the first year of savings. Within that amount, it will be 
$60 billion to $70 billion of that total, and over the total program it 
will save far more, twice as much as that.
  One of the most flagrant examples of corporate welfare results from a 
failure of the Internal Revenue Service, as I said before, to enforce a 
provision of the corporate income tax law that is already on the books. 
It does not take a new bill in Congress or a new law. All it takes is 
for the IRS to obey the mandate of the present law.
  By the way, I am not talking about something that is new in the 
present law or was recently added to the present law. This is a 
provision that was adopted in 1913. It was adopted in 1913 as an 
integral part of the basic income tax law. I am saying that the 
taxpayers have lost over $60 billion through its failure to enforce the 
law. This is over the past 3 years. It should assess at least that 
amount against dozens of large corporations right now in 1997.
  The corporate income tax law mandates a very heavy tax penalty on 
corporations that let their profits pile up far beyond the reasonable 
needs of their businesses instead of paying dividends to their 
stockholders or owners. The law mandates a penalty of 39.6 percent of 
the amount involved. That is the same as the top personal income tax 
rate on those with incomes well over $100,000.
  This is a very stiff penalty, 39.6 percent. That is how you will 
realize a great amount of money if that penalty is invoked. If it is 
utilized, that weapon of the Internal Revenue Service is applied, if 
the corporations are forced to obey the law, we are going to have those 
kinds of payments coming due.
  Let me just read that again: The corporate income tax law mandates a 
very heavy tax penalty on corporations that let their profits pile up 
far beyond the reasonable needs of their businesses instead of paying 
dividends to their stockholders or owners. The law mandates a penalty 
of 39.6 percent of the amount involved. That is the same as

[[Page H878]]

the top personal income tax rate on those with incomes well over 
$100,000.
  Hundreds of corporations have adopted the practice of letting their 
profits accumulate, and then, instead of paying dividends, as they 
should, using the accumulated millions or tens of millions, or in some 
cases billions, to buy back their own stocks on the New York Stock 
Exchange or the over-the-counter market.
  The amounts involved are in the billions of dollars, in fact probably 
at least $300 billion in the 3 years, 1994, 1995, and 1996. Hundreds of 
corporations have adopted the practice of letting their profits 
accumulate, and then, instead of paying dividends, as they should, 
using the accumulated millions or tens of millions, or in some cases, 
billions, to buy back their own stock.
  Mr. Speaker, one huge corporation, whose name is a household word 
known to every American, earned over $5 billion, or $10 per share, in 
1996; earned over $5 billion, or $10 per share, in 1996, but it paid 
its common stockholders only about 14 percent of that amount in 
dividends, $700 million, or $1.30 per share. It has used most of its 
earnings, upwards of $3.5 billion, to buy back its stock on the New 
York Stock Exchange.
  I hope my colleagues are listening to these numbers. I hope my 
colleagues heard the previous discussion about spreading the wealth, 
how people should get their taxes back, more money in the pockets of 
Americans to generate a more vigorous economy.
  Would we not generate a more vigorous economy in America if we had 
the stockholders pay their dividends? Huge profits are made. Instead of 
taking those profits and hoarding them in the corporate structure, 
buying back the stock, why not spread the money out into the economy, 
give it to the people who deserve the dividends, have earned the 
dividends, and let them invest the money as they see fit. We could have 
a more diverse, more vigorous economy if the corporations paid 
dividends instead of hoarding the money in these buy-backs.
  Why did the corporations do this? Well, they do not invite me to 
their board meetings, and they are very careful not to say much about 
what they are doing in their earnings reports or in their press 
releases or other communications to their stockholders and the public. 
That includes they do not say much to the SEC, the Securities and 
Exchange Commission, about this either. The agency that regulates them 
does not get much information of this kind.
  The reason seems fairly obvious. It is amazing that there is no 
discussion of the press, that some of these Senators and Members of 
Congress are not talking about the problem of buy-backs where billions 
of dollars are being hoarded and the economy is being adversely 
affected and the tax law is not being obeyed. They are not talking 
about it. Instead, they focus on the Consumer Price Index. People who 
ought to know better are turning away from a discussion of where the 
real money is to a discussion of how can we squeeze more money out of 
the poor, how can we change the Consumer Price Index, how can we tamper 
with that in a way which will produce savings on the backs of the 
poorest people in America?

                              {time}  2215

  Buying back their stock supports the price of the stock when a 
corporation does that. Maybe it moves it higher. It makes the 
stockholders happy, those who do not exactly know what is happening and 
would prefer to have the stock. Nobody gives them the choice of whether 
they would like to have their stocks at a higher level or the 
dividends. Nobody really gives them that choice, but it does make them 
happy to see the stocks rise. It also gives the executives bigger 
profits on their stock options and maybe they get bigger bonuses as a 
result.
  It makes some of the stockholders happy for another reason. It saves 
them from having to pay taxes that they would have to pay on large 
dividends that the company paid to them. Thus, many companies are using 
accumulated profits to buy back the stock in order to protect their 
stockholders from income taxes that they would pay if the company gave 
them a decent dividend instead of a tiny one.
  The law says when a corporation does this it must pay a penalty, a 
high 39.6 percent penalty. Listen carefully. What I am saying is that 
it is against the law. It is against the law to plot to assist the 
stockholders in avoiding the payment of income taxes. It is against the 
law. That is what this is all about. The law says when a corporation 
does this it must pay a penalty, a high 39.6 percent penalty.
  All it takes to inspire greater respect for the law is for the IRS to 
assess these penalties on several hundred corporations, but it does not 
seem to be doing this, as far as I can find out. If you would enforce 
the law on some corporations the word would go out, because over the 
years they have stayed away from doing this; but in the last 10 to 15 
years there has been a gradual increase of corporations hoarding their 
money, buying back their stock, watching over their shoulder to see if 
the IRS would do anything about it, probably. They have the best legal 
minds, so it is not by accident they are doing what they are doing.
  But it is against the law. You pay your income taxes on April 15. You 
obey the law. I am sure you want everybody else to obey the law. Yes, 
the law can be changed. Often it is changed in favor of the people who 
have the most clout, the most money.
  We have a big scandal raging with a focus on the White House, and 
excessive taxes being used to solicit contributions, collect 
contributions. All kinds of things are happening. They focus it on the 
White House, but if you have an objective study and you focus it in 
other directions, you will find it is also happening in the other 
party, also.
  It happens that there is too great an amount of money that is 
required to run for office. We know that. We are too cowardly to do 
anything about it. We need a constitutional amendment which definitely 
allows Congress to set limits on the amount of money spent for 
campaigns.
  This is a problem that we can solve, but nobody has the guts to 
really go after it. Anybody who talks about the problem and does not 
want to go all the way to a constitutional amendment to limit the 
amount of expenditures on campaigns is a hypocrite. They really do not 
want to solve the problem. They want to play games with the American 
people. Too much money is needed to run for office. There are too many 
opportunities to bribe anybody running for office indirectly. Legal 
bribery is taking place all the time. We need to deal with that.
  Corporations certainly have a lot of money. They are able to lobby 
hard. They are able to influence how the Tax Code is written. If they 
won through that avenue, we have to wave a white flag and surrender. 
But they did not win that way. I am sure they tried to change the law. 
The law has not been changed.

  I want to make it clear that I have not seen any corporation's income 
tax return and I do not ever expect to. Not only the tax returns 
themselves, but also all discussions and negotiations between the IRS 
and any taxpayer, corporate or individual, are totally private and 
secret. That is the way it should be. I do not speak from knowledge of 
having examined anybody's tax returns anywhere.
  But large publicly owned companies do publish their financial 
statements. My staff has examined hundreds of quarterly and annual 
earnings reports for 1994, 1995, and 1996. We have found more than two 
dozen companies with stock buy-backs amounting to $1 billion. Over the 
3 years a dozen corporations have over $2 billion of buy-backs, and a 
handful over $5 billion in buy-backs. These are the buy-backs which are 
not legal.
  If the IRS were to assess the 39.6 percent penalties against these 
dozen corporations, the tax penalties would amount to several hundred 
million dollars in almost every case, and well over $1 billion for a 
few of the individual corporations.
  As I said before, I estimated the total for all corporations would be 
at least $60 billion in penalties, $60 billion or more in penalties 
that would be collected over a 3-year period. So even though I have not 
been privy to any discussion between the IRS and any corporation, it 
seems very clear that the IRS is not assessing these unreasonable 
accumulations of surplus penalties against large publicly owned 
corporations. That is what the penalty is.

[[Page H879]]

It is called an unreasonable accumulation of surpluses. You cannot do 
that.
  There are two requirements for this penalty to apply. One is that the 
earnings and the profits of the corporations are permitted to 
accumulate beyond the reasonable needs of the business. The penalty 
will apply if you have permitted the earnings and profits of 
corporations to accumulate beyond the reasonable needs of the business.
  The other is that the accumulation is ``for the purpose of avoiding 
the income tax with respect to its shareholders.'' I am quoting from 
the Tax Code. For the benefit of anybody who might have just joined us 
and is listening, this is very technical. I realize that. It is 
something which is very simple in the law. A few simple sentences say 
clearly what has to be done, but I am going through this long 
explanation because of the fact that for some reason the law is not 
being enforced.
  I do not want to have a situation where people are able to pretend 
that the simplicity is not there. It is there. I am describing 
something which does not require hearings. It does not require more 
legislation. It is right there already in the law.
  Mr. Speaker, I submit for the Record a document entitled ``Tax 
Penalty on Corporations that Accumulate Surplus Profits in Excess of 
the Reasonable Needs of the Business, Legal Background.'' I want it in 
the Record so anybody who wants to look at it in great detail may 
examine it. It will be in the Congressional Record. Members may read it 
if they want to go into deep details.
  The material referred to is as follows:

Tax Penalty on Corporations That Accumulate Surplus (Profits) in Excess 
                of the Reasonable Needs of the Business


                            legal background

       One of the basic principles of the tax law in the U.S. is 
     that a corporation is a legal entity that is separate and 
     distinct from its stockholder-owners. It is sometimes called 
     a ``fictitious person.''
       Thus, the shareholder-owners are not personally liable for 
     the debts and liabilities of the corporation. This 
     distinguishes a corporation from a sole proprietorship or 
     partnership, where the owners of the business share all of 
     the assets, liabilities, debts and obligations of the 
     business. Limited liability is one of the most important and 
     most advantageous characteristics of the corporate form of 
     doing business and is the principal reason that the corporate 
     form is used by virtually all businesses, large and small, in 
     the U.S. and throughout the world.
       Because the corporation is a separate and independent 
     entity, its profits are subject to a corporate income tax. 
     Then, when profits are distributed to the stockholder-owners 
     as dividends, the stockholders pay a personal income tax on 
     those dividends. This so-called ``double tax'' is vigorously 
     and bitterly opposed by the business and investment 
     communities, but it is a basic part of our tax law.
       The so-called ``double tax'' provides a powerful incentive 
     for corporate business managements to let profits pile up in 
     the corporation, rather than distribute them as taxable 
     dividends. In order to prevent this, the U.S. tax law imposes 
     a severe penalty on corporations that accumulate surplus 
     (profits) in excess of ``the reasonable needs of the 
     business.''
       This penalty on accumulations of corporate surplus 
     (profits) in excess of the reasonable needs of the business 
     is not something new--it is a fundamental part of our tax law 
     and has been since the income tax was first adopted in 1913.
       In the original 1913 income tax law, the penalty was 
     applied against the stockholder-owners. Then, in 1921, the 
     law was changed so that the penalty applies (and has applied 
     ever since) against the corporation itself.
       Since its adoption in 1913, the Internal Revenue Code has 
     been reenacted many times. The rate of penalty has been 
     changed a number of times, and various amendments have added 
     relatively technical provisions involving notice to 
     taxpayers, burden of proof and the like. Otherwise, the 
     penalty provision has remained in the tax law since 1913 
     without interruption and with only two significant changes. 
     One changed the application from the stockholders to the 
     corporation itself, and the other in 1984 made clear that the 
     penalty applied to large public corporations. (See below.) 
     The penalty provision is found in Sections 531-537 of the 
     Internal Revenue Code.
       The penalty tax rate is 39.6% of surplus accumulated in 
     excess of the reasonable needs of the business; it was 
     increased from 28% to 39.6% in 1993.


     Constitutionality, Validity and Enforceability of the Penalty

       This penalty tax provision has been before the U.S. Supreme 
     Court three times. The first time was in 1938, when corporate 
     taxpayers challenged the penalty and alleged a number of 
     reasons why it believed it was unconstitutional, invalid and 
     unenforceable. The Supreme Court dismissed all of these 
     challenges summarily and without serious discussion, and it 
     unequivocally affirmed the constitutionality and 
     enforceability of the penalty. (National Grocery Co., 38-2 
     USTC 9312, 304 U.S. 282, 58 Sct. 932.)
       The U.S. Supreme Court considered the penalty provision 
     again in 1969 and in 1975. In one case the issue was the 
     motive or purpose for accumulating surplus. (U.S. v. Donruss, 
     393 U.S. 297.) In the other, there was a dispute about how to 
     calculate the amount of accumulated surplus. (Ivan Allen Co., 
     422 U.S. 617.) The constitutionality and enforceability of 
     the penalty provision was taken for granted in these cases. 
     It was never mentioned in either of the opinions.


    Applicability of the Penalty Provision to Large, Publicly-owned 
                              Corporations

       There is nothing in the Internal Revenue Code or 
     regulations that exempts publicly-owned companies from the 
     penalty for unreasonable accumulation of surplus (profits). 
     However, the legal community somehow developed the notion 
     that the penalty was intended to apply only to closely-
     held or family companies. An exemption for publicly-owned 
     companies evolved, even though it has no support in the 
     statute itself.
       In a case that became a landmark, Golconda v. Commissioner, 
     507 F.2d 594, the Ninth Circuit Court of Appeals held that 
     the penalty should not be applied against publicly-owned 
     companies unless a small group controlled 50% or more of the 
     stock. The Court said, ``There is, of course, no distinction 
     in the statutory language between publicly and closely held 
     corporations . . . [but] Treasury regulations and 
     interpretations long continued without substantial change, 
     applying to unamended or substantially re-enacted statutes, 
     are deemed to have received Congressional approval and to 
     have the effect of law.''
       The Internal Revenue Service responded to the Golconda 
     decision by announcing that it did not agree with it and 
     would not follow it. (Revenue Ruling 75-305). The IRS stated, 
     ``The position of the Service is that there is no legal 
     impediment in applying, in an appropriate case, the 
     accumulated earnings tax to a publicly held corporation.''
       The IRS never gave any support to the theory of an 
     exemption for publicly-owned companies. True, it did not (as 
     far as can be determined) to try appeal the Golconda decision 
     to the Supreme Court. But, that may be because it was afraid 
     it would lose. Despite the 1974 Golconda decision, the IRS 
     pursued another publicly-owned company successfully; it 
     obtained a brief opinion by the Court of Claims that ``the 
     accumulated earnings tax can apply to publicly-held 
     corporation'' (Alphatype Corp. v. U.S., 10/21/76, 76-2 USTC 
     9730). In its opinion, the Court stated that there is not the 
     slightest evidence that the Commissioner has by ruling, 
     regulation or official policy exempted such (publicly owned) 
     corporations from liability for the accumulated earning tax.
       In 1954, in one of the periodic re-enactments of the tax 
     code, including the penalty provision, the House attempted to 
     add a provision exempting publicly-owned companies if no 
     group controlled more that 10% of the stock. This proposed 
     amendment was dropped in conference.
       In 1985 the world changed. The Revenue Act of 1984, 
     effective in 1985, amended the law by adding section 532(c). 
     The relevant section of the Revenue Act of 1984 is as 
     follows:
       ``Section 58. Amendments to the Accumulated Earnings Tax.
       (a) Clarification that Tax Applies to Corporations Which 
     are not Closely Held.--Section 532 (relating to corporations 
     subject to accumulated earnings tax) is amended by adding 
     thereto the following new subsection:
       ``APPLICATION DETERMINED WITHOUT REGARD TO NUMBER OF 
     SHAREHOLDERS.--The application of this part to a corporation 
     shall be determined without regard to the number of 
     shareholders of such corporation.''
       The above section, which remains in the law, effectively 
     and permanently ended the de facto exemption for publicly-
     owned companies.
       In 11 years since the law was changed, the IRS appears to 
     have failed to apply the penalty to publicly owned companies 
     that are buying back their own stock.
       The change in the law in 1985 eliminated any doubt as to 
     whether publicly-owned companies were exempt from the 
     penalty--they are not. Yet, there appears to be only one 
     court case on the matter. In 1993, the Tax Court resoundingly 
     affirmed the opinions stated here; namely, that the 1985 tax 
     law change ``nullified'' the earlier Golconda decision and 
     made completely clear that publicly owned companies are not 
     exempt from the penalty (Technalysis v. Commissioner, 101 TC 
     397).
       Discussions and negotiations between the IRS and a 
     corporate or individual taxpayer are extremely confidential, 
     and it is not possible for outsiders to know whether the IRS 
     has raised the issue, unless and until a particular taxpayer 
     takes the IRS to court. However, the amounts of money 
     involved here--the penalties may measure in the billions--are 
     such that the matter would surely have come to public 
     attention if the IRS were active in any significant way.
       For example, if a publicly owned company is hit with a 
     multimillion dollar tax penalty that will significantly 
     affect its earnings,  financial position, net worth and 
     dividend policy, it is required to make that information 
     public immediately, under rules of the Securities and 
     Exchange Commission, the New

[[Page H880]]

     York Stock Exchange, and also the National Association of 
     Securities Dealers (NASD) which regulates companies with 
     stocks traded over-the-counter.
       The penalty should be applied against publicly-owned 
     companies that pay small dividends and spend large amounts to 
     buy back their own shares if the buy back amounts far exceed 
     the amounts needed for employee stock purchase plans, 
     executive stock options, and so forth.
       The tax law, in section 531-537 of the Internal Revenue 
     Code, provides that the accumulated earnings tax will apply 
     to any corporation . . .
       ``Availed of for the purpose of avoiding the income tax 
     with respect to its shareholders . . . by permitting earnings 
     and profits to accumulate instead of being distributed.'' 
     (Section 532.)
       ``. . . the fact that the earnings and profits of a 
     corporation are permitted to accumulate beyond the reasonable 
     needs of the business shall be determinative of the purpose 
     to avoid the income tax with respect to shareholders, unless 
     the corporation . . . shall prove to the contrary.'' (Section 
     533.)
       Thus, for the penalty to apply, two tests must be met:
       1. there must be an intent or purpose to save the 
     shareholders from income taxes on dividends, and
       2. the accumulation of earnings must exceed the reasonable 
     needs of the business. . . .
       ``Reasonable needs of the business'' is a factual test 
     involving a number of factors: the amount of earnings, future 
     plans that require large capital investment, the amount of 
     dividends paid, etc.
       The argument is made here that many large publicly owned 
     companies are accumulating profits far in excess of the 
     reasonable needs of the business, evidenced by the following:
       consistently, they are paying out in dividends 20% or less 
     of their earnings, AND
       consistently, they are accumulating cash far in excess of 
     their needs for capital expenditures, AND
       consistently, they are passing up opportunities to borrow 
     money on very favorable terms or are even reducing 
     outstanding debt, AND
       consistently, they are using accumulated earnings not to 
     pay dividends but to buy back their own shares at prices far 
     in excess of book value. (Thus, if the book value of their 
     net assets, as shown on their own published balanced sheets 
     is, for example, $10 per common share, and if they are buying 
     back their stock at $20 or $30 per share, they are reducing 
     the book value of their remaining shares.)
       It is argued there that this pattern of behavior clearly 
     indicates that the earning used for stock buy backs were 
     accumulated in excess of the reasonable needs of the 
     business.
       Corporate managements will argue that, ``Well, we have to 
     buy shares back because at the same time are selling shares 
     through employees stock purchases plans, executive stock 
     options and dividend reinvestment plans available to 
     stockholders, and we also (in some cases) need shares for 
     conversion of convertible preferred stock or debentures.
       These arguments are absolutely valid but many large 
     companies are buying back twice or three times or five times 
     or eight times as many shares as they need for these 
     purposes.
       Under Section 533, quoted in above, if a corporation fails 
     the ``reasonable needs of the business'' test the burden of 
     proof is on the corporation to show that it did not meet the 
     other test, namely, intent to protect the stockholders from 
     dividends.
       Thus, the Internal Revenue Commissioner can reasonably take 
     the following position: Corporations that have failed the 
     ``reasonable needs of the business'' test on the fact will be 
     assessed a penalty of 39.6%; and the burden of proof is on 
     the corporation to show that it did not have the intent to 
     protect stockholders from dividends.
       Sections 531-537 of the Internal Revenue Code must be 
     enforced immediately.
  These are the actual words of the statutes I have read before. It is 
sections 531, 532, and 533 of the Internal Revenue Code. As we move 
toward April 15, make a note to go and examine sections 531, 532, and 
533 of the Internal Revenue Code.
  Accumulation of profits is OK for the reasonable needs of businesses, 
even in large amounts. Whether the accumulation is justified is a 
factual question. It depends on an analysis of the particular situation 
of each corporation. There is no formula or rule that applies to every 
business.
  A corporation may be justified in accumulating profits without paying 
them out as dividends to finance the planned building of a new plant, 
the purchase of new equipment, to replace old items or to expand the 
business, to finance other kinds of expansion, such as the launching of 
a new product or the entry into new markets in other parts of the 
country or in other countries.
  They may do it for working capital needed to carry the inventories 
and receivables of a growing business. They do it to retire debt 
incurred in the course of a business or to make loans and advances to 
customers or suppliers to enable them to continue doing business with 
the corporation; to buy another business, to build reserves for product 
liability losses or reserves for property losses from storm damage; to 
finance expenditures required to meet environmental regulations; to 
finance research for the development of new products. They may 
accumulate capital. Nobody is talking about the government interfering 
with the amassing of large amounts of capital for business needs.
  It goes on and on. There are many good, justifiable reasons of a 
business which can justify the accumulation of profits. These have been 
examined and ruled upon in hundreds of cases in tax court and other 
courts in the 80 years-plus since the income tax and tax penalty were 
adopted.
  But buying back the stock just to run its price up and to protect the 
stockholders from income taxes on dividends, these are prohibited 
actions. You cannot do that legally. If the corporations want to pay 
the profits available to the stockholders, paying dividends is the way 
they should do it. If you want them to get the benefit of the profits, 
pay them the dividends; do not protect them by holding onto the money 
and lowering their own tax bill. That is clearly prohibited.
  Mr. Speaker, let me now take a few minutes to examine the reasons for 
and the history of this provision for a heavy tax penalty on the 
unreasonable accumulation of corporate profits and surplus. One of the 
very basic provisions of law and tax law in our country and throughout 
the world relates to the fact that a corporation is a legal entity that 
is distinct and separate from its owners, the stockholders.
  A corporation has been called a fictitious person. This separateness 
is crucially important to the stockholders, because it insulates them 
from the debts and obligations and liabilities of a corporation and its 
business. If a corporation has problems, loses money, and eventually 
goes bankrupt or out of business, the stockholders may lose everything 
they invested in the stock, but that is all they will lose. The 
creditors cannot come after their personal assets. This is a device 
which has worked over a long period of time, and it is a device which 
you have to pay a price for.
  This limited liability distinguishes an incorporated business from a 
partnership or a proprietorship, sole proprietorship. If those 
businesses go under, the owners may lose not only the amounts they 
invested but also their cars, their homes, their savings, and any other 
investment or assets.
  This lesson was painfully learned by many wealthy Americans, British, 
and others who invested in the unincorporated Lloyds of London. Many of 
these names, people who were the investors in Lloyds of London, had to 
file personal bankruptcy when Lloyds incurred huge insurance losses for 
several years in a row and assessed those losses against the investors 
personally.
  Because of this limited liability feature of the corporations, 
however, virtually all businesses are incorporated. Lloyds is one of 
the few huge operations in the world that operates that way. Even the 
law firms and accounting firms have recently figured out a way to 
organize professional corporations so that the partners can avoid 
unlimited personal liability.
  Because of the separate identity of a corporation, it is required to 
file its own income tax return and to pay a corporate income tax on 
profits. The corporation, for all the reasons I have just given you, is 
treated as an individual and is required to file its own income tax 
return and pay a corporate income tax on its profits.

  To prevent the excessive pileup of earnings, Congress established the 
tax penalty in the original Internal Revenue Code adopted in 1913. The 
code has since been renewed and revised and overhauled and amended many 
times.
  The penalty tax rates have changed a number of times, but the basic 
provision has remained in the law every year without significant 
change, with the sole exception of an amendment in 1984. That amendment 
only strengthened the law. It was an amendment to make clear that the 
penalty provision applies to publicly owned companies.
  The only big amendment recently was in 1984, when they amended the 
Tax Code to make it clear that the provision applies to publicly owned 
companies. There was a time when they

[[Page H881]]

said it was only privately owned companies, closely held corporations. 
But now it is quite clear as of 1984.
  This tax penalty is somewhat unusual in that the law does not say 
that excessive accumulation of corporate profits is a crime. You know, 
a lot of individuals that I know are in serious trouble with the IRS. 
The last time I was in an IRS office I saw the place full of people who 
were obviously poor people, and they were not being allowed to get away 
with anything. They were going to have to do whatever was necessary to 
pay the taxes that they owed. If they did not do that, if they told 
some lies, they would end up in jail. I know of a situation now where 
there is a guy who told a few lies, and they have got the U.S. attorney 
investigating him now. He may go to jail.
  But this tax penalty is unusual. The law does not say that excess 
accumulation of corporate profits is a crime. The law does say instead 
that corporations should not do it. If they do it they will have to pay 
a penalty. In other words, no corporation, executive board, or anybody 
is going to jail for violating this part of the Tax Code. It is very 
interesting. But they do assess a very heavy penalty.
  In the early days of the income tax, the IRS was diligent in applying 
this tax penalty to closely held or family companies, as I pointed out. 
It sometimes lost in court, but in hundreds of cases it did collect the 
penalties, in hundreds of cases.
  But for some strange reason, in the early days the IRS rarely applied 
the penalty to publicly owned companies. Perhaps the reason was that it 
was customary in those days for large companies to pay out good-sized 
dividends rather than using their profits to buy back their own shares. 
There is nothing in the Internal Revenue Code or regulation that gives 
publicly owned companies an exemption from this penalty on accumulation 
of profits in excess of reasonable needs of business.
  The notion sort of grew up like Topsy, but it has no basis. Somehow, 
perhaps because it was thought smaller companies were the worst 
offenders, it became customary for the IRS to leave large corporations 
alone, and so without any support in the language of the law, a de 
facto exemption for public companies evolved and eventually took on the 
force of law.
  The IRS never agreed to it, they never agreed to it, and indeed it 
went out of its way to publicly state its disagreement with the 
appellate court decision that confirmed the exemption in the landmark 
Golconda case in 1974.

                              {time}  2230

  There was one case that did go to the Supreme Court, the Golconda 
case in 1974, where they, the Court ruled that it did not apply to 
publicly owned large corporations. That was 1974.
  However, all that is history, all that is irrelevant now because in 
1984, Congress amended the basic penalty provision to make it clear 
that it applied to all corporations regardless of the number of 
stockholders. Congress looked at what happened with the case in 1974 
and Congress 10 years later amended the law to make it clear that this 
provision applies to all corporations regardless of the number of 
stockholders.
  In other words, the amendment eliminated an exemption that had 
previously been thought to apply to large publicly owned corporations 
with dozens or hundreds or even thousands of stockholders.
  Mr. Speaker, I would like to explain why I believe this 39.6-percent 
penalty should be applied against these huge corporations that are 
buying back their own stock in huge amounts.
  Again, for the benefit of anybody who just joined us, I am concerned 
about the fact that the Congress of the United States, the CBO, the 
Office of Management and Budget, great Senators, some of them from New 
York State, have focused their attention recently on gaining more 
revenue, gaining more money to save through an adjustment of the 
Consumer Price Index, lowering the cost of living increases for 
everybody on Social Security in order to help balance the budget.
  My question is, why do you not look at the Internal Revenue Code and 
demand that the Commissioner enforce the law that already exists and 
tomorrow, March 12, Wednesday, we are going to talk about other 
corporate loopholes, other corporate welfare that ought to be closed.
  Why is it that everybody in Washington who is in high places, 
leadership, the White House, why are they blind to the existence of 
great abuses that are being committed by corporations? Why are they 
instead focusing their microscopes on programs that serve poor people 
and squeezing everything they can, every dollar they can out of those 
programs.
  Mr. Speaker, I would like to explain why I believe, why I believe 
this 39.6-percent penalty should be applied against these huge 
corporations that are buying back their own stock in huge amounts. The 
law mandates that the penalty should be assessed if two tests are met. 
First, that profits are permitted to accumulate beyond the reasonable 
needs of business and, second, that this is done, quoting again from 
the statute, for the purpose of avoiding the income tax with respect to 
the shareholders.
  In other words, there has to be the fact of the accumulation, also 
the intent to protect the stockholders from income taxes. The officers 
and directors of large American corporations can read the statute as 
well as I can or better. They are way ahead of me in having platoons of 
well-paid lawyers to advise them and keep them out of trouble. I 
suspect, although I cannot prove it, that these high-priced lawyers 
have advised them that they are vulnerable to this penalty. I suspect 
that the lawyers have told them to be very careful in their public 
statements and to avoid bragging to the stockholders that they are 
protecting them from income taxes by using accumulated profits to buy 
back stock rather than paying dividends.
  My staff and I, as I said before, have examined literally hundreds of 
quarterly and annual earnings reports of publicly owned corporations 
from 1994, 1995, and 1996, and we were struck by how very little these 
corporations had to say about their stock buyback programs and the 
reasons for them.
  Here is one exception, one example we found of an exception. This is 
a case where the lawyers probably fell down on the job and let the veil 
slip. A very large American corporation, the name is a household name 
known to everybody, but it said, I will not name the corporation, but 
it said in its 1995 annual report, quoting from the report, ``some 
shareholders have asked us why we are repurchasing shares rather than 
increasing our dividend as we did in years past. We believe that most 
shareholders prefer gains in stock price to receiving dividends because 
those payments are taxable annually.''
  There is a clear statement by a corporation of their intent to 
violate the law. They are not supposed to help shareholders escape 
paying more taxes. The management of this large corporation made a 
mistake. They let the veil slip. They let the real truth come out and, 
as I said, this is one of the rare exceptions, one of the few instances 
we were able to find where they admitted the real reason for buying 
back their stock. Of course, the Wall Street community and the business 
community will put the opposite interpretations on all of these 
earnings reports. They will say, we did not have an intent or a motive 
to protect the stockholders from income taxes. That is not why we were 
buying back the stock. The proof is that none of our earnings reports 
will mention such a thing. That proves that the intent is not there, 
except for one unfortunate company that slipped.
  I am sorry but I have to say that that comes under the heading of 
very sophisticated baloney. This is one of those situations where 
everybody knows what they are doing and the reason they are doing it 
but nobody will say, nobody will speak the real truth. The point I am 
making here is that the Commissioner of Internal Revenue, if she 
considered assessing these unreasonable accumulations of surplus 
penalties, as I am urging her to do, she might conclude that there was 
not sufficient proof of intent to protect the stockholders from income 
tax. It is hard to prove intent, hard to prove what is in someone's 
mind. This is something that comes up often in our legal system.
  I am very pleased to be able to say that the Internal Revenue 
Commissioner does not have to prove intent. The Internal Revenue 
Commissioner does not have to prove intent. Rather the way the law is 
written, the burden

[[Page H882]]

of proof is on the corporation to disprove intent. The corporation must 
disprove that it intended to save money for its stockholders.
  Here is the actual language of section 533 of the Internal Revenue 
Code. ``The fact that the earnings and profits of a corporation are 
permitted to accumulate beyond the reasonable needs of the business 
shall be determinative of the purpose to avoid the income tax with 
respect to shareholders unless the corporation by the preponderance of 
the evidence shall prove to the contrary.'' Reading from section 533 of 
the Internal Revenue Code: ``The fact that the earnings and profits of 
a corporation are permitted to accumulate beyond the reasonable needs 
of the business shall be determinative of the purpose to avoid the 
income tax with respect to shareholders unless the corporation by the 
preponderance of the evidence shall prove to the contrary.''
  Mr. Speaker, we have seen that there are two tests for this penalty 
to apply. The first test is the fact of an unreasonable accumulation of 
earnings. The second test is the intent to protect the stockholders 
from income taxes. But the Internal Revenue Commissioner does not have 
to prove the second test, the intent. If the first test, the fact test, 
is met, the Commissioner does not have to prove intent. Rather it is up 
to the corporation to disprove intent. It might be hard for the 
Commissioner to prove intent. That is true, but she does not have to 
prove intent. The burden of proof as to intent is on the corporation, 
not the IRS. That is what the clear language of the statute says.

  Of course, Mr. Speaker, any corporation and any taxpayer has a right 
to object to any tax or tax penalty and to attempt to show that it has 
not been properly assessed. Discussions and negotiations between a 
corporation and the IRS are private and they are confidential. And if 
the discussions reach an impasse, the corporation can sue the IRS in 
tax court or Federal district court and let the court determine whether 
the tax is properly assessed. The penalty would have to be reduced or 
even dropped. Maybe a corporation could show that it was justified by 
the reasonable needs of its business in buying back its stock.
  But I believe the Commissioner of Internal Revenue should find out if 
the penalties are justified and the way to do that is to assess the 
penalties, let the corporations protest, and to settle the matter in 
the course of negotiations the IRS normally conducts with individuals 
and taxpayers.
  Treat the corporations the way they treat millions of Americans who 
file their taxes on April 15. Enforce the law. Enforce the law and let 
them deal with the attempt of the IRS to enforce the law. It certainly 
looks as though large penalties are justified based on my examination 
of the public financial statements of dozens of large American 
corporations and probably hundreds of others, too.
  Many large corporations have now established a pattern that includes 
most or all of the following: Consistently year after year they pay 
dividends on their common shares that amount to only 15, 20, or 25 
percent of their earnings. And consistently year after year, their 
accumulated earnings together with their cash-flows outside the 
earnings statement, from depreciation, amortization, deferred income 
taxes, provide far more cash than they need for capital spending and 
other necessary programs. And consistently year after year they do not 
use excess cash to pay down debt. Indeed in some cases, they actually 
increase debt by borrowing additional money and using it for the stock 
buy backs. And consistently year after year they accumulated large 
amounts of cash and profits far beyond the dividends they pay and the 
reasonable needs of the business, and they use large amounts of this 
money to buy back their common shares.
  For dozens of corporations, probably hundreds of corporations this 
pattern has been present in 1994, 1995, and 1996. I believe the 
Commissioner of Internal Revenue, Margaret Milner Richardson, should 
assess 39.6 percent tax penalties as mandated by sections 531 to 537 of 
the Internal Revenue Code, not on all the accumulated profits but on 
the amounts of accumulated profits used for net buy backs of stock.
  I believe that the amounts involved for all publicly owned American 
corporations are at least $200 or $300 billion or more. The 39.6-
percent penalty on these amounts will total at least $60 billion and 
possibly $70 or $80 billion of additional Federal tax revenue in this 
year fiscal 1997, ending September 30, 1997.
  Mr. Speaker, I have said that I believe the penalties should be 
applied to the amount of the net buy backs which is smaller than the 
amount of the total buy backs. Let me discuss this point for a moment 
because it is a very important one and it involves the counterargument 
that corporations make and will make against the charge that they are 
accumulating profits beyond the reasonable needs of the business.
  Many, in fact most publicly owned corporations have employer stock 
purchase plans, stock options for executives, key employees and 
directors, and dividend reinvestment plans for stockholders. In 
addition, some corporations have convertible preferred stocks or 
debentures which can than be converted at the option of the holder to 
common shares. All of these programs involve the sale or issuance of 
additional common shares which may be shares held in the corporate 
treasury or newly issued shares.
  As a result, they are selling and issuing other shares under these 
options, purchase and conversion programs. Indeed, this is the reason 
that they often give for their buy-back program.
  Mr. Speaker, this argument is absolutely valid. I agree that if a 
corporations buys back its shares, it is justified in doing so, if it 
issues or sells the same number of shares under these various programs. 
Unfortunately for their argument we have found that for many 
corporations the stock buy backs far exceed the number of shares 
issued.
  In examining the published financial statements of large American 
corporations, we found many that bought back in 1994, 1995, and 1996, 
they bought back 2 or 2\1/2\ times as many shares as they issued; we 
have found several that have bought back 5 or 6 or 7, 8 times as many 
shares as they issued; we even found that one bought back over 16 times 
as much as they issued.
  I think clearly we cannot expect the Commissioner of Internal Revenue 
to assess the penalties on amounts of stock bought and then reissued in 
the same year on option and purchase programs. It is for that reason 
that I am asking the Commissioner to assess penalties on the amounts of 
the net buy backs rather than the total buy backs.
  Finally, Mr. Speaker, I would like to address the question of how 
much money is involved here, how much corporate tax revenues could be 
raised if the Internal Revenue Commissioner assesses the penalties that 
I believe she should. I cannot estimate the amount with any kind of 
real accuracy, but I am absolutely certain that the amount is huge. It 
is enormous.
  I want the Congressional Budget Office to take a look at this. I 
would like the Congressional Budget Office to give us a reading on 
exactly how much money is involved here. In fact the Progressive Caucus 
budget, the combination Black Caucus and Progressive Caucus budget will 
include this as one of the items in the budget. And we will, our 
alternative budget will ask for an assessment, a reading of the 
Congressional Budget Office on exactly what amounts will be generated.
  Those who read the financial press and watch business programs on TV 
or surf the Internet are well aware of the amount of buy-back activity 
that is increasing all the time. We have asked the people in the 
Congressional Research Service to help us. So far we were not able to 
accumulate a tabulation, but there are people who are looking at this 
for commercial purposes. There is a buy-back letter that a California 
man puts out. There is all kinds of activity going on showing that this 
is a profitable activity.
  Let me conclude by saying that I have given a rather lengthy treatise 
here on a subject that I am not an expert in. I serve on the Committee 
on Education and the Workforce. I do not serve on the Committee on Ways 
and Means. I am puzzled and baffled by the failure of members of the 
Committee on Ways and Means to see the obvious. I am baffled and 
puzzled by the failure of the CBO, the Office of Management and Budget 
to see the obvious. Why are we studying ways in which we can cut 
programs for the poor? Why are we looking at the CPI and hoping to cut

[[Page H883]]

the cost-of-living increases for people on Social Security in order to 
help balance our budget when we have abuses of this magnitude? Why? Why 
is there a strain on the American character which allows leadership to 
always prey upon the poorest and the weakest? That strain was evidenced 
in the way we handled Native Americans, the people who owned this land 
when we got here. They were weak and we outmanned them and our weapons 
were superior and we took advantage of the weak.

                              {time}  2245

  We took advantage of slaves that we transported here from Africa. For 
232 years we held them in bondage. Why is there a strain that goes 
after the weakest people in a merciless way?
  In this sophisticated day, when we assume that we are more moral, 
that we have higher standards of morality and we assume that we are the 
indispensable Nation for the rest of the world and we set standards for 
the rest of the world and we talk about human rights, why are the 
people in our leadership focusing on ways to squeeze the poor while 
there are obvious ways to raise the necessary revenue?
  Progressives, liberals, have not paid enough attention to the revenue 
side of the budget process. We have not paid enough attention to the 
fact that the Internal Revenue Code is where we have the largest amount 
of giveaways. Corporate welfare is the biggest welfare program in 
America. We must end corporate welfare as we know it. We must end 
corporate welfare.
  We will begin our process tomorrow when the Progressive Caucus 
announces its war against corporate welfare. We welcome the gentleman 
from Ohio [Mr. Kasich], and all the other elements in this Capitol on 
the Senate side or the House side, wherever there are people who want 
justice; people who recognize that the place where there is the 
greatest amount of prosperity, where people are making money in great 
amounts right now is in the corporate world.
  Our corporations are not suffering. If we need to balance the budget, 
the steps to balancing the budget should be taken in the effort to end 
corporate welfare. Corporate welfare should be our target. Those who 
have the most and who have had the greatest number of advantages are 
also guilty of the greatest abuses.
  The corporate segment, the corporate proportion of the income tax 
burden fell to the present 11 percent. The total income tax burden. 
Only 11 percent of that is borne by corporations, while 44 percent now 
is borne by families and individuals. I have given one of the reasons 
that is true: these kinds of abuses, this kind of failure to enforce 
the law. We do not need hearings. We do not need legislation. All we 
need to do is tell the Internal Revenue Service to enforce the law.
  April 15 is the date that we all go out and obey the law. Why not 
have the law apply to all Americans at every level, including 
corporations that are treated as individuals for their own profit and 
economic sake?

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