HELD MISLEADING 2 Experts Tell Joint Committee Tax Collector Takes an Undue Advantage DISAGREE ON THE REMEDY Economist for Revision of Cost Figures, Accountant Favors Better Explanations ROFITS REPORTS By JOSEPH A. LOFTUS corporations were being taxed on something they did not have, Special to THE NEW YORK TIMES. namely, profits that were not dis- WASHINGTON, Dec. 7-Two HELD MISLEADING tributable. experts testifying before a joint Professor Paton asserted that committee on the Economic Re. Dec.8,1948 true earnings were not excessive. port agreed today that profits re- "The fact of the matter is that Continued From Page 49 ports are misleading and that the the forgotten man of the present tax collector takes undue advan- present tax structure accentuated era is the common stockholder. the tage of this abnormal situation. chap declared. who provides "No capital," important risk he the problem of retaining and re- They disagreed, however, on the other Investing enough of corporate in- correctives that would best reflect group in the community has been come to maintain the productive true profits to stockholders and squeezed as much as has the in- level of plants and facilities. others. vestor, and this includes the fur- Mr. Bailey said that while Con- The witnesses before a subcom- nisher of risk capital as well as gress had made provision whereby the investor in bonds and other mittee headed by Senator Ralph taxpayers can minimize the impact dollar contracts. E. Flanders, Republican, of Ver- of inflation on inventories, through "One very clear evidence of this mont, were Prof. W. A. Paton of the "last in first out" method, no the University of Michigan and such treatment is allowed for the squeezing business difficulty of is raising continuing money seen in the George D. Bailey, member of a new for increased cost of replacement of large Detroit firm of accountants. expansion through the is- facilities. sue of common stock. If corporate Their point was that all prof- "The result is," he said, "that a earnings are at a phenomenal and its were not distributable and in corporation is allowed a deduction excessive level by proper tests, the a period of rising prices a larger for depreciation on cost and then people who buy and sell equities proportion of profits than ever must save from its taxable earnings must be extraordinarily stupid." must be kept for the business it- the additional sums needed on ac- The committee will hear tomor- self to finance replacement of count of the change in the price row testimony by representatives plant and inventories. level. But those sums so retained of the American Federation of La- Their discussions of what to do are subject to taxes. bor and the Congress of Industrial about this pointed up the current "If a corporation must save $1 Organizations. Walter Reuther, conflict in the business community from its profits for its replacement president of the United Automo- between economists and account- problem, it must set aside roughly bile Workers, was scheduled to ants. The economists would revise $1.60 of its profits before taxes in testify tomorrow, but his appear- the cost figures on the books. The order to have $1 left. Thus, in con- ance has been postponed until accountants would rely on expla- sidering the replacement problem Dec. 17. nations of the present system to and its effect on corporate profits, correct misunderstandings. it is necessary at the same time to Adams Leaving RCA for NBC f "The change in the value of the consider that the problem is ag- David C. Adams, vice president dollar has been so marked, and gravated and accentuated by the and general attorney of RCA Com- return to an earlier dollar has be- tax statutes." munications, Inc., has resigned, ef- come so unlikely, as to warrant Senator Joseph O'Mahoney, Dem- fective on Dec. 31, to become as- changes in accounting procedure ocrat, of Wyoming, said the Gov- sistant to Charles R. Denny, execu- to meet the situation," Professor ernment was spending 1948 dollars tive vice president of the National Paton said. "The remedy, as I see and questioned whether it would Broadcasting Company, it was an- it, is systematic revision of re- be fair to tax corporation profits nounced yesterday. Howard R. corded costs-to bring them into line on the basis of some other kind of Hawkins will succeed Mr. Adams to with present prices in all cases in dollar. The witnesses objected that as general attorney. which the recorded data are so far out of line as to render income statements based thereon inade- quate and misleading. Cost An Economic Quantum "Actual, significant cost is an economic quantum, not just a mon- etary expression. If this is a rea- sonable view, it follows, for exam- ple, that if a building was built ten years ago at a cost of $1,000,000 in terms of 1938 money, and the same building would now cost $2,500,000 in terms of 1948 money, it is no ~longer reasonable to de- scribe the cost of the building as $1,000,000 in making a financial statement that purports to be set up in 1948 dollars, and that the reader is expected to interpret in terms of 1948 dollars. "And similarly it is no longer reasonable to describe the portion of the cost of the building deducted from revenues as depreciation of 1948 as a fraction of $1,000,000." Mr. Bailey said the American In- stitute of Accountants has paid particular attention to the problem of depreciation to determine wheth- er accounting principles should be modified to permit or require de- preciation to be determined on the basis of replacement cost. "For many reasons," he added, "it came to the conclusion that such a change in fundamental ac- counting principles was not de- sirable, but it did recognize the problem as I have outlined it and has recommended that the condi- tion be made known to stockhold<