Mr. BURKE. Are there any questions? Mr. Corman. Mr. CORMAN. I have one question. I take it from your testimony that if we put a limit on the amount of nonfarm income that could be offset you think that would be disastrous? Mr. SCHWENKER. Yes, sir, I really do. It is difficult today to encourage people to get into the raising of horses. We are talking not only about the thoroughbred industry but the harness industry and quarter horses. You have a lot of people who are not rich people but moderately prosperous small businessmen. They simply are not going to take this risk if they are going to be not allowed any losses from it. Most all of them want to make money at it, but it takes a long time to do it. It takes anywhere from 6 to 12 years before a man really begins producing winners. Mr. CORMAN. The suggestion has been made that we put a limit of $20,000 on the amount of nonfarm income that could be offset by the loss. I think that would take care of the small businessmen you are talking about. Do you think we would still have trouble? Mr. SCHWENKER. Yes, I do. I am from Ohio. Ohio is the largest breeder of harness horses in the world. We are compared to Kentucky with the thoroughbreds. I am familiar with the people breeding harness horses, and I feel that that new rule would interfere with the breeding of harness horses in our State which is representative of the harness industry. Mr. BURKE. Mr. Clancy. Mr. CLANCY. Thank you. I want to commend you for a fine presentation and a very interesting one, Mr. Schwenker. When you speak about the harness horses and the thoroughbreds are you also referring to the quarter-horse industry that has grown so much in the last few years. Mr. SCHWENKER. By all means, I am. I would compare the quarter horse more to the harness horse from the standpoint that they generally are produced by smaller people, and the quarter horse doesn't sell for anything near as much as the thoroughbred. Mr. CLANCY. Do you have any statistics to show how many horsebreeders of all types we have in the country? Mr. SCHWENKER. I will turn that question overto Mr. Schweder. Mr. CLANCY. As you point out, there are a number of people who are mentioned as being horsebreeders. A number of us were not aware of the fact that there were 52,000 contestants last year. Mr. SCHWENKER. That is correct-for thoroughbreds only. Mr. CLANCY. The small number of breeders that we hear about could not produce that many. Mr. SCHWENKER. Only 1 out of 10 horses that are bred for racing ever get to the starting gate. Mr. CLANCY. As I understand your position, then, there is a direct relationship between the increase in business that this industry is experiencing and the tax policies with respect to it, is that correct? Mr. SCHWENKER. Yes, that is true. Mr. CLANCY. You feel that if there is any change or restriction of that tax policy that we could witness a decrease in the amount of revenues obtained by the various States from racing? Mr. SCHWENKER. That is my honest opinion, Mr. Clancy. I might amplify that in this way: The leading racing States- the ones that breed thoroughbreds, harness or quarter horses have realized the importance of the horse industry to the extent that most of them now offer breeder awards. Maryland was the first State to start this. This was followed by Florida, Illinois, New York State, Ohio, Oregon, and Washington, to name only a few. Now, in Ohio, the State legislature has set up the funds, one for thoroughbred horses and one for harness horses. These two funds together are generating about $1.5 million of revenue that is turned back to the breeders of horses to encourage them to breed horses in the State of Ohio. This is an example of how important this is to the State of Ohio. It gives employment to the people on the farms, some of whom are untrainable for jobs in factories and other places. It provides an outlet for farm products. It makes use of the pasture lands. Mr. CLANCY. Do you feel that by increasing the capabilities of the farms and the breeders that we will have an increase in the amount of revenues obtained by the States? Mr. SCHWENKER. Yes, sir. Mr. BURKE. Mr. Duncan. Mr. DUNCAN. Thank you, Mr. Chairman. How many people do we have engaged in horse breeding in the country? Mr. SCHWEDER. In breeding and training? Mr. DUNCAN. Just breeding. Mr. SCHWEDER. Approximately 65,000 breeders of record with a total employment on the farm of about 45,000 workers. Mr. DUNCAN. How many horses reach the gate? Mr. SCHWENKER. About 1 out of 10. Mr. DUNCAN. And the nine, the expense of raising them is carried as a tax deduction? Mr. SCHWENKER. Yes. Mr. DUNCAN. Thank you. Mr. BURKE. On behalf of the committee I wish to thank you for your appearance. Off the record. [Discussion off the record.] Mr. BURKE. Thank you very much. This concludes the hearing today. The committee stands adjourned, to meet at 10 a.m. tomorrow. [Whereupon, at 5:56 p.m., the committee was adjourned, to reconvene at 10 a.m., Tuesday, March 13, 1973.] GENERAL TAX REFORM TUESDAY, MARCH 13, 1973 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Martha Griffiths presiding. Mrs. GRIFFITHS. The committee will come to order. We are very happy to have you here, Mr. McDonald, to present the American Bar's suggestions. You may proceed in any way you choose. STATEMENT OF DONALD MCDONALD, CHAIRMAN, SECTION OF TAXATION, AMERICAN BAR ASSOCIATION, ACCOMPANIED BY K. MARTIN WORTHY, CHAIRMAN-ELECT, AND F. CLEVELAND HEDRICK, JR., DELEGATE Mr. McDONALD. Thank you very much, Madam Chairman. Let me first introduce the gentlemen who are at the table with me. On my left is F. Cleveland Hedrick, Jr., our section delegate to the house of delegates of the American Bar Association. On my right is K. Martin Worthy, the chairman-elect, who will continue to press our proposals in the year to come. Mrs. GRIFFITHS. We are very happy to have both of you here. You may proceed. Mr. McDONALD. To understand the American Bar Association proposals, I think it would be well if the committee understood how those proposals are formulated. First of all, the American Bar Association is open to any lawyer in the United States and has over 162,000 members. The tax section that we represent is merely 1 of its 21 sections, but it is responsible to the house of delegates and to the board of governors for all matters of taxation. Our section was founded in 1939 when the code was first codified. The tax section is open to any lawyer or law student member of the ABA who is interested in working on taxes and at the beginning of this year we had over 14,000 members and 1,252 law student members. The section is divided into some 46 committees. Thirty-one of these deal with the substantive aspects of the tax law, general income tax, exempt organizations, estate and gift taxes, income of estates and trusts, corporate stockholder relationships, civil and criminal tax penalties and similar topics. Each of the 14,000 members is asked once a year on which committee he would like to serve. Last year 3,300 members applied for admission to a committee. Twenty-five hundred were assigned to committees because some of our committees are so large that they are impractical if we put any more than that on our top committee, which is 160 members. Eleven have over 100 members. Some of them are as small as 21 members. These committees are composed not only of practicing lawyers, but teachers from the law schools, lawyers employed in various Government departments, judges, lawyers in large firms, and private or sole practitioners and some corporate counsel. They report to an 18-member council which is geographically distributed. Representation on this council has been both diverse and illustrious. Dean Griswold and Professor Surrey and Professor Cohen all have served on the council. Professor Blum from the University of Chicago Law School is now on our council. Other former members of the council with whom you may be familiar are former Commissioner Thrower, Laurens Williams, former Assistant Secretary of the Treasury; John Nolan, former Deputy Assistant Secretary for Tax Policy; Mr. Worthy, former Chief Counsel for the Internal Revenue Service and Scott Crampton, Assistant Attorney General of the Tax Division at the present time. In addition, Judge Darrell Wiles of the U.S. Tax Court has been on the council. Judge Morton Fisher was chairman of the section at one point and Norris Darrell, now president of the American Law Institute has been on our council. What are the sources of the recommendation that we have put before you? First of all, the work of Mr. Mills' advisory groups on subchapters C, J, and K led to many of our legislative recommendations. Some of them supported the advisory groups, some opposed. Any administration tax proposal is reviewed by our committees. Some recommendations have come from meetings with your joint committee staff, with the Internal Revenue Service and the Treasury Department. Moreover, annually each committee circulates its members to call upon their experience as to problems worthy of legislative recommendations. How are these recommendations screened? First of all, they must pass one of the 31 substantive committee chairmen. Next, three times during the year they come before the council, in November, January and May. At the same time, in the January and May meetings they are described to the full membership in attendance, some 300 people. But before any of these proposals can become even a tax section recommendation, it must have an affirmative vote of the 400 or 500 members of the section at the annual meeting. This process can sometimes be long and time consuming. For example, our proposal in connection with income in respect to the decedent came before the section 4 different years before it was consid |