to construct or acquire property eligible for the investment credit which they cannot now cancel without liability for damages. This rule is explained in part C below.

3. Effective date of October 10, 1966

As indicated above, your committee has moved the effective date forward to October 10, 1966, from the September 9, 1966, date in the House bill. The committee action eliminates a retroactive feature of the House bill and instead makes the bill effective when the Committee of Finance reported it. In view of this consideration, your committee made the effective date coincide with the date it began action on the the bill.

4. Exemption of up to $25,000 of investment

Your committee's bill, at the election of the taxpayer, exempts from suspension of the investment credit up to $25,000 of investments made during the suspension period which would otherwise be ineligible for the investment credit under the terms of this bill. The exemption applies to the property ordered, acquired or constructed during the entire suspension period, but only with respect to property which is to be used in the taxpayer's own business. In the case of partnerships, the $25,000 limitation is applied at both the partner and partnership levels (e.g., if a partnership elects to take the full investment credit of $25,000, a 50-percent partner could make such an election only with respect to an additional credit of $12,500).

The pressure for loans to finance significant increases in plant and equipment spending stems largely from the Nation's larger business organizations. The $25,000 exemption will be a negligible factor in the investment decisions of such organizations. It will not be negligible, however, to small business enterprises and farms, many of which presently have difficulty raising funds because of existing monetary restrictions.

Furthermore, investment by small business and farms makes up a relatively small percentage of total investment in machinery and equipment.

Your committee concurred with the reasoning of the House in providing for this exception to the suspension of the investment tax credit, but it raised the limit of the exception to $25,000 from the $15,000 contained in the House bill. The committee believes that $25,000 is a more appropriate limit for small business enterprise and independent farmers. The lower limitation would not cover some single units of equipment that farmers and various small businessmen purchase. The action also is consistent with long standing public policies to foster small business and farming.

5. Exemption of water and air pollution control facilities An amendment adopted on the floor of the House specifies that water and air pollution control facilities are, under certain conditions, not to be considered suspension period property even though constructed or ordered during the suspension period. Thus, facilities of this nature will continue to remain eligible, for the investment credit.

The exception is provided in recognition of the importance of stimulating private industry to undertake expenditures for facilities which will help to abate water and air pollution. There is a clear need to step up efforts to purify the air we breathe and the water in our streams and lakes.

Suspension of the credit, even for a short time, would discourage private efforts to abate water and air pollution and would simply impose a larger direct burden on the government.

This provision of the bill specifies that water and air pollution control facilities will not be treated as suspension period property if they are used primarily to control either water pollution or atmospheric pollution by removing, altering, or disposing of pollutants. The facilities must conform to the State program or to State requirements in regard to the control of water or air pollution and they must be in compliance with the applicable regulations of Federal agencies and with the general policies of the United States, in cooperation with the States, for the prevention and abatement of water and air pollution. Certification to this effect must be made by the State water or air pollu tion control agency, as defined in the Federal Water Pollution Control Act or the Clean Air Act. In addition, such a facility must be constructed or acquired in furtherance of Federal, State, or local standards for the control of water or air pollution.

6. Exemption of railway freight and passenger cars

Your committee provided an exemption, not provided in the House bill, for railway freight and passenger cars. Such equipment will therefore remain eligible for the investment credit even though it is constructed or acquired during the period from October 10, 1966, to December 31, 1967. Locomotives and other self-propelled cars, and railway equipment other than freight or passenger cars will be affected by the suspension of the investment credit.

The shortage of boxcars and other freight cars and the serious implication this shortage has for the economy are well known. As recently as May 26 the President commented on the seriousness of the freight car shortage and stated that it should not be tolerated. The administration also excepted the railway industry from the request made in April that business reconsider capital expenditure programs and, wherever feasible, postpone part or all of such programs.

It has been pointed out to your committee that the 7-percent investment credit has been and continues to be an important incentive to the construction of needed railway cars. Withdrawal of the investment credit, even for a short period, would not be in the national interest. The slight effect such a withdrawal would have in lessening inflationary pressures in the capital goods industries would be more than offset by the adverse effect which a continuation of the present shortage of railway cars would have. The latter could intensify a transportation bottleneck of serious proportions, particularly with regard to the transportation of grain.

7. Procedure for taking suspended credits into account in computing maximum limitation

In 1966 and in subsequent years, some investment credits will be allowed (for example, where binding orders were placed before October 10, 1966), while others will not because the property was either acquired or ordered during the suspension period. In cases where property ordered during the suspension period is not delivered until 1968 or subsequent years, even in these years there may, therefore, be

investment which is disallowed for purposes of the investment credit. The bill establishes a priority as between the "disallowed investment credits" and the "allowed investment credits." The bill, in effect, provides that the first investments to be taken into account for purposes of the maximum limitation are the disqualified investments with respect to property either acquired or ordered during the suspension period. This effect is achieved by reducing the maximum investment credit which may be claimed in any taxable year ending after October 9, 1966, by the amount of the credit which would have been allowed for the taxable year involved but for the suspension of the investment credit as provided by this bill. The next credits for investments which will be applied against the maximum limitation are those earned during the current year. Next, as under existing law, carryovers of unused credits from prior years will be allowed to the extent of any remaining portion of the maximum limitation. For purposes of this provision, suspension period property in effect is deemed to be owned by the lessee.

Reducing the maximum limitation first by the amount of credit for disqualified investments attributable to the suspension period is necessary to prevent taxpayers in some cases from claiming as large investment credits during a particular year as would be true in the absence of the suspension of the investment credit. To do otherwise would substantially lessen the impact of this bill with respect to investments attributable to the suspension period. This means that the bill would have a lesser impact in diminishing inflationary pressures than would otherwise be the case.

8. Property to equip new UHF television stations

Another problem brought to the attention of your committee relates to property necessary for the operation of an ultrahigh frequency television broadcasting station where authorization for the station had been granted by the Federal Communications Commission before October 10, 1966. Your committee provided that the investment credit is not to be suspended in these cases where the taxpayer had entered into a binding contract for the acquisition of the broadcasting transmitter before the beginning of the suspension period, but only as to property which is constructed, et cetera, in accordance with the authorization (as it may be modified). In your committee's view this is a type of commitment which should be honored for purposes of the credit. It does not apply to property constructed, et cetera, for a station which had commenced operations before the beginning of the suspension period.

9. Effective date

This provision of the bill applies to taxable years ending after October 9, 1966.

B. Limitation on use of certain methods of depreciation (sec. 2 of the bill and sec. 167 of the code)

1. Present law

The following methods of depreciation are permitted under present law (code sec. 167) with respect to tangible property acquired when new by the taxpayer, or constructed by him for his use, after December

31, 1953, provided the property has an expected useful life of 3 years

or more:

(a) The straight-line method;

(b) The declining balance method at a rate not to exceed twice the applicable straight-line rate;

(c) The sum of the years-digits method; and

(d) Any other consistent method which does not provide deductions during the first two-thirds of the useful life of the property which exceed the deductions allowable under the method described in (b).

Under the double declining balance method a rate equal to twice the straight-line rate is applied to the unrecovered basis of the property. This is a basis which each year is reduced by the depreciation taken in the prior year. The sum of the years-digits method is a method similar to the double declining but achieving a somewhat faster writeoff and leaves no unrecovered cost.

In the case of property acquired or constructed before December 31, 1953, or property acquired after that date from the original or a subsequent owner, the methods of depreciation described in (b), (c), and (d) above may not be used. Depreciation in such cases may be computed under a reasonable and consistently applied method of depreciation including such methods as the straight-line method, the declining balance method at a rate not in excess of 150 percent of the applicable straight line rate and, under appropriate circumstances, the unit of production method.

In comparison with the straight-line method and the declining balance method at a rate of 150 percent of the applicable straight-line rate, the other methods of depreciation listed above provide depreciation deductions during the early years of the asset's life that are substantially larger. For example, in the case of an asset with an expected useful life of 10 years, use of the declining balance method at a rate twice that of the straight-line rate permits the recovery through depreciation deductions of roughly two-thirds of the investment in the property in the first half of its useful life while the use of the sum of the years-digits method permits the recovery of nearly three-fourths of the investment in the same period. Use of the declining balance method at a rate equal to 150 percent of the applicable straight-line rate in the same example permits the deduction of only 56 percent of the asset's cost in the first half of its expected useful life. Under the straight-line method, of course, only one-half of the amount invested can be recovered in the first half of the asset's useful life.

2. Explanation of provision

Bill provides that the accelerated methods of depreciation may not be used with respect to buildings (other than property which would be eligible for the investment credit but for the suspension): (a) which are ordered during the suspension period or (b) whose construction, reconstruction, or erection begins during the suspension period. It prohibits the use of all methods of accelerated depreciation allowable under present law that provide deductions in excess of 150 percent of the applicable straight-line rate. However, as indicated further be

low, the accelerated depreciation during the suspension period will remain available for an investment of up to $100,000 in buildings.

The suspension period begins on Oct. 10, 1966, (September 9 under the House bill), and ends on December 31, 1967. In this case also, as in the case of the investment credit suspension, an exception is made for buildings whose construction was begun prior to the beginning of the suspension period, or whose construction was fixed under the terms of a contract binding on the taxpayer at that time, and at all times thereafter. The same definition of a binding contract will apply in this case as in the case of the suspension of the investment credit. (See part C below.)

This provision, in effect, prohibits the use of the accelerated methods of depreciation with respect to buildings whose construction commences during the suspension period or which are ordered during that period. The provision complements, but does not overlap, the suspension of the investment credit. Accelerated depreciation with respect to buildings offers much the same tax incentive to construct such property as the investment credit offers with respect to property eligible for it. If this provision were not included in the bill, some investment funds would be shifted to this type of construction as a result of the suspension of the investment credit and inflationary pressures in this sector of the construction industry would be intensified. Furthermore, this provision will release resources for the construction of owner-occupied residential dwellings.

With respect to buildings affected by this provision, the same methods of depreciation may be used as are now available under regulations issued by the Internal Revenue Service with respect to property constructed before December 31, 1953, and to property acquired by a taxpayer who is not the original user of such property. The allowable methods will therefore include the straight line method, the declining balance method at a rate not to exceed 150 percent of the applicable straight line rate and, under appropriate circumstances, the unit of production method.

In no event will the accelerated forms of depreciation specified in the code (the double declining balance and sum of the years-digits methods) become available for buildings built or ordered during the suspension period. If, upon termination of the suspension period, accelerated depreciation could be taken on all buildings constructed during that period, the provision would have little or no moderating effect on the volume of orders for buildings since the length of the suspension period is so short relative to the expected useful life of most buildings.

3. Exception of up to $100.000 of construction

Your committee amended the House bill to permit accelerated depreciation during the suspension period for an investment in a building or buildings costing not more than $100,000. The taxpayer, however, is allowed only one such exception during the suspension period.

This amendment generally is parallel for buildings to the $25,000 exception from the suspension of the investment tax credit on personal property. (However, the exception in this case is available only if the total cost of the building or buildings does not exceed $100,000.) The limitation is low enough to avoid encouraging construction of

S. Rept. 1724, 89-2