Plugging the Leaks

Soon after Congress last year passed a new revenue code, the law sprang some big, unexpected leaks. Two of the biggest, originally designed to make tax rules conform to business accounting practices, were:

¶A section allowing companies to set up a reserve fund to meet future expenses without paying taxes on the reserve until the following year. Example: a manufacturer who sold a television set in 1954 for $329 and estimated that he would have to spend $16 to service it in 1955 was allowed to report only $313 as 1954 income..He would not pay taxes on the rest until the end of this year.

¶A provision allowing firms that were paid in advance for services to withhold taxes on the income over the years until the service was rendered. Until 1954, they had to pay the entire tax charges in the year the income was received, regardless of how many years it took them to perform the service.

Originally, the Treasury estimated that the changes would cut 1955 revenues not more than $50 million. Instead, the delayed taxes are well on their way to reducing receipts anywhere from $300 million to $1 billion. The fact that the provisions do not eliminate eventual tax payments, but merely postpone them, was cold comfort to Treasury's embattled budget balancers. Secretary George Humphrey admitted that the changes were a "serious mistake," asked Congress to plug the leaks.

Last week the House passed a bill to do so on a retroactive basis, and the Senate is expected to okay it this week. Thus, companies that took deductions under the old provisions will have to refigure their tax bill, pay up any difference by Sept.15. Some companies had to call back their annual reports from the printer for correction, while a few plan to appeal the retroactive portion, contending that they should not be penalized because Congress and the Treasury miscalculated.