Volume 517, April 16 – April 17, 1942

DIARY Book 517 April 16 and 17, 1942 Regraded Unclassified - A - Book Page Airplanes Aircraft despatched - British Air Commission report - 4/17/42 517 304 American Bosch See Foreign Funds Control - B - Batt, William See Foreign Funds Control: American Bosch British Purchasing Mission Federal Reserve Bank of New York statement showing dollar disbursements, week ending April 17, 1942.. 299 - C - Capital Issues Committee See Financing, Government Chile See Customs, Bureau of Correspondence Mrs. Forbush's resume' - 4/17/42 242 Customs, Bureau of Chile: Courtesy to foreign visitors discussed in Treasury-State correspondence - 4/17/42 289 - D - D Deferment, Military See Secret Service - 3 - Excess Profits See Inflation Exchange Market Resumes - 4/16-17/42 131,326 - F - Financing, Government Home Owners Loan Corporation, Reconstruction Finance Corporation, etc., future plans discussed by HMJr, Bell, Hadley, Baker, Murphy, Buffington, and Haas - 4/16/42 28 Regraded Unclassified - 1- - (Continued) Financing, Government (Continued) Book Page Capital Issues Committee: Purcell-Buffington conference - 4/16/42 517 34 a) Extensive organization to control public offerings of securities not necessary at this time: Purcell b) National Committee of Securities Industry for War Financing: Letter to member firms 35 c) Conference: present: HMJr, Purcell, and Buffington . - 4/22/42: See Book 519, page 59 d) Conference: present: HMJr, Purcell, Eccles, Currie, Jones, Bell, and Buffington - 4/29/42: Book 522, page 18 Government bond prices - recent changes in: Haas memorandum - 4/16/42 38 War Savings Bonds: Interdepartmental Committee for Voluntary Savings Plan established by Executive Order - 4/16/42 40 FDR to be asked for brief talk for newsreels to spur interest - 4/16/42. 56 a) HMJr reports on conversation with and support of FDR who hopes for $1 billion monthly - 4/18/42: Book 518, page 2 b) Hopkins thinks FDR doesn't wish to broadcast just now - 4/21/42: Book 518, page 233 Agents - report on - 4/16/42 57 Advertising: New copy discussed by staff and Weir (Lord & Thomas) - 4/17/42 164 Vassar cooperation - 4/17/42 192 Railway Labor Executives' Association thanked for cooperation - 4/17/42 194 Progress report - 4/17/42 196 Payroll Savings Plans - analysis of - 4/17/42 205 Foreign Funds Control American Bosch: Monnet-Batt knowledge of German control discussed in Foley memorandum - 4/16/42. 82 Vatican: Currency situation and transfer of sums from United States money into the money of European countries: Vatican-Treasury-State correspondence - 4/17/42 314 - G - Government Bond Market See Financing, Government Regraded Unclassified - 1 - India Book Page Financial and Economic Conditions: American Consul, Bombay, asked for weekly report - 4/16/42 517 122 Inflation Excess Profits: 6% limitation tacked on Deficiency Appropriation Bill in House: Congressman McCormack tells White House he does not approve of this method - 4/16/42. 5 a) HMJr-Paul conversation - 4/16/42 ? b) HMJr-McCormack conversation 4/16/42 11 o) HMJr-Rayburn conversation - 4/16/42 18,144 d) HMJr-Patterson conversation - 4/16/42, 25,155 e) HMJr-McKellar conversation - 4/17/42 147 f) HMJr-Forrestal conversation - 4/17/42 156 g) Sullivan and Paul discuss examination of returns with HMJr - 4/21/42: Book 518, page 278 Merillat report on editorial opinion: "The Battle of Inflation" - 4/17/42 237 Interdepartmental Committee for Voluntary Savings See Financing, Government: War Savings Bonds - L - Latin America Chile: See Customs, Bureau of Lend-Lease U.S.S.R.: Status of program as reported to FDR - 4/16/42 96 Lord & Thomas See Financing, Government: War Savings Bonds (Advertising) - M - Merillat, Herbert Editorial Opinion on the Home Front: The Battle on Inflation - 4/17/42 237 Military Reports British operations reports - 4/16-17/42. 132,327 Coordinator of Information reports: British Political Warfare Executive weekly directive - 4/16/42 137 The War This Week, April 9-16, 1942. 140 Weekly Empire Guidance of British Ministry of Information - 4/17/42 329 Kamarck summary - 4/17/42 331 Monnet, Jean See Foreign Funds Control: American Bosch Morgenthau, Henry, Jr. No communications to bear his name unless he personally executes them - 4/16/42 2 a) Kuhn-Odegard-Graves accepted - 4/17/42 219,220 Regraded Unclassified - O - Book Page 011 One-third curtailment in 17 Atlantic Coast States, District of Columbia, Oregon, and Washington - 4/16/42, 517 81 - P - Petroleum See 011 - R - - Railway Labor Executives' Association See Financing, Government: War Savings Bonds Revenue Revision Non-Profit Organizations: Treasury request for statement of receipts and disbursements in connection with exemption from income tax discussed in Congressman Robertson (Virginia)-Treasury correspondence - 4/16/42. 70 Robertson, A. Willis (Congressman, Virginia) See Revenue Revision - S - Secret Service White House detail: Deferment plan - Gaston memorandum - 4/17/42 229 Securities Industry for War Financing, National Committee of See Financing, Government: Capital Issues Committee Security Markets (High-Crade) Current Developments: Haas memorandum - 4/17/42 230 Shields, Paul Biographical eketch by Buffington - 4/17/42 226 Spiegel, Harold R. Assigned to Havana, Cuba, by Division of Monetary Research 4/17/42 297 Switzerland New trade agreement between Switzerland and Turkey signed at Ankara - 4/16/42 126 - T - Taxation See Revenue Revision Turkey New trade agreement between Switzerland and Turkey signed at Ankara - 4/16/42 126 Regraded Unclassified - U - Book Page U.S.S.R. See also Lend-Lease 1942 National Defense Loan issued in amount of 10 billion rubles - 4/16/42 517 128 a) Over-subscribed in 2 days - 4/20/42: See Book 518, page 219 - V - Vassar College See Financing, Government: War Savings Bonds Vatican See Foreign Funds Control Voluntary Savings, Interdepartmental Committee for See Financing, Government: War Savings Bonds - W - War Savings Bonds See Financing, Government Weather Bird (Schooner Yacht) Changed to Swiss registry - American Legation, Bern, cable - 4/17/42 310 Weir, Walter J. (Lord and Thomas) See Financing, Government: War Savings Bonds (Advertising) 1 TREASURY DEPARTMENT Washington FOR IMMEDIATE RELEASE, Press Service Thursday, April 16, 1942. No. 31-21 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 1/2 percent Treasury Certificates of Indebtedness of Series A-1942. Subscriptions and allotments were divided among the several Federal Reserve Districts and the Treasury as follows: Federal Reserve Total Subscrip- Total Subscrip- District tions Received tions Allotted Boston $ 212,414,000 $ 104,289,000 New York 1,724,584,000 832,804,000 Philadelphia 111,799,000 55,613,000 Cleveland 150,548,000 75,334,000 Richmond 77,737.000 39,828,000 Atlanta 73,532,000 37,200,000 Chicago 368,055,000 185,568,000 St. Louis 71,103,000 37,386,000 Minneapolis 50,052,000 27,087,000 Kansas City 44,835,000 23,493,000 Dallas 47,634,000 24,526,000 San Francisco 129,772,000 63,774,000 Treasury 185,000 98,000 TOTAL $3,062,250,000 $1,507,000,000 -000- Regraded Unclassified 2 April 16, 1942 The Secretary this morning gave the following instructions to Mr. Thompson: I want to get out an order to the 9:30 group that no communications should go out of the Treasury with my name attached that I personally do not execute. If I am not here, telegrams or communications should be signed by an Acting Secretary. 3 April 16, 1942 9:55 a.m. HMJr: Hello. Operator: Congressman Doughton. HMJr: Hello. Operator: Go ahead. HMJr: Hello. Robert Doughton: All right, Henry. HMJr: How are you? D: First class. How are you? HMJr: Fine. Bob D: Yeah. HMJr: do you think that you could tell me fairly definitely when we would go on this morning, because some of these gentlemen have an appoint- ment with the President at 11:45. D: Well, I'll let that - if you - at when? HMJr: At 11:45. D: Well, if they do that and they got long, they better go on ahead of Paul, if it would be agreeable with him HMJr: Well D: and you all, why we could shift - change places with them. HMJr: Well, how would it D: If they were here - you see we're going to start right now. HMJr: Well, suppose - could we say that we could go on, say, at sharp eleven? Regraded Unclassified 4 - 2 - D: Yes, we can let Paul - let's say at sharp eleven. I'll let - if Paul's not through by that time, why we'll just suspend him until afternoon. HMJr: And we'll go on at eleven. D: Yeah, and you'll be here now ready to go on at eleven, and I'll have that understanding. HMJr: Yeah. Did you ask Walter George to come over? D: I did. I called him and didn't get him, and told his folks, and I'll call him again now. HMJr: Fine. D: He said he'd come, and I told his secretary, and I guess he'll be coming. I'll call him right now again. HMJr: Senator D: Eleven o'clock. HMJr: Senator Vandenberg, coming from Michigen, might be interested in this. D: Well, that's fine. Well, I'll call him right now. HMJr: Well, then, we'll be un there ready to put on a show at eleven. D: Fine. Thank you. HMJr: It's very kind of you to have us up. Regraded Unclassified 5 5 HE WISHINGTON WHIT GTON HOUSE to MEMORANDUM handle STAT: 4-16-42 Congressman McCormack phoned that in the Deficiency Appropriation Bill, the House put in the 6% limitation and the Senate put in a more liberal limitation. He says that the Speaker, the House Conferees and he, himself, all feel this is not a desirable way to legislate - to put any limitation of profits in an appropriation bill. It should be done through excess profits - in the Ways and Means Committee - or through the Naval Affairs Committee, after full consideration of all factors involved. McCormack says that he, the Speaker and the House Conferees think all the provisions in the Deficiency Appropriation Bill, now in conference, should be stricken out. The Conferees are meeting this afternoon. Senator Barkley is out or town and so far could not be reached. If the President agrees, McCormack hopes he will take action to see what can be done with the Senate Conferees to have them Il recede, and strike out any and all provisions. Chur- E.M.W. 6 UNREVISED REVENUE REVISION OF 1942 HEARINGS BEFORE THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES SEVENTY-SEVENTH CONGRESS SECOND SESSION ON REVENUE REVISION OF 1942 PART 30 APRIL 16, 1942 Printed for the use of the Committee on Ways and Means UNITED STATES GOVERNMENT PRINTING OFFICE 60603 WASHINGTON : 1942 CONTENTS Statement of- Page Anderson, H. W., vice president, General Motors Corporation 2889 Bentley, James A., vice president, Carrier Corporation, Syracuse, N.Y. 3050 Fernald, Henry B., chairman tax committee, American Mining Con- gress. 3043 George, Senstor Walter F., a Senator from the State of Georgia 2952 Jerpe, John M., director of General Motors Bond Drive for Victory activities. 2890 Morgenthau, Hon. Henry, Jr., Secretary of the Treasury 2882 COMMITTEE ON WAYS AND MEANS Murphy, Ray, assistant general manager, Association of Casualty and Surety Executives, New York, N. Y 3024 HOUSE OF REPRESENTATIVES Nixon, Russ, Washington representative, United Electrical, Radio, and Machine Workers, C. 1. o 2883 ROBERT L. DOUGHTON, North Caroliza, Cheirmen Paul, Randolph, special tax adviser to the Secretary of the Treasury. 2862, 2953 THOMAS H. CULLEN, New York ALLEN T. TREADWAY, Massachusetts Reuther, Walter, director, General Motors Division, United Auto- JERE COOPER, Tennessire FRANK CROWTHER, New York mobile Workers, C. 1. 0 2884 JOHN W. BOEHNE, JIL, Indiana HAROLD KNUTSON, Minnecta Swigart, T. E., Houston, Tex., representing Petroleum Pipe Lines Co. 3035 WESLEY E. DISNEY, Oklahoma DANIEL A. REED, New York Briefs, letters, memoranda, etc.: FRANK H. BUCK, California ROY 0. WOODRUFF, Mienigan Arnold, Charles M., Southwick, Mass., representing the Connecticut RICHARD M. DUNCAN, Missouri THOMAS A. JENKINS, Ohio Valley shade-growing tobacco farmers, statement 2861 JOHN D. DINGELL, Michigan DONALD H, McLEAN, New Jersey Clark, Samuel O., Jr., Assistant Attorney General, letter 2972 A. WILLIS ROBERTSON, Virginia BERTRAND W. OEARHART, California Gershel, George F., representing the Gershel-Kaffenburgh Tobacco PATRICK J. BOLAND, Pennsylvania FRANK CARLSON, Kansas Co., Hartford, Conn., statement 2861 MILTON H. WEST, Texas BENJAMIN JARRETT, Pennsylvania Ickes, Hon. Harold L., Petroleum Coordinator for National Defense, RAYMOND 8. McKEOUGH, Illinois letter 2880 KNUTE HILL, Washington Johnson, Senator Edwin C., & Senator from the State of Colorado, ARTHUR D. HEALEY, Massachuseits proposed amendment to section 713 of Internal Revenue Code, 8050 AARON LANE FORD, Mississippi Joint Committee on Internal Revenue Taxation, report by staff on BARRON K. GRIER, Clerk power of Congress to tax interest from State and local securities 2999 MASHIN Y. McCANIESS, Amidant Clerk Wilson, C. E., president, General Motors Corporation, Detroit, II Mich 2895 III REVENUE REVISION OF 1942 THURSDAY, APRIL 16, 1948 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. O. The committee met at 10 a. m., Hon. Robert L. Doughton (chair- man) presiding. The CHAIRMAN. The committee will please come to order. Mr. TREADWAY. I ask unanimous consent to insert statements by Mr. Charles M. Arnold, one of our Connecticut Valley tobacco growers from Southwick, Mass., and Mr. George F. Gershel, of Hartford, Conn. The CHAIRMAN. The chair hears no objection, so they will be in- serted. (The statements referred to are as follows:) STATEMENT OF CHARLES M. ARNOLD, SOUTHWICK, MASS., REPRESENTING THE Con- NECTICUT VALLEY SHADE GROWING TOBACCO FARMERS I speak for the Connecticut Valley shade growing tobacco farmers. They oper- ate in Connectleut and Massachusetts, with a present acrenge of about 6,500. It is estimated that our product wraps approximately 2,000,000,000 cigars annually, and that is its only use. The industry represents an Investment of over $10.- 000,000. Originally It was conducted by a considerable number of farmers, but since the advent of the two-for-a-nickel cigars the Industry hus suffered to the extent that 50 percent of the growers have been forced out of the business. Unless tax rates are so adjusted ns to protect our market, with due regard to the necessity of providing for necessary governmental revenue, we will be in a very precarious situation. I have today carefully read the testimony given on Wednesday, April 8, by Mr. Alvaro M. Garcia, president of the Cigar Manufacturers' Association of America, and the brief filed by him at that time. In my judgment, his presenta- tion measures up to what would be for the best Interests of the Government, the farmer, the packer, and others concerned. Accordingly, we urge that the recommendations of Mr. Garcia and his associates be favorably considered by the Ways and Means Committee. CHARLES M. ANNOLD. STATEMENT OF Group F. GERSHEL, REPRESENTING THE TOBACCO Co., HARTFORD, CONN. The proposed revenue rates of cigare contained In the new tax bill are, from the standpoint of Connecticut wrapper and binder tobaccos, rulnous. Connecticut tobacco is produced primarily for 5, 10. and 2 for a quarter and higher-priced cigars. Situated as we are in the most highly Industrialized section in the country, we are where we must compete with Industrial wage rates, which, coupled with the fact that Connectleut tobaccos require the greatest amount of fertillzer and the finest quality of any type of tobacco raised in the world, makes It Imperative that the cigar manufacturer to whom we must sell our tobacco be permitted to manu- facture and sell his cigars at B alight profit. 2861 2862 REVENUE REVISION OF 1949 REVENUE REVISION OF 1942 2863 The proposed rajes of $2,50 per 1,000 on the rigurs and under would Travel the 2 -fur-3 eigar In this price class and would force all higher priood elears mately TO percent of this total in accounted for by oil and gas prop- to In increased to price, with the result that the 2-for-5 cigar would Immediately erties, the rest by sulfur, metal, and cont mines. outstrip all other cigars, thus placing our domestic tobacco Industry in the post- A. Percentage depletion 4 a special privilege.-The 1941 Rovenus Uon of having to will this tobneco for those chemp cigars, which wonld necessarity selling our product at # loss. Act levied a combined normal and surtax rate of 31 percent on the nel We feel most atromously that the rales proposed by the Clgar Manufacturers income of corporations in excess of $25,000. In addition, an excèse of Amorica are the proper rates in order to maintain the balance between the profits tax was imposed with rates ranging up to 60 percent. Yet many clamp elgar and the most expensive cigar. NO that we. ax farmers, will be able to oil companies pay extremely low income taxes, and most oil companies produce and cell of fl profit to our customer the clgir manufacturer, who in turn mmy be pormitted to sell his cigare of is proble and with pay living prices to the pay no excess-profits taxes. Some actual examples of oil companies former. bis worker, and his supplier of other maferials. that made provision for Federal income taxes of less than 31 percent of Gronge F. net income are listed in exhibit 1. Each of the 4 major oil companies The Gershel-Kaffenburgh Tobucco On listed in that exhibit set uside for Federal income and excess-profits A01 Windsor Ktreet, taxes less than 26 percent of its 1941 net income reported to stock Hartford, Com. holders. The 13 minor companies, which generally speaking were en- The CHAIRMAN. The first witness this morning is Hon. Randolph gaged more exclusively in production, set aside an even smaller part of Paul, tax adviser to the Secretary of the Treasury, income, the percentage varying from 18 percent to as little as 2 percent Mr. Paul, you may proceed. The striking difference bet ween the percentage of income absorbed by taxes for these companies and the statutory tax rates is to some ex- STATEMENT OF RANDOLPH PAUL, SPECIAL TAX ADVISER TO THE tent attributable to differences between book income and taxable in- SECRETARY OF THE TREASURY come common to all corporations. In the main, however, it in attribu- table to the special percentage depletion. The companies ordinarily Mr. PAUL Mr. Chairman and members of the committee, in state- report depletion to their stockholders on A cost. basis, but receive for ments before your committee on March N. 1942, the Treasury reconi- tax purposes IL very much larger allowance of percentage depletion. munded the elimination of (1) percentage depletion, and (2) the privi- Despite the statutory provision limiting percentage depletion to 50 lego available to the oil and gas and mining industries of expensive percent of the net income from each property, the use of percentage development costs.¹ Several withesses have appeared before your depletion instead of cost depletion enables many companies to cut their committee in opposition to these recommendations. I should like now taxable income by much more than 50 percent. Exhibit 2 gives a few to present evidence supporting the Treasury's position and to refute actual examples. For the first two companies cited, percentage deple- the arguments made by the representatives of these industries in favor tion converted sizable net incomes into deficits, for the third company, of existing provisions of the statute. it reduced net income by more than 75 percent, for the fourth company, it almost completely wiped out net income. The examples given in 1. #LIMINATION OF PERCENTAGE DEPLETION this exhibit are not untypical. The amount freed from taxation through percentage depletion bears The Treasury believes that the favored treatment to a particular little or no relation to the netual cost of the depleted property, Per industrial group involved in percentage depletion should not be re- centage depletion continues even after 100 percent of the cost of the tained in an all-out war tax program. Percentage depletion does not property has been recovered. For example, one of the leading oil com- appreciably stimulate exploration and discovery. It is not essential to panies in the East Texas field still has in the ground more than three- the maintenance of the output of stripper wells. Its elimination will fourths of the original oil reserves in 10 oil properties. Yet this com- in no way endanger the supply of raw materials needed for the war pany has recovered through percentage depletion, and the related offort, The continuance of the special privilege involved in percentage option to expense intangible development expense, more than the depletion would allow the oil and mineral industries to escape their entire cost of the property and of intengible development. If, on the fair share of the tax burden at a time when millions of small taxpayers remaining reserves. this company should obtain depletion allowances are being asked to save and sacrifice for the winning of the war. The nt the rate enjoyed thus far, the aggregate deductions for depletion continuance of the provision at such a time cannot but adversely affect would approximate five times the cost of the properties, and the aggre- the morale of the American taxpayer. gate deduction for both depletion and intangible development costa It is estimated that at 1942 business levels and proposed 1942 tax would approximate three times the coxt. of the properties plus intan- rates the elimination of percentage depletion and the substitution of gible development costs (exhibit 3). cost depletion will increase the revenue by $117,000,000.² Approxi- B. The elimination of percentage depletion will not endanger the supply of raw materials needed for the war offort-The claim that the depletion. development The conta" To or For repital account to be recorved (Anglide I for all and give wells, the regulatives give the Taspayer the option of charging "In- elimination of percentage depletion will endanger the supply of raw banling regulations define development costs" AS "wages, through repairs, TOIL are supplies, nie Inclgent En and investory for Une drilling of wells" fool, materials needed for the war effort cannot be accepted. may be 10.23 too 10). For The regulations provide that all (regniations the development charged in expense except development in PRODUC of receipts development while world . Reductions in taxable income by more than 50 percent. despite the statutory Timita- Chringh vision The latter edult la charged (e) capital the mine is tion, BEY pumible Imparter the law specified that percentage depleting be computed with currel In deplefinn the development 10.25 (m) 16), Development value for mines account are expenditures reserverable ID: Preject to each property Consequently, after the taxable Income of proportion At exteting refer the of the Includes mine other is extimated than expenditures at $97,000,000. on depreciable property showing and Income has been reduced by a martinum of 50 percent by depletion allowances, " as be reduced still further by the deduction of Insure DD other properties. 2864 SEVENUE REVISION OF THE REVENUE REVISION OF 1948 2865 1. The oil industry-(a) Production and reserves-The production of crude oil in 1941 was the highest in our history. At the name time salvation of the stripper well industry lies in advances in crude-oil the known reserves of crude oil increased to an all-time high. Total prices rather than the percentage depletion provision. reserves of 20,800,000,000 barrels were about 15 times the output in In support of the claim that the elimination of percentage depletion would lead to the abandonment of stripper wells, it has been main- 1941 (exhibit 4). Even the record output of 1,400,000,000 barrels in tained that the provision for percentage depletion introduced in the 1941 WILE below the maximum achievable. The production of oil in Revenue Act of 1926 led to II substantial increase in production from at least some States, including Texas, is still proceeding under prom- the eastern part of the United States. It is true that there was a sub- tion regulations designed to reduce output to probable market demand. stantial increase in the production of crude oil in Pennsylvania and While military requirements for oil products in 1942 will increase New York after 1926. However, this increase seems directly trace- very substantially over 1941, civilian consumption will decrease greatly able to the development of water flooding methods, methoda that ware because of the transportation and rubber shortage, so that total con- first permitted by local law in 1921.* The resulting increase in pro- sumption is not likely to expand and may even decline. The loss of duction manifested itself prior to the enactment of percentage deple- oil-producing areas in the Far East will throw a greater burden upon tion. Batween 1921 and 1926 there was a steady increase in produc- American oil resources; but the shortage of tankers will make it tion, the incroases being minor from 1921 to 1924, but substantial necessary to replace the supplies formerly produced in these areas by from 1024 to 1925, and again from 1925 to 1926. Naturally, the full restricting civilian consumption rather than by expanding production effect of this now technique for extracting oil WILH not felt at once in this country. Recent increases in the seriousness of the transporta- and continued to operate after 1926 (exhibit 5). tion shortage have already led to a reduction of production. The (e) The effect of price-The effect of percentage depletion on pro- Office of Petroleum Coordinator early in March ordered a widespread duction is negligible compared to the effect of price changes. In 1941 reduction in output throughout the Southwest.* Later, the State the tax relief attributable to percentage depletion amounted to about authorities in Texas ordered 18 shut-down days in April. This marks 5 cents per barrel of oil, In that year the price of oil went up 8 the first time in the history of proration in Texas that the oil wells cents a barrel. In Pennsylvania it rose by even more-since August have been ordered to shut down for more days than they are permitted 1940, by 90 cents 11. barrel including n recent increase of 25 cente per to produce." It is clear that the problem of oil supply is a problem of barrel granted by the Office of Price Administration to stimulate transportation and not of production or limited reserver. output in that area. (b) Stripper wella.Witnesses opposing the Treasury's recommen- 2 The mining industry.-The conditions of supply vary widely for dations have claimed that their adoption would lead to the widespread different metals. Some are in abundant supply; others are limited as abandonment of stripper wells-the wells with relatively low output to known deposits: still others, like aluminum and manganese, are and high cost of production. Clearly. the elimination of percentage limited by the availability of power, processing plants, and materials depletion would not have any such effect. Most stripper wella pro- for exploitation, for example, explosives and mining equipment made dues small amounts of oil under conditions that leave little or no book of steel, profit. The operators of such wells get little, if any. benefit from per- These variations in supply conditions have been recognized by the centage depletion because of the statutory limitation of percentage agencies dealing with the problem of war production. In the case depletion to 50 percent of not income from the property. The con- of some metals, premium prices have been established to stimulate tinued operation of these properties cannot be dependent on the con- production: in other CHEES direct assistance in adding to equipment tinuance of percentage depletion. They are continued in operation for recovery has been extended, This approach clearly indicates the because current revenues exceed "out of poolost" costs, although they diversity of situations in the mineral industry and the difficulty of may not. exceed total cost, including depreciation, depletion, and over- trying to accomplish specific results by any general tax relief such 0,0 head. percentage depletion. In a sample study, based on the tax returns for BA. large number of Representatives of the mining industry have pointed out that the properties in Pennsylvania. it hns been found that of the properties acceleration of production for war purposes will subject the industry producing fewer than 400 burrels R year nearly one-half showed no to greatly increased income and excess-profits taxes at the time when net income even before any allowance for depletion. These proper- it is exhausting reserves that might be produced in lator years under ties get no percentage depletion under existing law, Other properties lower tax rates. The Treasury is aware that producers of exhaustible get only n. negligible amount of depletion because of the to percent mineral resources face a. special problem in increasing production net income limitation. Only 1 out of 12 properties got percentage by using available reserves, and is studying methods of providing ap- depletion equal to 27½ percent of gross income, the maximum amount propriate relief under the excess-profits tax This problem, which allowed by existing law. In order to qualify for this maximum por- involves both price policy and tax policy, affects all producers in centage depletion allowance, these properties had to have net incomes the industry and not only the relatively few who now benefit from in excess of 2 times 2716 percent or 55 percent of gross income. Such percentage depletion. Any solution of this problem should be appli- a large margin of profit is not characteristic of the stripper well. The Pennarivania Statutes 1000, 16, 268m-3, Acte 1991. D. 919, a (assended-1929, a 021). Wall Street Journal, March n. 1042. ON and Das Journal, April 2, 1942. p. 16. 2866 REVENUE REVISION OF 1943 SEVENUE REVIRION OF 1942 2807 cable to the large number of producers who now get no benefit from percentage depletion as well as to those who do. application of selentific knowledge to the search for oil has not, how- C. Percentage depletion cannot be justified an a to explora- ever, reduced the discovery of oil to a routine matter, The unusual tion and disoonery.-The original enactment of discovery depletion strike, such ILN that in east Texas, respects neither price nor technology, in 1918 WILH prompted by a fear of mineral shortages and the desire Such exceptionally fortunate discoveries of Inrge pools are naturally of Congress to stimulate the discovery of minoral properties and com- irregular. Provisions enncted in the law cannot máke them otherwise. pensate for the hazard involved in prospecting.* The shift to per- (iii) The influence of war priorition.-Percentage depletion should centage depletion in 1926 was in the interest of simplicity of adminis- be a particularly negligible factor in the discovery of oil during the tration; problems involved in determining which taxpayer was en- war period. The shortage of steel has led the War Production Board titled to the benefit of the discovery, the exact date when the discovery to restrict the use of steel in drilling oil wells to such an extent that was made, and the value of discovery wells within 30 days of discovery drilling will be curtailed by about 40 percent in 1942. This restriction were difficult and led to extensive controversy, is limited primarily to the drilling of development wells rather than We now know that the 1918 fear of oil shortages was unfounded. It discovery or wildost wells. The Intter have been granted a priority is also clear that we did not need this special discovery provision to rating of A-2, the former of A-8. In addition, the Office of Petroleum obtain exploitation of our natural resources, and that the provision Coordinator is urging the industry to drill at least 4,000 denst wells has been extremely costly in terms of the revenue. It is not true that in 1949 compared with 3,100 drilled last year, even though the total the development occurring between 1918 and the present time has number of wells drilled will probably be reduced from 32,000 in 1941 been the result of tax ineentives. It has been due principally to high to fewer than 19,000 in 1942. The forced restriction in the drilling of prices and improvements in the technique of discovery, development wells will release substantial funds for the drilling of the 1. The oil industry-(a) The importance of other factors-The wildont wells. The saving from the drilling of fewer development tremendous post-war expansion of the oil industry in attributable to wells in 1942 will exceed the cost of all wildcast wells expected to be the factors mentioned and not, as witnesses before your committee have drilled in 1942. The shortages necessitating curtailments in the drill- claimed, to the enactment of the discovery depletion provision by ing of development wells are likely to continue, and, indeed, to be intensified during the entire war period. Congress in the 1918 act. During this period the antomobile industry (3) The ineffectiveness of percentage depletion as a stimulus to the expanded enormously. The extended use of antomotive transportation prospector.-Even if percentage depletion contributed to the stimola- created a strong demand for oil products which led, in turn, to IN tion of exploration and discovery-and we do not agree that it does- high level of crude oil prices; it also stimulated technical advances to it would be an extremely wasteful and costly method. It would have raise the gasoline recovery ratio. It was these factors, and not per- been cheaper for the Government to have paid the entire cost of drill- centage depletion, that accounted for the increase in reserves and in ing all the dry holes classified ns wildcat wells in 1941. The estimated output. cost of drilling these holes was about $50,000,000," the estimated loss (i) The influence of prior-The importance of the price of oil in revenue from percentage depletion attributable to oil and gus wells products in stimulating or retarding the seareh for oil is clearly Te- was more than $65,000,000, The reason why percentage depletion is 50 vealed by exhibit 6 and chart 1 which shows for the period 1917 to 1941 ineffective a stimulus is that n. large part of the benefit accrues not to the number of wells deilled and the average price of oil per barrel. In prospectors but to operators and royalty owners. all except 5 of the 25 years covered by the exhibit the number of (i) The operator.-Twenty major integrated companies have been wells drilled changed in the same direction As the average price per reported to account for about 53 percent of the total crude petroleum barral, rising when the price rose and declining when the price de- production of the United States, While data for these 20 companies clined. are not available, it. WILS estimated that the major companies in 1941 (ii) The influence of technical developments-While price changes accounted for only 25 percent of the wildent wells drilled and 36 per- have been the major stimulus to the search for new oil, the effectiveness cent of the footage drilled." Their share in the direct benefits of per- of this search has also depended in large part upon developments in the contage depletion is much larger than their share in the prospecting technique of discovery and on pure chance. Immediately after the for new oil, since they frequently purchase properties with potentiali- First World War there was a great advance in the application of sui- ties which have been established by the activities of independent pros- entific knowledge to the discovery of oil. According to a study by the pectors. National Research Project, scientific approaches have accounted for (ii) The royalty over.-Royalty owners who bear little or none of nn increasing proportion of oil discoveries, while wildeatting based on the cost of prospecting obtain disproportionate benefits from percent- "hunches" has become relatively less significant. According to this age depletion. They have little or no investment to charge against stinly, the ultimate production from wells discovered by scientific methods between 1922 und 1038 wax estimated at about 14,000,000,000 At the hearthes on the Cofe on required in on Weekly toe March %. 1942, 3. 14, It was barrels, whereas the corresponding figure for wells discovered by other ontimated that 10 1941. 3,11% wildost wells your drilled, of which 450 were succomful and 2,027 were ary holde, At ER cyerage drilling cost or $17,300 per bale (reported for methods was only slightly over 5,000,000,000 barrels (exhibit 7), The 10:15 la Petrolouio and Natural Gas Production, National Health Project, Works Progrem Administration, No 201) United (try lesten involved an expenditure of 145,447,000. At an Review mat per holy of $20,000 (an outside Rente allowing for possible Increase la cost) 8. Bept No. 017, and Cong. H - P. 41, 8. Doe, XII. 280, d&th Cons. 2d D. 6. the 2.027 dry holes in 1941 represented a total drilling cust of $52,040,000. , Hearings on the Cole bill reported la on Weshly for March 2. 1942, 2868 REVENUE REVISION OF 1042 REVENUE REVIDION 100 1945 2860 income which maken the percentage depletion allowance particularly two demades have - changes in the organisation of the oil industry valuable to them. The benefits of percentage depletion to royalty that have made it better able to bear the risks of prospecting. Larger owners are confined largely to taxpayers having ownership prior to companies have become more important and have shouldered G. larger the discovery of oil. Purchasers of royalty interests in developed part of the conts of prospecting, properties ordinarily pay a sufficiently high price to entitle (hem to (a) Providens for the offsetting of losses against profits.-Pereent- lärger depletion allowances under cost depletion than under percentage age depletion is of no help to the operator who loses his capital in depletion. (c) Other provisions favoring the prospector.-There are several repeated unsuccessful ventures, since he gets the benefit of percentage depletion only if he develops property that yields n. not income, On statutory provisions designed to provide relief to the prospector. The the other hand, the operator who engages in both successful and un- Mineral Lands Loasing Act of 1920 provides that successful completion successful ventures is permitted, both under the present law and the of a well on the public lands entitles the prospecetor to a lease at a Treasury's proposals, to offset the cost of dry holes and unproductive royalty rate of 5 percent-less than half the customary commercial lesses against current income from productive property; he may also royalty of 12½ percent. Section 105 of the Internal Revenue Code carry forward operating losseo for 2 years. Consequently, even with- limits the surtax imposed by section 12 to 30 percent of the selling out percentage depletion, provision is made for the offsetting of losses price in the case of an oil or gas property, the principal value of which on unsuccessful ventures against gains in successful ventures. No has been demonstrated by discovery work done by the taxpayer. satisfactory reason has been offered why one operator should be per- Finally, section 721 of the Code provides for relief under the excess- mitted to recover more than his capital investment because another profits tax in the case of abnormal income resulting from exploration, has lost his capital. discovery, and prospecting. (b) Changes in the structure of the industry-During the 20 years 2. The mining industry.-The unimportance of percentage deple- of discovery and percentage depletion the structure of the oil industry tion in stimulating discovery and exploration is even clearer with has changed substantially. The industry is now in a much better post- respect to the mining industry than in the case of the oil industry. tion to offset losses against income from successful welle, and thus to The development of mining properties in the field of the basic metals distribute the prospecting risk. Domestic production of crude petro- has passed beyond the stage of prospecting risk and adventure, and has leum in 1941 was about four times 08 great as in 1918, The estimated settled down to a predictable, scientific, and commercial business enter- investment in crude petroleum production of $5,700,000,000 in 1935, prise involving the use of low-grade ores. together with investment in transportation, refining, and marketing, Except for the metals that have more recently become of commer- makes the combined petroleum industry the fourth largest in the cial importance, domestic deposits of high-grade ores were fully ex- country in terms of investment (exhibit 8). The gross investment in plored many years ago. Growing demand and technological develop- petroleum properties, plant, and equipment more than doubled from ment, further stimulated by the war emergency, have led to more 1921 to 1938, increasing from $6,500,000,000 to $14,800,000,000 (exhibit extensive exploration of low-grude ores. This cannot be termed 9) "discovery", since the deposits for the most part have been known to This increase in the size of the industry has been accompanied by exist, A recent proposal by the Secretary of the Interior calls for a the integration of production with transportation, refining, and mar- program of extensive exploration of additional low-grade ores-to be keting with the result that the risks of prospecting are actually dis- carried out at Government expense. Moreover, most mineral depos- tributed over a very large aggregation of capital. Twenty major its-including metals of more recent commercial importance-are not integrated companies have been reported to account for about 58 developed by original prospectors; their development requires large percent of the crude petroleum production of the United States, 72 percent of the mileage of crude-oil pipe lines, 87 percent of the tonnage amounts of capital and is of necessity undertaken by established enter- of oil tankers, 76 percent of the crude-oil refining capacity, and BO prises. D. Percentage depletion cannot be justified by any special risks in percent of the gasoline sales of the entire petroleum industry in the United States (exhibit 10). This integration is the development of the oil industry.-The hazardous character of the oil industry has been recent years. Six important refining and marketing organizations cited as a renson for retaining the specially favorable tax treatment that owned no important producing properties in 1918 how account accorded the industry through percentage depletion. The possibility for 38 percent of the crude petroleum production of the 20 major (lint percentage depletion may permit the recovery of considerably companies and 16 percent of the national total (exhibit 11), more than the actual cost of exploration and development of n. produc- Although these large producers account for n smaller share of tive well has been anid to be justifiable on the ground that the excess prospecting and exploration than of production, they now bear more in needed to compensate for the cost incurred in connection with wells of the cost of exploration, either directly or indirectly, then they did that never become productive, when discovery depletion WHIS first enacted. The use of so-called The answer is that percentage depletion is largely ineffective in scientific methoda for locating oil deposits, deeper well drilling. and accomplishing the desired objective and that the law contains other other factors increasing capital requirements have rended to favor provisions for the offsatting of lossos against gains. Further, the past the large operator. Largo producers also make what are termed "dry-hole contributions" to independent wildcatters and purchase Department of the Interier invoice release Fabruary 16, 1942 leases in prospect from the wildcatters. 2870 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 2871 (0) Loons to Animon drilling-Concern has been expressed that the elimination of percentage depletion would make it difficult to borrow production. This excess must be charged to capital account to be no money to finance drilling for oil. The testimony presented to this covered through depletion. It is recommended by the Treasury that the committee has indicated that bank loans are commonly made only on expensing of development coats be eliminated and that all development the basis of productive properties. The servicing of such loans de- costa of productive properties be capitalized. Companies that elect to pends on the ability of the operator to recover his capital investment expense intangible development costa for tax purposes frequently and to carn a sufficient margin over his operating costs to pay inter- capitaliz» intangible development costs in their reports to stockholders est on the loan. The Treasury proposal would in no way interfore Intangible development costs are a proper capital namet for purposes with the recovery of the capital investment since depreciation and of reports to stockholders; they are filcowise a proper capital amet for depletion allowances would be permitted equal to the amount invested. tax purposes. Moreover, the interest paid on the loan is an allowable deduction It is estimated at levels of business for the calendar year 1948 and at from gross income in computing taxable income, Consequently, per- the proposed tax rates that the elimination of the expensing of develop- centage depletion does not benefit the taxpayer unless his income ment costs alone, without the elimination of percentage depletion, would increase the revenue by $84,000,000.1* The combined effect of exceeds the amount needed to repay capital cost and to pay interest on outstanding loans, i. O., unless he in a good credit risk without the eliminating percentage depletion and the expensing of development costs would be to increase the revenue by $206,000,000,18 benefit of percentage depletion. E. The elimination of percentage depletion will simplify the com- Under the existing law, is taxpayer who uses percentage depletion and who is not subject to the net income limitation gets the same de- putation of the tax.-Percentage depletion is not a simple method of pletion allowance, whether he capitalizes his development expenses or computing the depletion allowance. Under existing law percentage de- deducts them currently as expense. Expensing his development coste pletion is computed separately for each property. This involves seri- gives him an additional deduction: capitalizing them does not, The ous difficulty, first, in determining the price of the product nt the expensing of development cost is, therefore, equivalent to allowing B property, and, second, in allocating expenses. The extensive litiga- double deduction, once when the costs are incurred, and once through tion 11 that has resulted from the necessity of computing percentage percentage depletion. (For illustration of excessive allowances, see depletion for each property separately is sufficient evidence of ita exhibit 8.) complexity. Moreover, the provision for percentage depletion has not If percentage depletion were eliminated and cost depletion substi- obviated the necessity of computing depletion based on cost. Since tuted, the option of expensing development costs would not involve a raxpayers have the option of using the one or the other basis, they gen- double deduction. In that case, if development costs were capitalized, eraily compute cost depletion in order to protect themselves. Further, they would be included in the base to be depleted and would be recov- in their reports to stockholders, corporations ordinarily use coat deple- cred through depletion allowances; if the costs were expensed, the tion rather than percentage depletion. base to be depleted would be smaller and hence the depletion allowance F. Percentage depletion in not justified as an offset to the heavy less, burdena of other (ages-It is claimed that special relief from the Expensing of development costa should be eliminated, however, re- income tax in the form of percentage depletion is justified because the gardless of the action taken with respect to percentage depletion. This oil industry now bears is heavy tax burden in the form of gasoline privilege is not permitted to other groups for comparable capital out- taxes, property taxes, and State production or severance taxes. This lays. The drilling cost of a productive well, for example, is a capital claim cannot be accepted. Neither the property nor the production investment in the same way NS the cost of a building or of equipment taxes are restricted to the oil industry alone They affect other indus- to a small retailer or manufacturer. There seems no more justification tries as well and justify no special rolief for this particular industry. for allowing the capital investment in the well to be deducted from While the gasoline taxes are peculiar to the oil industry, they are current gross income than for allowing the retailer or manufacturer borne in large part by the consumer rather than the producer. to deduct his capital investment from his gross income at the time when the investment is made. II. KLIMINATION OF THE INTANGIBLE DEVELOPMENT EXPENSE OPTION The original option for oil and gns wells dates back to 1917. The The regulations now give taxpayers the option of expensing in- regulations contemplated development work done directly by an oper- tangible development costs of oil and gas properties. They also permit stor: they are written in terms of expenditures by un operator on the expensing of the development costs of mines except the excess of wages, fuel, and other items. The trend in the industry since the costs over receipts for mines that have not yet reached the state of adoption of the regulations has been toward drilling by independent contractors. The decisions of the Board of Tax Appeals 12 miggest 11 Palmer V. grender, UST 17, 8. 551 Twin Bell on Ayndicate, una U. 6. 312: Vinton that under the regulations operators may no longer be entitled to ex- Privateum Company of Team certiorari dented, 288 D. 8. 601 Unhaumer's Natural (for Ca., certineari denied, 200 17. H, 634 J. J. Parkins, 302 II. S. 005 Munitain Producers Corpora. pense development costa where the operator does not drill the well flom, 302 If 8. 081: Honkline (HE Ca, and Ur 8. 062: Thomas A. O'Donnell. 303 If. N. NTO: himself, but pays a fixed price under n contract. The Treasury is Wilshire 00 Co,, 208 11. A. 00 J. Piece Anderson, 60 CL 052 Ribe ou land Development the DM M. ON 621 Affer Milling CM., 20 Fed Supp. (42) Norky Mountain ou 10, an B T. A. Rheriden n yoming Unit (%., U, it. Court of Agemale for the district of Columbia. TTOS, ann Montrial Mining On 41 0, T. A. IDD, Mirabel Outskativer Co., 41 H. T. A. 401 13 Al extating enter the estimates are and respectively, M Benet Drilling City 42 B T. A. 1067. and W. D. Ambrica, 42 R. T. A. 1400 (proding decident Divember 31, 1043. c C. A. 5) 2872 REVENUE REVISION OF 1982 SEVENUE REVIMION OF 1942 2878 reluctant to nontinue the option in force in view of these administry, more per foot of hole drilled for wells less than 6,000 feet in depth and tive and legal problems. It may be suggested that the expensing of development coats could 50 cents per foot of bole drilled for wells in excess of such depth. (b) Metal mines.-On metal mines hereafter discovered, allow 10 be disallowed merely by changing the regulations. It might be percent of gross income for taxpayers who bear the burden of the cost. claimed, however, that the interpretation given by the regulations of exploration, development, and operation of the property. has become imbedded in the statute, since it is of long standing end (0) Nonmetal and coal mines-For nonmetal mines, including coal has been retained unchanged in the regulations concomitant with mines, discovered, allow 5 percent of gross income for tax- soveral reenactments of the basic legislation." To avoid controversy, payers who bear the burden of cost of exploration, development, and it would be best to eliminate the expensing of development costs by operation of the property. statute rather than by amending the regulations. If these allowances were made, the present limitation of percentage The elimination of the option to expense intangible development depletion to 00 percent of the net income of the property-computed coste has been objected to on the grounds that taxpayers would have before deduction of depletion-should be retained. difficulty in segregnting such expenses from others. The experience 2. Reasons for the proposal-Tax incentives for stimulating desir- of the Buronu of Internal Revenue does not support this claim. State- uble industrial developments can be justified only if they are effective in ments have been made by the Independent Drillers Association that terms of their cost to the public. Accordingly, if it is desired to con- more than 80 percent of all oil wells are drilled by members of their tinue tax incentives to encourage discoveries in mining properties, association. Most of these are drilled at EL fixed price under a contract such incentives should be denied properties that will be developed in that differentiates intangible costs from others. the ordinary course of extending the recovery of known commercially profitable mineral deposita. III. POSSIBLE ALTERNATIVES TO THE ELIMINATION OF PERCENTAGE DEVERTION It in suggested that for oil and gas wells this can be done by defining Is discovery as a pool outside of the limits of a previously discovered The Tressury is firmly convinced that percentage depletion should and proven oil or gas pool. It is suggested further that the benefits of be completely eliminated. However, in case your committee prefers discovery allowances be limited to those contributing substantially partial retention and modification of percentage depletion to its elimi- roward the cost of the exploration of a new pool. Persons who, through nation, I should like to make some suggestions along that line. fortuitous circumstances, find themselves the beneficiaries of mineral A. Continuance of percentage depletion for stripper wells and mar- Jeposits discovered by others, have made no economic contribution. ginal mines only-1f your committee desires to continue percentage For this reason it is proposed that a minimum financial contribution depletion for stripper wells and marginal mines, this might be accom- be required varying with the depth of the well. plished by the following: It. is suggested that for mines the definition of discovery used in the (a) Oil and gas properties.-Permit percentage depletion at the present regulations 15 be adopted. The benefits might be limited to rate of 25 percent of net income from the property for taxpayers taxpayers who boar the cost of exploration, development, and operation who operate oil or gas wells on which the unrestricted production is of the property. not more than 11/4 barrels per well per day and on which the net C. Special treatment of existing propertien-1. Proposal.-If, fur- income from the property-computed without allowance for deple- ther, your committee desires to accord special treatment to all tax- tion-in not more than 10 percent of the gross income from the prop- payers who developed properties prior to January 1, 1942, this could arty. This allowance shall be restricted to taxpayers who boar the be accomplished by the following proposal: actual burden of the cost of operating the property. (2) Oil and gas properties.-Permit percentage depletion at the (b) Mines.-Permit percentage depletion at the rate of 25 percent rate of 15 percent of gross income for taxpayers who elected to charge of net income from the property, for taxpayers who operate mines on intangible drilling and development coste to capital account in prior which the not income from the property-computed without allow- years, and at the rate of 5 percent of gross income for taxpayers who ance for depletion-is not more than 10 percent of the gross income elected to charge such costs to expense. from such property. This allowance shall be restricted to taxpayers (b) Metal mines-Permit percentage depletion at the rate of 10 who bear the actual burden of the cost of operating the property. percent of gross income for metal mines of taxpayers who capitalized B. Treatment of new discoveries-1. Proporal.-If your committee intangible development costs in prior years, and at the rate of 5 percent should desire to continue percentage depletion not only for stripper for who charged such costs to expense, wells and marginal mines but also for new discoveries, this might be (e) Nonmetal mines, including coal minos-Permit percentage de- accomplished by the following provisions for properties becoming pletion nt the rate of 5 percent of gross income for nonmetal mines of productive after December 31, 1941. taxpayers who capitalized intangible development costa in prior years, (a) Oil and gas propertiex.-On future discoveries of new pools, and at the rate of 2½ percent for taxpayers who charged such costs to allow depletion not to exceed 2714 percent-or n. lesser peremage-of expense, gross income to taxpayero contributing the equivalent of 20 cents or If there allowances were made, the present limitation of percentage depletion to 50 percent of the net income of the property (computed a Orfewold, A Summary of the Regulations Problem no Harvard Law Review 298, 1041. before deduction of depletion) should be reduced to 25 percent. IN Resulations 100. sec. 10.28 (m) 2. 10-0 2874 REVENUE REVISION OF 1942 GEVENUE REVISION OF 1943 2875 Moreover, if percentage depletion were continued for mines, it should not be required that taxpayers make a binding election in order to consideration to the objections repeatedly advanced against the elím- ination of these special allowances. These objections have been nº secure the percentage depletion allowance. 2. Reasons for proposal-(a) The reduced rates.-The available examined in the light of the special needs for the war program. It evidence suggests that the present rates applicable to gross income in is found that the elimination of percentage depletion and the expensing computing percentage depletion are much more generous than is justi- of development costa will not interfere with the war effort, will yield about $206,000,000 of much needed revenue, and will remove from the fied in view of the costs of acquiring properties and of developing them. As shown in exhibit 12 for 1934 the United States Department statute a long-standing and inequitable privilege. Thus, it will con- tribute substantially to the war effort in terms of national morale. of the Interior reported that cost depletion amounted to about 73/2 per- cent of the average selling price, and intangible development costs, (The chart and exhibits submitted by Mr. Paul are as follows:) on a capitalized basis, amounted to about 6 percent. PRICE Dollars BM. The increase in tax rates since these percentage provisions were 2 3.00 2.50 200 - 1.50 1.00 06 1 enacted make them far more generous now than they were when en- acted, For example, the 1936 normal tax on corporations reached a maximum rate of 15 percent. Under this rate there was B tax saving Etc. of 4.1 cents attributable to the 271/4-cent depletion allowance permitted P. from each dollar of gross income. If the taxpayer's net income was 75 percent of his gross income, the tax saving amounted to 57/2 per- 7 cent of net income. Under the proposed tax rates and with only a 5-percent depletion allowance, the corresponding tax saving would 39 be 5.9 percent of net income if the taxpayer were in the highest excess- profits-tax bracket. In general, the possible tax saving under the proposed tax rates and the proposed percentage depletion allowances exceeds the tax saving under the 1936 rates and percentage depletion allowances. NUMBER OF WELLS DRILLED FOR OIL AND GAS 48. 98. (b) The differential rates.-The proposed lower percentage allow- ance for taxpayers who expensed development costs is intended to compensate for the advantage they gained by exercising the option Total Wells Drilled ex. of expensing such costs. Taxpayers who expensed development costs have no capitalized amount to be depleted, whereas taxpayers who capitalized such costs have such an unrecovered capital, For oil and gas mines, the suggested differential is 10 percent. Chest - IS. Server See Examin 4. proteminary The size of the suggested differential is based on preliminary date R supplied by the Tariff Commission from its current survey on the costs of producing crude petroleum. According to this survey, the annual deductions under the method of capitalizing costs currently 12. average about 10 percent of gross income. (e) Reduction in the net income limitation.-At present, percentage depletion allowances are limited to 50 percent of net income, If per- AND PRICE OF CRUDE PETROLEUM, 1941 1917-1941 centage depletion were to be continued on existing properties and the rates suggested above were to be substituted for the present provision, this limitation should be reduced to 25 percent. Unless this is done, U.S. Average Price 255 for Altha will R R. considerable part of the effect of reducing the gross income percent- ages would be lost, since for many taxpayers the net income percentage 12, rather than the gross income percentage is the effective limit to the amount of depletion they can deduct, 6L IV. CONCLUSION The Treasury has made many studies of percentage depletion and 2/50 related allowances in the past several years. It has given careful WELLS Thousands Office of the Services of the Insury 1 3 , I se 30 25 20 = of 18 Since there was an undistribisted-profte tax In 1936, this estimate assumes that all Inrome was paid out, 2876 REVENUE REVISION OF 1942 REVENUE REVISION OF 1943 2877 EXHIBIT 1-Net income and provisions for Federal income tases of selected oil companies for 1041, with provision for Federal income tares less than as per- Examine 4.-United Blates petroleum production, consumption, imports, exports, of not income, de reported in Moody's Industrials Supplement and estimated reserved, 1986-41 [Millines of harmlai Net Income Provision for Texas a Domestic communication Company before Federal Federal persent of Year Production Imports of Exports of Exclanated taxes Income taxes bet income of orade ell erode oil crude oil meriod of AD alla Givoline Fuel nill ente all ( Mider companier Percent 1925 771 780 307 340 (i) 15 $23,514.535 $5,078,458 25.8 1927 911 BITE 305 € 339 NII 16 Phillips Petrolmans Co 1925 901 7,679,638 361 3 1,705,000 21.0 899 384 82 IN Ekilly oa Co. 67,704,081 13,650,000 25.1 1,007 940 383 € 415 2 R Texas Corporative 1,401,500 1980 698 699 € Union Oil Co. of California T,700,732 10.0 I 39 62 1981 24 851 DATE € 408 335 at R 1932 765 at 3 879 700 Missur companies 45 27 1933 906 BOB 380 € 324 32 37 56,582 1,400 21 1004 008 020 410 3 340 36 61 Blahop or De 710,007 $16,574 1025 23 WT 594 435 867 12,177 X 1,100 et Devocted 00 Ca 1986 1,255,400 20 1,003 482 E 411 as 50 Timesten oa Co. of Tesal 138,000 30,0 1007 1,279 C,170 11 083 18,609 519 442 UF 47 Kirby Perminum Co North American Off Consolidated $ 37,000 17.0 1088 207,101 1,254 1.137 A21 15.207 600 X 17 1,734,200 63,350 1030 3.7 1,255 (201 550 17,840 458 53 72 16.488 Plymouth on Cir 188,600 1940 765,700 11.5 1,88 1,125 880 800 63 52 Republic Natural Das Call $10,019 127 3041 1,3%2 19,025 122,695 (48) 600 (1) (1) 3 20,300 Republic Sujerior Oil Co 144,503 138,000 19.0 Texas Guif Productor Co 340,004 $ 24,204 7.1 Universal Consoladated on Co 310,123 41,50 11.8 1 End of year Sgurre, entimated by American Fotroleum Institute Includes only merves in known and proved Melds, and nicoverable by production methods then known. Wellington on Cir 208,304 15,949 7.0 , No comparable entimate available, Würde on and Gue Cir $40,234 $9,500 27 , Estimated by OR and Oar Tournal, Jan. 29, 1942. 1 Data not made public Boures: Petrolemin Facts and Figures, For Paillips Co., Indudes $105,100 for excess-prufita Emples; no other excipany in this table reported separately reserves fur excess-proôts (asis, EXHIBIT 5.-Production of crude all in Pennsylvania and New York and average May Include State Incorde taves. - Viscal your enting June 20, 1941. price, 1911-89 , Reserve established fie Federal tasm, shown in reported balance street. Bourer: Moody's Industrials Supplament through Mar. 25, 1942. Production Average Avenue prior Production Year (in thro- mnde of Pennayl- Year (In thos- price punde of Penangl- Exturer 2-Net income of nelected off companies reported for income tax pur- barrels). vanis crude (per barrel) barrels) vanis trade poser compared with net income on the boata of cost depletion (per Inril) (In thousands of dellars] 1911 9,201 $1.22 1021 8.406 $1.33 1912 8,712 1.64 1922 8,125 3.21 1918 8,863 2.49 1028 8.650 3.33 Depletion Net Income 1936 Tamble cet 0,109 1.01 1924 8,920 101 Company Your claimed for Cost suro Income re- transed en cost 8,720 1.00 1025 0,702 1.63 Income tax: depletion 1956 depletion? 8,457 2.52 1920 ported 10,917 3.50 purpuses 1917 6,033 8.25 1027 11,768 3.00 1938 8,217 4.00 1928 12,559 3.27 1919 8,989 4.16 1929 15,107 2.70 1937 V,801 000 -1.000 4,20 1920 8,344 0.07 B 1M07 10,100 2,000 -5,000 1,800 1037 3,600 40 600 4,000 Bourne: Bureau of Mines, Minerals Yearbook. 1011-29. B IVS 5,300 1,000 e 2,400 EXHIBIT fl-Total number of wells drilled for oil and gas and United States - Under persistate deplintion privilenes average price of crude potroleum at the wells, 1917-41 I After dediresion of AS pensot of dividebda received. United States United States Bouro: Form 1130, experination Income tax return. average price SVPTAGE price Year Total wells drilled nf erude per Year Total wills troleum per drülled of enade De trubsum per Examin 3.-Percentage deplation and intangible development costs of a leading harrel burni oil company for 20 oft properties in the East Teaas field 1917 23,407 $1.10 3900 21,240 11.19 1. Cost of properties (Including additions to cost) $3,001,218 Nie 25,647 1.95 1931 12,432 is 12. Depletion sustained on cost $701,604 1919 29,173 2.10 1992 38,040 .67 1020 3. Depletion allowed under existing law $3,625,541 33,011 8.08 1932 15,312 .87 1921 21,037 1.72 IRM 1.00 4. Ratio of depletion allowed to cost of properties percent 121.1 1022 34,699 I.SI Has 21,420 is 5. Intangible development costa expensed $3,083,271 1023 24,438 1.34 1036 25,890 1.99 1924 6, Total deductions for depletion and intangible development coste $6,718,815 21,588 1.43 1907 33,015 1,18 1025 25,623 1.48 TOTAL 27,499 1/18 7. Cost of properties plus Intangible development costa $6,084,580 1920 29,319 1,88 1109 27,717 1.02 8. Ratto of total deductions to coet of properties plus Intangible 1927 24,143 1.30 1940 30,640 1.02 1928 development costa 110. 22.381 1.17 TMI 32,149 1.10 percent 1029 36,356 L27 9, Original all reserves (barrels) $64,408.000 10. Remaining oll reserves (barrels) $48,704,533 - Prilimitary. 11. Percent of original reserves remaining percent 75. 6 Bouron: For 1917-39, Patrolenra Facts and Figures (1041), psi. 79 and 52, (1017) pp. TM and 92 For 1940 and 1941, data un number of wells from on and Gas Journal, Jan. 29, 1042, data on average prise from the Schedules filed with Income-iss returns, 1931-37. of Minis. 2878 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 2879 Examin 7.-Number of off fields discovered with more than 1,000,000 barrets of EXHIBIT 10.-Relative importance of 20 major oil companies des the petroleum vitimate production, and ultimate production by method of discovery, 1922-38 industry of the United Blates Number of off delds Ultimate production (millions of barrels) Ratio of 20 Year or date All am- Twenty major ell Total partes major all companies Yesr geolog- companier to all Genlog- Gao- Rendom Geolog- Oeo- Random Total lost physical drilling physical Iral and drilling Total comounies (cal gio- physical Percent Domestic production of orde potrolenin (in thousands of barrels) 1997. 343 347 MIL 844 1,279,160 471,093 $3.6 1022 14 8 22 1923 in e 21 532 582 145 630 Mileage of erude all plus lines: 26 - 27 550 AND 17 M7 1934 Trunk line June 30, 1936 57,820 Le 1 2 544 à 549 49,371 22 7 606 88.4 1925 Gatbering line. de 1926 27 2 4. sa 243 62, 62,700 1,708 1,711 1,954 30,294 8 67.4 21 3 3 R 644 208 852 22 1927 874 Total 110,080 1928. 24 1 2 37 2,358 90 2,458 7 79,658 72.0 2,665 on tsokwre 1929 24 10 a 37 647 88 930 83 1,013 Number Sept. 30, 1938 200 ass 64.1 1930 18 4. I 23 166 44 210 13,430 3,640 Deadweight tompage. do 4,168,450 8,634,400 1931 9 A 3 3) 65 163 415 747 87.2 1,165 Daily crude off refining capacity (In thousand 1932 10 4 I 15 182 13 164 34 199 harrels of crude oll Input) Jan, 1, 1008 4,351.2 3,291.5 78.6 1933 14 7 21. 180 87 267 267 Bales of gasoline (la thousand barrels) 1938. $ 500,005 $ 407,689 80.0 1934 20 18 I 45 ass 628 1,008 I. 1,009 1038 as 30 4 DE 635 680 1,315 ao 1,345 1936 56 38 3 97 424 372 795 8 BO4 I Total United States gasoline reasumption. 1037 63 44 4 111 331 754 1,085 Il 1,000 I Includes only 18 companities, 1938 78 de 2 144 281 624 805 7 812 Bource: Temporary National Economic Committee Hourtogs, Petroleum Industry, pt. H-&, pp. 77149 Total, 1992-38 512 234 M 796 10,138 8,854 13,092 5,297 19,288 772), 7730, 7781, 7817. 4 Includes Kast Texas discovery. Examiner 11.-Gross production in 1088 of major oil companier having NO (m- portant producing properties in 1918 Source: Petroleuro and Natural Oar Production, National Research project, Works Progress Admin- istration, July 1009, pp. 836-7, Nota-Due to reanding, (be eum of the individual Items will not add to totals in all chart 1011 pro- 1988 pro- Name of company duction Name of company duction Exminer 8-Gross investment in the American petroleum industry, by divisions (ternia) (burnis) of the industry, 1935 Atlantic Refining Co, 14,417,000 Total for 2) major companies. $28,637.000 Continental on Ce 27.337,000 Total for 5 as is persent of Cross Grou Scony Vacum on Co.) 58,481,000 total for 3) major companies 27.8 investment Percent of Investment Percent of Standard on Co. (Ind.) 27,401,000 United States total Division Division *1,214,356 (In millions total (in millions total Standard on Co. (N. J.) 60,020,000 Total for 4 companies as & perent of of dellars) of dollars) Standard ou Co. (Ohio) 38,000 total for United States. 16. Il Total for e companies 199,617,000 Productog 5,685 42.7 Marketing 1,834 11. Natural cariline 279 20 Transportation 2,127 18.6 Total 13,276 100.0 N Information as to crude production of companies in un ha description of mempany's operations la Refining 1.400 if - Moody's, 1019. : Etendard On of New York, & component of Econoy Vamum Ou City acquired important preducing perperties in 1918. Bouron: Temporary National Committee henrings, pt: HA, p. 7701. . Petroleism Facts and Figures, 1941, p. 64. Bource: Production data from Temporary National Consulttee Hearings, pl. 14-A, p- 7778. Examine 9.-Gross investment in propertics, plant. and equipment of the Ameri- can petroleum industry, 1921-38 EXHIBIT 12.-Depletion, intangible development cost, and acerage setting price of crude petroleum,' 1951-94 Cross instituent firess (neest ment 1921 $6,550,000,000 1930 12,000,000,000 1922 7,677,000,000 1911 12,100,000,000 Intangible A VETURO 1923 8,000,000,000 1922 12,200,000.000 Yest Deplation develop- milline 1021 9,161,000,000 1953 12,300,000,000 ment cost I price 1925 9, 500,000,000 1934 12,700,000.000 1926 10,000,000,000 1955 13,270,000.000 1927 10,500,000,000 IVM 13,775,000,000 1981 $0.084 $0.007 80.643 jos. 11,001,000,000 1917 1932 14,525,000.000 LOBE 63 653 1929, 11,500,000,000 1004 1931 14,750,000.000 -073 .054 .07% 1934 ,074 , 000 .064 Surrer Temporary National Ecunomic Committee Heartage, pt. HA, p- 7700. I Avenue cost is based upon "company interest" oil, or approximately 14 of the total crude petrobium production, : As reported by producers nast of the Missimippi. For producers west of the Mississippi the reported mets were obserged to empisal and amortized. Emarge- B. e. Department of Interior, Potroleum Administrative Board, report on the Closs of Producting Crude Petroleum, Has. 2880 REVENUE HENTSION OF 1042 LEVENUE REVISION OF 1942 2881 Mr. PAUL Mr. Chairman, I have is letter I would like to road mto Still in a light rain, although seriously, this in the first time the com- the record, addressed to the Secretary of the Treasury by the Secretary mittee has had the information that $206,000,000 was involved. The of the Interior. The purpose of this letter in to state clearly the post- Secretary of the Treasury came down and gently hinted at $80,000,000, tion of the Interior Department with respect to this proposal of the and we proceeded on that theory. Trensury, The CHAIRMAN. You may proceed to read the letter. I just wonder if Mr. Paul has a new pencil OF some new figures, or has sharpened his pencil. Mr. PAUL (reading): Now, Mr. Chairman, I am going to be pretty tedious in this cross- examination, because in the long run we can save time by getting as United STATES DEPARTMENT OF THE INTERIOR, OFFICE OF Personanm COORDINATION FUB NATIONAL Donover many of these questions asked and answers returned 118 possible; that Washington, April 15, 1948 is, it will anve time in executive session, in my judgment. So I hope Ilon. Heary MONARNTHAU, Jr., the committee will not be impatient with me, in my awkward way of Receptary of the Treasury. presenting the questions I am going to ask. It will take considerable My DEAR Ms. SECRETARY II has been suggrested to me that certain portions time. of the testimony before the Waya and Menus Committee given by Mr. Robert E. Atten may possibly be interpreted as Implying that the Office of Petroleum I do not want to delay the committee. I assure you I am just as sick Coordinator for National Defonse is opposed to any modification of the present and tired of these hearings as any other member of the committee. 27% percent depletion allownnce as applied to the production of off and gas. But this is the first shot we have really had at this matter. While 1 believe Mr. Allen made II quite clear that my office has taken no post- Mr. KNUTSON. May I suggest that we have it go over until some tion with respect to this matter. I wish you to understand that this office has no other day, if that is the casel optaion to express either for or against 6 modification of the existing depletion allownnoo, Any change in the untional tax structure as applied to any particular Mr. REED. Mr. Chairman, I shall probably want to ask n series of industry must necessarily have some economic effect upon the operations of that questions myself on this matter, and I think we should have nn oppor- Industry Obviously, however, that effect in any particular lostance unit be tunity to study the statement that the Treasury has made, The Treas- weighed against the offect of other changes for other Industries. It Involves ury has been coming in here, in IL sort of merry-go-round fashion, pre- a balancing of the economic effects of the many different methods of raising revenue which are before you ne well (LE a judgment of the equities of the whole senting these things, as Mr. Disney has indicated, n. piece at a time. tox structure an between many classing of taxpayers. This is an important subject, and I think it would be well for us to Il to for theme reasons that my office profers not to reader more difficult have an opportunity to examine Mr. Paul's statement, n.s. presented your mak of weighing there freublimone questions of national theat policy by this morning, to formulate our questions in an orderly way. plactug Itself in the postion of efther advocating or not advocating one method of relaing necessary INTEDGOR AH a multitude of other methods which The CHAIRMAN, The Chair would like to inquire if it is agreeable may be pursued. For no to take other than D. pentral position would require a to have Mr. Paul come back, perhaps at the foot of the calendar this detailed analy of the many fax suggestions which your Department has with- afternoon. entited to the Ways and Means Committee Neither I nor my office has made Mr. DISNEY. Let me suggest that Mr. Paul, in the interést of saving each a study, his own time, be recalled tomorrow morning. Sincerely yours. (Rigned) HABOLD L. TOKER, Mr. REED. Mr. Chairman, if we were to recall Mr. Paul this after- Petrolegia Courdinition for National Defense. noon, we could not pay attention to the other witnesses on the calendar and study this oil question, too. Mr. DISNEY. Mr. Chairman, may I make this observation with no- The CHAIRMAN, Would it be agreeable to you to come back tomor- spect to Mr. Ickes' letter? Of course, Mr. Allen made it just AB plain row morning, Mr. Paul! na the lights shining here that he was simply here to give the com- Mr. PAUL Entirely. That may fit in better because I see that you mittes whatever facts it might inquire for; and it was never an at- have a number of people on the calendar today, Also, I have 11 short tempt to commit the Interior Department. So Mr. Ickes, letter sim- statement on the matter of tax-exempt securities which I intended to ply is another page in the hearing. Mr. Allen's testimony WHE never make to the committee, but in view of your arrangement for 11 o'clock asked for ns anything except factual, and he specifically made no this morning, perhaps 1 cannot do that at this time. recommendation one way or the other. Mr. DISNEY. I nsk unanimous consent Mr. Paul return in the morn- Mr. Chairman, this makes several bites that we have had at this ing at 10 o'clock and be the first witness for inquiries. cherry; this is the first time that the Treasury has really played all its The CHAIRMAN Without objection, the unanimous-consent request cards. I nsk unanimous consent that later in the hearing I have leave is agreed to. to file n. statement or to produce a witness on this subject. Mr. CROWTHER. Mr. Chairman, I do not want to be overeritical, but Mr. REED. I should like to join in That unamimous-consent request, it seems to me that we have FL different condition here than ever before. Mr. Chairman, I do not remember, during hearings of this kind, that the Treasury The CHAIRMAN. Without objection, the nhaninions-coment request made frequent entrances back into the hearings in what the lawyers of Mr. Disney and Mr. Reed will be agreed to call rebuttal. I do not remembere that. It may be I am wrong about Mr. DISKEY. Mr. Paul, I am glad to note the appearance here of that it. However, if that procedure is extended to many of the other sub- famous oil man, Mr. Tarleau, of the Treasury Department. ns your jects that we have under discussion, and other interested witnesses assistant. He has had a lot of experience on Manhattan Island in the were allowed to appear again, these hearings would be of interminable oil business and his testimony ought to be worth more than that of the length, and we never would get through. oil people. 2882 REVENUE REVISION OF REVENUE REVINION OF 1982 2883 I just call attention to that fact, that this is rather a new procedure. Mr. DISNEY. May I say that Mr. Robertson propounded is unanimous- extract this plan today, and 1 thought that you gentlemen would like consent request to bring Mr. Paul back. That is how that came about, to hear about it the way I heard about it. It was explained to the President and it WAS very pleasing to him. The CHAIRMAN. The Chair will observe that the Treasury is perhaps more vitally interested in this matter than any other department, and With your permission, before the General Motors people are pre- I am sure that in justice to the committee, all they want to do is to give sented, there are two representatives here of the employees whom I would like to introduce. The first in Mr. Nixon, of the United Eleo- what information they have for the benefit of the committee. Of trical Radio Workers. course, if we were to recall any other witness who might want to The CHAIRMAN. We shall be glad to hear Mr. Nison at this time. appear again, these hearings would drag out into an interminable length, 05 the gentleman from New York says. Mr. CROWTHER What I had in mind was without any intent to STATEMENT OF RUSS NIXON, WASHINGTON REPRESENTATIVE, criticize, but it seemed to me, in fairness, that some appointed repre- UNITED ELECTRICAL, RADIO, AND MACHINE WORKERS, sentative of the industry who has appeared ought to have an oppor- tunity, after studying this last statement of the Treasury, to ay The CHAIRMAN. You may proceed, Mr. Nixon. something about it. I had in mind Senator Gore, who made the Mr. NIXON. I am the Washington representative of the United opening statement on that subject, for the industry. I have no doubt Electrical, Radignand Machine Workers, a C, I. O. affiliated union. that he would like, after is study of this statement, to make another Wo represent some 400,000 workers in this industry engaged very statement to the committee. But I am afraid that if we adopted that largely in the production of war material. We represent the workers policy generally we would be establishing a precedent that would cause in the electrical divisions of the General Motorc Corporation num- a great deal of trouble for us and lengthen the hearings too much. But bering approximately 25,000 men and women, it does seem fair, after as exhaustive IL study ss has evidently been I am extremely happy to have the opportunity, on behalf of the made of this proposition, that somebody on the other side should have union I represent, to come here at this time jointly with management un opportunity to say something about it. to tell you just 15 word about the steps that have been taken in the The CHAIRMAN. The Chair feels that that point has been well taken development of a program, a joint management and labor program, care of in the unanimous-consent request made by Mr. Disney. for the increased purchase of bonds, for the purpose, of course, of in- Mr. CBOWTHER. I am perfectly satisfied to have Mr. Disney and creasing the sale, increasing the strength of our all-out war produc- Mr. Reed act as suggested. tion program, to defent the Fascist enemies of the American people. Mr. PAUL Mr. Chairman, may I say that the last thing I want to This program has been developed through the joint collaboration of do is to inflict myself on the committee, the unions and management. in the various General Motors Corpora- The CHAIRMAN The Chair will state with reference to this unusual tion plants. It is the result of consultation and discussion between procedure that has taken place, that on yesterday morning the Sec- the representatives of the men and the management. retary of the Treasury communicated with the chairman of this We are pleased to be able to come here on this matter with a complete committee, and said he would like to arrange for some representative unity, with a common objective of increasing the sale of these bonds. of the General Motors Corporation to appear here this morning: that On the part of the workers who are represented by my organization, the Secretary himself was interested in the statement that would be I am happy to be able to say that without reservation we pledge every made. Arrangements were made which the chairman hopes are agree- ounce of our energy to the successful carrying out of this program. able to the membership of the committee, that Secretary Morgenthau We are talking about it in our union meetings. We are putting but- would be here to introduce certain witnesses at 11 o'clock. letins on the bulletin boards of the companies throughout the land. Without objection, we will hear the Secretary at this time. We are writing about it in our union publications. We have com- mittees working on this problem. We are trying, wherever possible, STATEMENT OF HON. HENRY MORGENTHAU, JR., SECRETARY OF to have a joint cooperative effort with management to make the sale of these bonds n great success. THE TREASURY We are doing this, gentlemen, as I am sure you realize, in consistent action with a program that my organization and I believe labor 88 an Secretary MORGENTHAU, Mr. Chairman, Senator George, and gen- entirety has long followed, of giving its support and unreserved sup- tlemen of the Ways and Means Committee: port to every element of public policy and public action which will I appreciate-very much this opportunity to come here and explain culminate in an all-out war production to the defent of the Fascist to you A part of the Treasury program now being carried on with Axis. the help of management and labor, to bring to the attention of the I am happy to be able to be here and to express with Mr. Anderson, workers of this country OUP voluntary pay-roll-deduction plan. At of the General Motors Corporation, and the other representatives of present this plan has been adopted in some 54,000 plants in this that company, the complete unity in this great effort in which we are country, employing about two-thirds of all the workers in industry, engaged. or about 20,000,000 people out of a. total of 30,000,000. General Motors, The CHAIRMAN. We thank you. Will you call your next witness, in cooperation with the various members of employee unions, are to Mr. Secretary! 2884 SEVENUE REVESION OF 1045 REVENUE REVISION OF 1942 2885 Secretary MORGENTHAU. Mr. Chairman, we have two representatives here of the employees; the next one is Mr. Walter Reuther, who morate, and that labor morale will be reflucted in increased war pro- duction. representa some 200,000 employees of General Motors. The CHAIRMAN Mr. Reuther, please identify yourself for the bens- On the other hand, if you have a compulsory-savings plan, which checks off the money from the worker's pay envelope, you do not got fit of the record, this enthusiasm that comes out of a voluntary campaign, and you will STATEMENT OF WALTER REUTHER, DIRECTOR, GENERAL MOTORS not build the kind of morale that this kind of campaign will build, DIVISION, UNITED AUTOMOBILE WORKERS, C. 1. 0. when it is launched jointly by Government, management, and labor, We feel that we can get. more bonds purchased by our people; we Mr. REUTHER. Mr. Chairman and gentlemen, my name is Walter can build up a greater interest and understanding of what this war effort means, the sacrificas it takes, the sweat it takes to win it-we Reuther, director of the General Motors Division of the United Auto- can build up better morale and out of that will come a greater effort bile Workers Union, C. I. O. on the part of the individuals. I represent about 200,000 General Motors workers in some ninety- So we strongly arge-and I know I spenk for all of the 200,000 odd plants throughout the country. workers in General Motors, and the other thousands of workers in I want to say that we are in complete agreement with the plan that our industry-this voluntary method on the basis of these plans, is going to be submitted here today, and feel that it represents the which will be submitted to you, as the real way to mobilize the Amer- most effective way to mobilize the workers for full participation in the ican workers for full participation in the war, in terms of the war war effort for purchasing the greatest amount of Defense bonds, effort, in terms of production, in terms of buying greater amounts The United Automobile Workers Union, which has some 650,000 of Defense bonds. members in the automobile and aircraft industries, at its convention last I hope that your committee will go along with that suggestion, August, by unanimous vote of the convention, agreed to initiate a because it is the real democratic way; it is the basis on which We can movement in our industry to have these voluntary pay-roll check-offs mobilize our people. for the purchase of bonds, The CHAIRMAN. We all realize, I suppose, that it in not only nones- When the Japs attacked Pearl Harbor our union pledged to buy sary but expedient that a portion of the war program be financed by $50,000,000 worth of bonds, and yesterday the president of our union, the purchase of bonds. It could not reasonably be expected that it Mr. Thomas, announced that we had already purchased more than could all be financed through taxation, and that portion which cannot $50,000,000 of bonds and we have pledged to buy $50,000,000 more of be financed through taxation must of necessity be financed by the bonds, as we put it, to replace the battleship Arisona that was lost, sale of securities. because some of our boys were on that ship. You think, after studying the matter thoroughly, that the voluntary Five other C. I, 0. unions have subscribed and pledged to buy plan, at lenst nt this time, is much preferable, will work much better, 8111,000,000 worth of Defense bonds. One of our plants, having about would be necepted by the American people with a greater degree 8,000 workers, agreed to buy $1,000,000 worth of bonds, and in 9 weeks' of matisfaction, than a compulsory plant Is that your thought time the workers of that plant oversubscribed the $1,000,000. Mr. REUTURE. Our whole experience has been, if you go to the We think this is the most effective way of approaching the problem, workers and explain why this money is needed, through such cam- because it is the democratic way of mobilizing the workers on a volun- paigns as are being proposed here, you can raiso much more money lary basis. on that basis than you can on a compulsory basis. That is why we We have not gone along with the recommendation of the Treasury were able to oversubscribe $50 000.000 in a very short time, and we Department for 10 percent. We have recommended 20 percent, and we are now working on the second $50,000,000. If that had been done on are trying to get our people on a voluntary basis to subscribe 20 per- a compulsory basis, I do not think we could have gotten that much cent of their income for the purchase of Defense bonds. And in many money in that short IL time; plus the entliusiasm that we build up for plants we are meeting that mark. the war effort. I think that such plans as will be submitted by the General Motors Mr. COOPER. Mr. Chairman, I would like to inquire very briefly Corporation, which represent joint management, Government, and just for information. lubor campaigns, can fully mobilize the people in the shops; it can I am favorably impressed with the statement that you make here. make them realize that this is a war where everything that they, as I have no doubt you have given it a great deal of study and thought. citizens of a free, democratic country, have, is at stake, and I believe And I am favorably impressed with the results that you anticipate they will do more on a voluntary basis, they will buy more bonds than we will get from the organized workers of the country. I assume, of they will on a compulsory basis. course, if the plan is applied for the organized workers of the country, Álso, it will have its effect on production, because in these cam- it would have to be applied to everybody else in the country; is that paigns we 1180 posters, and in departmental meetings, in shift meetings, true? in plant meetings, We get up competition between groups of workers Mr. REUTHER. That is correct, the MATTIN principle. in the shop, which will all bring about a lot of enthusiasm for the Mr, COOPER. Could there be any difficulty anticipated in a situation whole war effort. That enthusiasm will develop a very fine labor of this kind? Let us take any small town, not having in mind organ- 2886 REVENUE REVISION OF 1942 REVENUE DEVISION OF 1943 2887 ind workers for the moment, but just ordinary citizens of the country, Mr. CHOWTHER Along this line, 1 am very much interested, as We Here is a man living in B. certain house, in any small town, who for all are, and impressed, with this statement of your combined effort, patriotic reasons buys all the bonds has can and makes IA real incrifice This may not be exactly in line with what we are discumming at the in buying them. Yet, you might find in the next block is man who present moment, but do you not. think that this question of hours, in much better situated financially, and is in a position to buy many that line been made so much of before the country, in one on which more bonds than the first man, but he does not follow the impulse of we should come to no agreement voluntarily, between the members of patriotism, as the first man did. He declines to buy any at all. the union, the Government and the employers! Do you not think that What do you think of B possible situation of that kind't could be arranged You are pretty well vorwed in this matter. You Mr. REUTHER. I um not qualified to speak for the general public, had B plan yourself here a year or more ago; perhaps if it had been but I know that the workers, if given the facts, if told what the war is adopted, it might have helped, all about, and what We have at stake, will respond on IL voluntary Mr. REUTHER. I do not think there is a necessary relationship be- basis. And I think the public at Inrge will respond in a similar man- tween the question of hours and the question of selling bonds. ner if they are made aware of what the facts are; if we earry the war Mr. CROWTHER, That is true. to them, and make them understand what their stake is in this war. Mr. REUTHER, I think I enn answer the question: nt least I can give I think in that event the people at large will respond voluntarily. you my viewpoint on it. Certainly, at the present time, in the plants Mr. COOPER. That is your thought on it. of General Motors-and I think Mr. Anderson, of the General Motors Mr. REUTHER. Yes. Corporation will be able to tell you-the workers B.D.C. prepared und Mr. TREADWAY. Would the witness kindly repeat the amounts that the company is prepared to operate those plants me many hours per he read off so hastily, that the different unions have already sub- day and as many days per week as necessary. The question of hours scribed? is not holding up one single job in the General Motors Corporation Mr. REUTIER. A fter Pearl Harbor, the United Automobile Workers, today. We have been able, through collective bargaining, around the C. I. O,, put this poster out, all over the union halls and throughout conference table, in a democratic manner, to work out all the problems the plants where we have contracts, on which we stated that we pledged relative to the operation of these plants 7 days IL week, 24 hours a day, to replace the battleship Arizona, which was sunk at Pearl Harbor. where necessary. And we pledged at that time-that is, our members-to buy $50,000,000 Mr. CDOWTHER. Thank you very much. I know there is a difference worth of bonds. We have already purchased $50,000,000 and we are between the two subjects, but I wondered if something could not be now working on another $50,000.000 for a battleship in the Atlantic, since this is a two-ocean war. We want to buy a battleship for each troublesome. done along that line on this question that has apparently been so ocean. Mr. DINGELL. If I may interject n. thought that undoubtedly has Mr. TREADWAY. How far has that progressed some bearing on what the committee will do: Obviously, we want to Mr. RECTHER We have just started on the second $50,000,000. As reach all of the workers and as many of the people as possible in this an illustration, I pointed out that in one plant, with 8,000 workers, Treasury recommendation, and I have set out to ask what is your when we made the pledge to raise $50,000,000, that plant of 8,000 idea of a voluntary plan described here ne having been initiated by workers suid that they would volunteer to subscribe $1,000,000, and it your members, if it is to be adjusted to attain the Government's objec- took them 9 weeks to do it, on n voluntary basix. five of keeping down inflation and winning the war, instead of B We have set our sights-and that has been set by the international compulsory plan, as more effective and desirable. How are you going executive board, the highest governing body in our union-at 20 per- to reach a certain number of people who are not organized, as Mr. cent instead of 10 percent, We are shooting at that 20 percent mark. Cooper touched upon and, perhaps, a certain number of slackers! In addition to what our union has done, the textile workers, the Undonbtedly, the country is going to insist that everybody buy bonds, retail clerks union, the C.I.O. shipbuilders union, and the aluminum Of course, you and your organization, I think, can handle that frac- workers of America, C. I. O.-those four unions, plus ours, jointly tional problem quite easily, by the competition among the men. I agreed to buy $111,000,000 worth of bonds, not including our second think you can shame them into buying in the few instances where they $50,000,000, which would make $161,000,000 altogether. That is on may be disposed not to participate, but what about the others? What n voluntary basis. is your suggestion to the committee about handling that situation? If we launch campaigns of the type being proposed here this morn- I mean what methods would you use on the slacker dollar? ing, that have the support and cooperation of the Government, labor, Secretary MORGENTHAU. Could I say something there? and management, working as a team, in a common effort, we think Mr. DINGELL Of course. that will generate tremendons enthusiasm, which will make it possible Secretary MORGENTHAU. Mr. Dingell, if it is agreeable, after you to buy even more than we have bought in the past. gentlemen have heard General Motors explain the plan, if there are Mr. TREADWAY. These pledges that you speak of would add up to any questions you would like to ask from the Treasury, along the $211,000,000; I think you said $161,000,000. line you are asking, I think it in our responsibility and we are here Mr. REUTHER. That in right; $211,000,000 in correct, ask. and Mr. Gamble is here to answer any questions along the line you Mr. TREADWAY. Thank you; that is all. 2888 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 280 Mr. Of course, Mr. Secretary, E am concerned about what tion against Inter: does that not memomarily see back to killing that is labor's view, that is the reason I am asking Mr. Reuther what he enthuslasm you are talking about? thinks of trying to get at the slucker dollar that is in the pocket of Mr. REUTNER. That is right, I think sooner or later the people who someone who may not be disposed to cooperate, Now, we won't have are interested in running the war will realize that labor's morale, in that difficulty with the U. A. W., C. 1. O., and probably won't have the final analysia, is the thing that determines production. it with the Textile Workers Union, and probably won't have it with Mr. BOLAND. After all, labor is going to win this wart the Clerks' Union, C. 1. O., but we may have a definite problem of that Mr. REUTHER. It is the man's attitude on the machine, and that is kind outside of that organization, particularly among the unorgan- morale, and, if any arbitrary action in directed against labor, it will ised workers, and how are we going to get at that? I would like to destroy that morale and, in destroying that morale, you destroy the have your reaction or idea about that. Do not you think we ought very thing out of which more production will flow. to apply gome coercive legal force to it? Mr. BOLAND. That is all; thank you Mr. REUTHER. I think it is unfortunate that we do not have all the Mr. REUTHER. I would like to say, Mr. Chairman, I would like to workers organized 80 that your union is a constructive force in all leave these with the committee, if you care to see them-some of the of these plants. It seems to me, however, if the organized workers, literature we have put out in this connection. working jointly through their unions and the managements of the The CHAIRMAN. Whom will you call next, Mr. Secretary companing, will set a fine example for the Government, then if the Secretary MORGENTHAU. Mr. Amderson, vice president of General management of corporations will follow through on the unorganized Motors in charge of personnel. plants, I think they will also do a pretty good job, Of course, with The CHAIRMAN, Mr. Anderson, please identify yourself for the the union in there pitching, we can do 16 better job, but I think the benefit of the record. Trensury Department, working with the respective plants, can do n. fairly good job on that basis, STATEMENT OF H. W. ANDERSON, VICE PRESIDENT, GENERAL Mr. DINGELL. I presume, of course, the A. F. of L. will follow the MOTORS CORPORATION example of the C. I. 0, Mr. REUTHER. I understand they are in agreement with the basic Mr. ANDRESON. H. W. Anderson, vice president, General Motors. principles I have stated here today. At the time the Defense bonds were offered for sale by the United Mr. DINGELL You think the unorganized worker might be left to States Government we immediately developed A plan for the systematic the Treasury to work out some sort of a plan with the management purchase of these bonds by pay-roll deductions. That plan was put and workers in the unorganized plants; but that still lonves the man into effect in August 1941. We reviewed the results of that plan at the who refuses to cooperate out of the picture: he is still not covered in end of the year, and the results were rather disappointing; 80 we our discussion between you and me, and I feel there should be no immediately said we would have to develop what we call & sales-promo- stacker, cannot be any slacker dollar in the country. tion campaign to bring enthusiasm into this particular organization Mr. REUTHER. I agree with that; but I think the way you mobilize for the war effort. democracy is by carrying this war to the people and make them under- This plan was developed in February. We could have introduced stand, and I think you can jar 99.9 percent loose, and I do not think it in March, but we did not want to introduce it on March 15, because one-tenth of 1 percent is going to be very important. we thought it would have too much of IL handicap at that date; so that Mr. DINGELL. I agree with you. we had the plan ready for April 16. Mr. BOLAND, I was very much impressed with your statement here, Mr. Jerpo here can put the plan on and explain it BM he goes along but there is one point I would like to bring out. What would be your and, if there are any questions before or after the plan is put on, 1 will opinion of the workers' enthusiasm if Congress started to pass arbi- be very happy to try to answer thom. trary labor legislation? The CHAIRMAN. The Chairman would like to say we appreciate very Mr. REUTHER. I think, to a very large extent, any arbitrary action much and thank each and all of you for coming here this morning and on the part of Congress which would make this plan compulsory would explaining the arrangement that has been worked out between the man- take the edge off the enthusiasm. I mean the point is in a plant where agement and the employees of your great industry. I feel it will have we have local union officers, have local unions bargaining committees a moet wholesome and reassuring effect, not only on those who have in the plants, have shop stewards in each department, each of those purchased bonds in the financing of this grent war program and inspir- fellows will be captains in this campaign who are going to be beating ing their patriotism, but at the same time it will reassure the tax- the drums and pepping the boys up, and there will be competition be- payers that there is full cooperation in the country, not only by the tween the departments, each one trying to see who can buy the most (expayers but by industry and its employees, and that there is complete bonds, and there will be competition between the shifts in the shops, and unity, This demonstrates to the country that all of us are going for- there will he competition between one plant and another plant. But ward with this great war program in which we are all so vitally inter- the minute you make it compulsory, it is an automatic proposition ested, and on which the the very life and liberty and sulvation of our and you lose the benefit of all that campaign. country depends. Mr. BOLAND. I appreciate all of what you say there, but am assum- I wish to congratulate you, and to congratulate the representatives ing for the minute that Congress would start to pass arbitrary legisla- of your employees, and labor, upon your splendid work, your patriotic 09003-12-pt. 20-2 2890 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 2891 efforta, and the success you have made in getting together. I think it will have a wonderful effect on the country. We have here [exhibiting], Mr. Chairman, a complete chart presen- Mr. ANDERSON. Thank you, Mr. Chairman. tation that we wish to present to you at this time and to incorporate Mr. DISNEY. I want to congratulate Secretary Morgenthau on being in the record. It covers the entire campaign plan. The first chart is: the spearhead for setting this in motion. It is primarily through him that it Was started. AN UNIENT APPEAL IN Our NATION'S FIGHT POR Line Mr. Anderson, how many employees has General Motors! Then a series of charts follow: Mr. ANDERSON. At the present time we have 220,479. Mr. DISNEY. How many of them make more than $2,300 per year? General Motors Corporation bas been called upon to play a vital part in today's Mr. ANDERSON. If you would like, I can give you some statistics here, national emergency. THE UNITED STATES Government HAS ASEED THAT Our RESOURCES, PLANTS, EQUIPMENT AND PRESONNEL be geared to the production of but maybe not just in that order. eseential war materials peeded to protect our homes and defeat odr Mr. DISNEY, Can you supply that in the record and not take the enemies time now! Mr. ANDERSON. Yes, sir; I can. We have necepted that production responsibility and TODAY AVE PRODUCING TUB Mr. DISNEY. And give me just an answer to that question-how ESSENTIALS OF WAR We are making the machines and fabricating inaterials for instruments of war in ever-increasing quantities. many make more than $2,300 per year. Mr. ANDERSON. Well, the average of the salaried group, which con- sista of 50,479, for the year 1941, was $2,631; the average for the hourly rated group for the year 1941 was $2,141. At the present current rate While everyone In the main understands the Importance of no all-out produe- tion effort in armament building, Very Few PROPLE REALTRE THE ADDRED FINANCIAL of employment, which is currently going at 45 hours per week, the RESPONSIBILITY they must now share To PREVENT Our DESTRUCTION AND RUIS. hourly rated group will average $2,580. (Mr. Anderson submitted the following table for the record:) TODAY. the cost of the Nation's Victory armament building program is reaching General Motors employment and pay rolla in United Biotes STAGGERING PROPORTIONS. From dawn un dawn-every 24 houre-our national war expenditures currently approximate $168,000,000. Think of (t) Almost $7,000,000 per hour-and the cost in stendily rining INI ent 1947 Employment: Right now- Hourly rated 180,570 221,700 1170,000 Balaried 43,005 50,700 00,470 America must have the help of every living person to finance the cost of war To INSURE ULTIMATE VICTORY, The importunce of this cannot be exaggerated or Total 204,181 272.478 20.470 over-emphasized! Hourty $0,058 11.009 11.15 Weekly Hourly rated $37.40 $42.73 $20.00 Now- Balaried $48.00 $50.00 $00.00 The General Motors Corporation and every member of the great General Motors Annual everage: Bourly ratid $1,804 $2,141 family BS patriotle eitizens have been culled upon to do their part by liberally Salaried $2,000 $2,631 $3,107 Investing In UNITED STATES WAR Borns. Il Excludes allowances la lieu of vacation and fir military service. , Estimate based on 44 hours of work a work for N weeks A year. Present average Is about 45 hours 6 Early In August 1041- week. . Regular employee including intermittent workers. General Motors Corporation became one of the first to fnangurate B plan Note-With them sernings employees should be shie to purchase too to tike worth of hunde anuelly whereby General Motors employees could purchase D. S. WAS Bonne Transpoit despite increase to will of living. PAY Rou DEDUCTIONS. The majority of our employees, however, did not take advantage of this opportunity-maloly through Incla of understanding and be- The CHAIRMAN. We thank you for your testimony, cause our Nation was not at war. Who is your next witness, Mr. Secretary| Secretary MORGENTHAU. Mr. Jerpe. Since then- The CHAIRMAN. Please identify yourself for the benefit of the record. Events have changed! Our shores have been attacked. Our Island possessione invaded, STATEMENT OF JOHN M. JERPE, DIRECTOR OF GENERAL MOTORS Our citizens killed. BOND DRIVE FOR VICTORY ACTIVITIES Our future threatened. America has changed from A NATION AT PEACE TO A NATION AT WAR Mr. JERPE, My name is John M. Jerpe; I am director of the Gen- May I call your attention, gentlemen, to a little thing above the ban- eral Motors Bond Drive for Victory activities. ner at the center, that we have in very prominent spots throughout the corporation, reminding our people that we are at war and that we are not in "Business as Usual." The next is- THE STRUATION In VERY GRAVE 2892 REVENUE REVISION or 1042 REVENUE REVISION OF 1942 2893 There is No TIME for Complacency THE Zipo Hour-APRIL 16. General Motors Employees start a New Daive you No TIME for Belfishnes! No TIME for Hiding Facts Therefore, to arouse the curioulty and maximum Interest of the General Motors' Uncle Sam la in a fight for Life and Freedom. employees in the War Bond Program, A TRANKS CAMPAIGN will be conducted be- ALL Inte DOLLARS Most Go To WORK. tween April 8th and April 15th. The following activities and materials have been developed to help you attain your objectives, When I any "you," gentlemen, we have appointed 90 campaign man- -60 TODAY It becomen the responsibility of General Motors Corporation through Its map- agers in 90 of our plants throughout the country. We have given agerial and supervisory staffs to see to it that all employer thoroughly understand these campaign managers this plan: We have told these men we are the purposes and benefits of the Was BOND PROBAM and that they are given the interested in 100 percent results; that we want them to use the plan opportunity to participate to the fullest extent ne a track to run on and to supplement the plan with any other things they want to use; to come to us at the end of this month with B true report of 100 percent employee participation. To properly discharge this respons/bility General Motors will insugurate and BULLETIN BOARD Postrom conduct A HOND Durve For VICTORY designed to reach every employee-st work and at home! The majority of General Motors employes pass the time clock several times a day. On the morning of April 8th, this mystery poster will appear near time clocke-on bulletin boards and other places where General Molore employee THE PURPOSE OF THE CAMPAIGN will be to ESCOURAGE EVERY GENERAL Morons will see It. EMPLOYEE to invest In WAR Bonne EVERY PAT DAY. THE Zeno Hotra GENERAL Morors EMPLOYES' Victosy-Avil 10rm and, thereby gain the objective of 100 PERCENT EMPLOYEE PARTICIPATIONS, The insignia now is just two S's. We have not come out, did not come out on April 15 with anything more than teaser copy, and that is to arouse employee interest all over the United States. Then we had This objective will be accomplished In two ways: a campaign book with B very good lot of interpretations. One is 1. THROUGH REGULAR PAT HOLL SAVINGS. "Sacrifice," another "Small Donations for Victory," and a number of others. No one knows, in General Motors, except we who built this The necessary procedure for employee Investment in War Bonds through pay. roll savings la already established. plan, what S. S. V. means, but today at noon, throughout the land, we are having meetings of our employees wherever possible to have those 2. OUTHOUT PURCHASES THROUGH THE CORPORATION. meetings-rallies, if you please-where S. S. V. is being explained na This procedure Is not Intended to supplant the systematic pay-roll anving "To Save and Serve for Victory." method-but rather to supplement the pay-roll savings plan. Thus, General The next is- Motors will accommodate those employees who can and will make outright pur- chases of war bonds through the company from Idle accrued suvings. TEASE STENCH To further arouse eurlosity and Interest In the campaign, this design will be The CAMPAIGN EMILEX that will be In effect for the "Duration" will be- provided for stenciling on floors, sidewalks and walls In and around the plant. GM-HAVE-SKEVE The Insignia contains the letter "V" for Victory, and the words "Save" nod B. B. V.-Aran 16 "Serve", which dramstime our light for life In the present emergency We even furnish the paint, brushes, and stencils to be sure the job is done, and done very beatuifully. To make this eampaign effective and to obtain destred results, It will be broken Please notice, during the preannouncement period, April 8 to April Into three phases. 15, this teaser notice will be attached to the pay check or time card of 1. PRE-ANNUUSCEMENT. all employees: The period to arouse curlosity and atimulate employee Interest. Zano HOUR-APELL 16ra. General Motors Employee start new Victory Drive. 2. ANNOUNCEMENT. The period when all employees will be contacted and adven an opportunity to subscribe for the bonds. DIRECT BY MAIL a. Poer ANNOUNCEMENT. The period Involving Individual employee follow-up and checking for results. To Intrigue the Interest of every General Motors worker and bis entire family this direct-by-mail card, embodying tenser copy, will be mailed to all employes at their home addresses. PRE-ARMOUNCEMENT. The teaser copy is what we call that, and all it asys on that is "Zero Past enmpaigns prove that REMPONEE was greatest where INTERENT was built Hour-April 16th. Employees save and serve," BO 68 to build up up prior to the formal announcement. interest in the thing, before we announce the campaign. By the way, 2804 REVENUE REVISION OF 1042 REVENUE REVISION OF 1942 2895 we mailed out approximately 250,000 of those cards to employees' us. to addition to that, We have A button he puts OR that says "I am homes, Drive. buying bonds in General Motors Save and Serve for Victory Bond The next It PLANT PUBLICATIONS Now I think I should explain to you gentlemen how the cards will Articles of a teaser nature regarding the campeign will be carried lo all plant be handled. Within 3 days, or on April 19th, we want all cards, papers during the presunouncement period. returned. Then those cards will be sorted and those who agree to par- ticipate, their names go to our comptroller's office and pay-roll deduc- The next poster is- tions start. Those who do not agree to participate must certainly will Hrip INSUEE THE ULTIMATE Success of the Bowe DRIVE for VICTORY and The right kind of organization and execution of preannouncement activities have good, definite reasons for doing that, We will try to encourage camble you to launch your Bord BALES DRIVE with an outstanding announcement, them to do 6 little bit more than what they fail to do in the origin of the campaign. We also have B. plant letter that goes to every employee Then the- from his plant manager, which reads: ANNOUNCEMENT GENERAL MOTORA CORPORATION, It la highly important that the campaign annodncement be made with all the Detroit, Mich., April 16, 1949. force and drive that can be mustered The announcement most be inspirational 4" Important Message to All General Motors Employer: and stirring. It should reach the majority of General Motors employees 011- Today you saw the announcement of the GENERAL Morons EMPLOYES Board Daive FOR VICTORY. Its purpose la expressed in the theme, "Save and Serve for Victory." ANNOUNCEMENT DAY-APRIL IOTM This drive deserves your support. We are enguged in a strennous was that demands every last ounce of energy, every ability and every resource available The following materials and auggested activities are provided to help you make before victory can be won your announcement most successful. Beside working hard at our jobs, you and I can help in another way, We can We have a 40 by 60 announcement rally poster posted in all of our help by raising funde to pay for planes, tanks, guns, ships, ammunition, and other war equipment produced in such large quantities that no enemy can compete plants at 7 o'clock this morning so that when the men came to work with tas they saw they had to buck up to win the United States war program. Our subscription to a bond enables the United States Government to curry on these war production activities. It Ilkewise sets aside cash for our own on venlence In the future. ANNOUNCEMENT RALLIES Save through honds. Every bond to redeemable in cash with Interest. This Announcement railles should be held at all plants and division locations on means a useful personal savings fund on hand when the war is over-a profection April 16th. At plant locations where more than one shift le involved, the for you and the welfore of your family. announcement should be repeated for each shift Serve with bonds. They provide the material for our fighting forces to defent In any event It should be made at a time when Lt will not Interfate with (be enemy. They produce the military power that will protect our lives and liberty. production All the Information on how to obtain bonda is given in the attached booklet. Rend It carefully. Announcement rallies should be planned with care and consist of- We urge you to support our country and our fighting men by subscribing for bonds to the limit. The amount you lend goes to protect yourself and your 1. Martial muste. family and preserve liberty. 2. Campaign spenker. The program should be of less than 30 minutes dutation, and It la highly Im- Save and Serve for Victory Cordially yours, portant that the epenker have the ability to make a stirring, Inspirational address. C. E WILSON, Prosident We wrote the speech for all of our campaign managers. We have not asked them to memorize the speech, but we have asked them to B. Department hends and foremen should inform employees that- take the substance therein and use that as a guide to get the job done. The application card Muar Bg RETURNED regardless of whether the employee The next poster is the meat of our entire campaign- subscriber to the Drive, Increases his participation In If or does nothing about It. & return envelope is provided for this purpose. APPLICATION CARD A. In order to facilitate employees' participation in the Bond Drive for Victory through authorized pay-roll savings, department heads and foremen will die- Each new employee should be given a telbute is specially addressed, sealed envelope containing- PAY-BOLL SAVINGS APPLICATION CARD And the container envelope itself has the name of the employee printed on the outside and contains an application card for participa- when he la signed up and an effort made to secure bis participation to the plan tion in the Bond Drive for Victory in this form [indicating], and on at that time, If he does not enroll in the plan, he should be followed up each the bottom of it we say: 30 days thereafter. By sure that all Invest and save and serve for Victory. Bulletin-board posters took the place of the teaser card this morn- The employee's name is also on this card. In addition to the appli- ing, and at 7 o'clock this morning we changed from the teaser card to an announcement poster, cation card and container envelope, we have a booklet here that de- scribes the Government's bond sale plan. We also have an envelope that the employee can put his application card in and send that back to 2896 REVENUE REVISION OF 1042 REVENUE REVIDION OF 1943 2897 BULLETIN-BOASD Postman thermometer higher than No. 8 or No, 2, right there they will do 8. On April 10th, immediately following the Announcement Rally, the Leaser better job than if we asked them to do it, because they do not want posters on time clocks, bulletin boards and other places where General Motors to see anybody get 100 percent before they do, because that is the employees congregate, will be replaced with this attention-arresting announcement American way. poster. Then we have a big board that we use to handle the management. The big board is placed in the lobby where the management or other ILLUMINATED SION people can 888 it, and that shown just what that particular plant is doing. Remember, we have 93 plants, so we had to get 93 boards, and To serve 68 a constant reminder at the drive, this animated und Illuminated sign will be placed near time clocks and at other points where It may be seen they show what each plant is doing in the drive, and we are insisting, by large groups of employees. It will remain in use throughout the entire drive, in a kind way, on having everybody hit that ball on April 30th, when And here is the kind of sign we have [indicating]. We have 1,000 the drive ends. But that, of course, is not the end of the activity; that of them, and we have them over every time clock and everywhere our is merely a splash of enthusiasm that we are putting in the program, and we will follow through every month to Bee that this activity is 100 people come. It reads: percent every month until the war is over. General Motors Employees' Boud Drive for Victory. Then we have display banners [exhibiting]- A Bond Pays Off-in Victory-in Liberty-in Cash. DIRECTOR The next is- To atimulate further Interest la the campaign, entrance, lobby, and window WINDWILD Bricks displays should be used during the announcement period wherever possible. This ettcker on car windshields is another means for publicizing the drive, A larger size sticker for home windows la also supplied. This sticker in your home window indicates you are a participant PLANT PUBLICATIONS in the drive. Current Issues of all plant papers will publish reports on the progress and results The second mail piece is a piece of the teaser card mailed between of General Motors Employees' April 8 to April 15. This piece goes to every one of our employees at home today- Bown DRIVE POS VICTORY. DIRECT BY MAIL TO EMPLOYEE'S HOME This attractive direct-by-mail folder containing complete information regard- NEWSEAPER PUBLICITY ing the Bond Drive for Victory will be malled to the home address of all General Motors employees on Announcement Day. Appropriate newspaper publicity etorles will be supplied. These should be released following the Announcement, accompanied by photographs of Bond Drive activities at plant locations. The photographs are to be taken locally. He la Dorno His BEST We have IL picture of a soldier over anywhere where fighting is going on and we say to our people, "You can help him. Let your If Announcement netivities are properly handled, every employee will thoroughly dollar fight. Save and Serve for Victory," with the balance of the understand the entire plan and be Impressed with the Importance of each individ- unl's participation. material therein. The next step is- Post ANNOUNCEMENT QUOTA BOARDS While the Announcement of the enropaign is important. we cannot hope Quota boards will be displayed on Announcement Day showing the established to attain our objective during the brief Announcement period. It Is essential objectives for all divisions, plants, and departments. In cases where plants therefore that a well-organised, sustained Post-Announcement activity be operate on shifts, additional boards will be supplied to record the percentage of carried on. participation among the employees of each shift. To reach the ultimate goal of 100 percent EMPLOYEE PARTICIPATION to the A master quota board will be displayed in the General Motors building show- BOND Durs FOR VICTORY the following Post-Announeement Activities are pre- Ing the quotas established for all General Motors divisions. mented- Behind you, gentlemen, we have two small quota boards that we call "Departmental Boards." In our plants, we operate plants, de- MINUTE Mey HAILT partments, and shifts. Sometimes we have two shifts, sometimes three, BO We put a shift and B. department quota board in line, end To maintain morale and keep interest at G high pitch. Minute Men Ballies then we post them at the same time, 80 if No. 1 shift gets red on the should be conducted In all planta and divisions. Programs conducted at theme rallies should be short, carefully planned, and Include reports on progress made to date. 2898 REVENUE REVISION OF 1942 REVENUE REVISION OF 1982 We have changed this from a monthly basis to weekly and that [indicating] will be posted all over our plants, THROUGH ENTRUNIARTIO AND UNIFED EFFORT Here is an idea of the type of posters we are going to use: Every individual employee la General Motors will gain full knowledge of the Bonns BOY BULLETS urgency, the purposes, the excellence of U. 8. War Bonds Be an Investment and- YOUR BONOS BUT Bouse THE RECEIVE (if THE 8, 8. V. CAMPAIGN WILL pm - BUY A Born TODAY AND General Motors and General Motors' employees will SAVE and SERVE for Victory. You Term SAKES [A poster containing B picture of children in bed] Buy BONDS (The following charts were displayed by Mr. Jerpe:) SLAP THAT JAP. EVERYONE BUYING Bowds THEY Fist WHEN You BUY Bonos. Fus VICTORY Tomornow, BUY A. BOND TODAY TODAY PUBLICITY The cost of the nation's Following the Announcement n. continuous flow of publicity will be directed to employees through- NEWSPAPERS, PLANT PAPERS, G. M. FOLKS, AND SALES News VictoryArmament Building Program is reaching QUOTA ATTAINMENT AWARDS STAGGERING PROPORTIONS To recognition of individual, plant or departmental participation, these special awards will be made, I am just human and I know, if Anyone gives me IL card with my name on it, that it at least has appreciation contained therein. I keep From Dawn til Dawn it, and I think we are all about the same way. So here [exhibiting] Mr. Wilson, who is president of General Motors Corporation, is giving every 24 Hours this card, pocketbook size, to all employees who participate. It is merely IL recognition thing: OUR NATIONAL JACK JERPE, WAR EXPENDITURES Central Office, General Motors. CURRENTLY As a fellow employee, 1 congratulate you on your participation in the General Motore Employees' Bond Drive for Victory. C.E. WILSON. President. Every employee geta that. Approximate DEPARTMENTAL AWARD ONE HUNDRED SIXTY-SIX Each department securing 100 perdent participation will be given this special General Motors Award. MILLION DOLLARS 100 percent General Motors Employees Bown Darve FOB VICTORY. We sales promotion men are always guilty of extravagance. I or- dered 2,000 General Motors award banners. Then we questioned the field on what they thought we needed, and I had to up that order to Think ofit!ALMOST 4,500 General Motors award banners. I may say now that the drivé is just starting and we have quite a few departments in the corporation that are already 100 percent subscribed. Last, and very important, is our-t- $7,000,000 PER HOUR PLANT AWARDS Each plant attaining 90 percent EMPLOYEE PARTICIPATION 08 Mone will receive this special flug from the United States Treasury Department. and the cost is steadily rising! Then there is a picture of the flag they will obtain. 2900 REVENUE REVISION OF 1942 REVENUE REVISION or 1989 2901 NOW RIGHT NOW The General Motors America must have the L Corporation and every help of every living person GM member of the great to finance the cost of war DIESEL POWER General Motors family To/Insure CHEVROLET as patriotic citizens have been called upon ages ULTIMATE FIESER to do their part by liberally investing in VICTORY Allison ATES DELCO VMV Nar * * * * * * The Importance Of This A UNITED SERVICE ICMSS BONDS Cannot Be Exaggerated NOTORS Or Over-emphasized ! 39 * * * * * * * * * * * * GENERAL MOTORS 2902 REVENUE REVISION OF 1042 ARVANUE REVISION OR 1949 2908 Early in August, 1941 Since then General Motors Corporation EVENTS HAVE CHANGED! became one of the first to inaug- our shores have been attacked. urate a plan whereby employes our island possessions invaded. our citizens killed. could purchase our future threatened. U.S. Ware BONDS THROUGH PAYROLL DEDUCTIONS s The majority of our employes however, did not take advantage of this opportunity *mainly through lack of understanding and because DEPART our nation was not at war. America has changed from A NATION AT PEACE TO A NATION AT WAR! 2904 REVENUE REVISION or 1942 REVENUE REVISION OF 1942 2905 There is THE NO TIME SITUATION for Complacency! NO TIME for Selfishness! NO TIME IS for Hiding Facts! VERY Uncle Sam is in a fight for Life and Freedom. GRAVE ALL IDLE DOLLARS MUST GO TO WORK! 60688-42-pt. 30-4 2906 REVENUE REVISION -02-1942 REVENUE 2002 so TODAY To properly discharge it becomes the this responsibility Responsibility GENERAL MOTORS General Motors Corporation will Inaugurate and Conduct through its Managerial and Supervisory Staffs to see to it that all employes A BOND thoroughly understand the purposes and benefits of the DRIVE * Warse * BOND PROGRAM and that they are given the VICTORY Designed to reach every opportunity to participate to the fullest extent. employe at work and at home! 2908 REVENUE REVISION OF 1049 REVENUE REVISION OF 1949 2909 THE PURPOSE and, thereby gain OF THE CAMPAIGN will be to the objective of ENCOURAGE 100% no EVERY GENERAL MOTORS EMPLOYE EMPLOYE to Invest in Warse BONDS PARTICIPATION Every Pay Day * 2910 REVENUE REVISION OF 1948 REVENUE PRIVISION OFFICE 2992 THIS OBJECTIVE WILL BE ACCOMPLISHED IN TWO WAYS: The hrra 1 THROUGH REGULAR CAMPAIGN Hw PAYROLL SAVINGS EMBLEM The necessary procedure for that will be in effect for employee investment in Defense Bonds through payroll savings the'Duration will be is already established. 2 OUTRIGHT PURCHASES GM THROUGH t CORPORATION SA E This procedure is not intended to SER supplant the systematic payroll E saving method but rather to supplement the payroll savings plan. Thus, General Motors will accommodate The insignia contains the letter "V" those employes who can and will for Victory and the words Save make outright purchases of Was Serve which dramatize our Fight Bonds through the Company from idle accrued savings. for Life in the present emergency. 2912 REVENUE REVISION or 1948 REVENUE REVISION 07 1949 2913: ..To make this campaign effective and to obtain desired results, it PRE-ANNOUNCEMENT will be broken into three phases TO: O PRE-ANNOUNCEMENT Past campaigns prove that-- The period to arouse curiosity and stimulate employe interest. RESPONSE 2 ANNOUNCEMENT was Greatest The period when all employes where will be contacted and given an opportunity to subscribe INTEREST for the Bonds. 3 POST-ANNOUNCEMENT was Built up The period involving individual prior to the employe follow-up and checking formal Announcement. for results. 2914 REVENUE REVISION OF:1942 REVENUE REVISION OF 1049 2915' BULLETIN BOARD POSTERS ZERO HOUR NEW DRIVE The majority of General Motors employes FOR VICTORY ! pass the time clock several times a day. ? 2 On the morning of April 8th, this mystery poster will appear near time clocks on bulletin boards and other places where General Motors employes will see it. smolt NO Data ZERO THE HOUR ? Therefore GENERAL MOTORS EMPLOYES to arouse the curiosity and maximum interest of the General Motors employes VICTORY in the WarBond Program. A TEASER CAMPAIGN APR will be conducted between 16th APRIL 8THand APRIL 15TH The following activities and materials have been developed to help you attain your objectives: - n° FE M N M N 2916 REVENUE REVISION OF 1042 REVENUE REVISION OF 1949 2917 TEASER STENCIL TEASER NOTICE To further arouse curiosity and During the Pre-Announcement interest in the campaign this design will be provided for period. April 8th to April 15th. stenciling on floors, sidewalks this teaser notice will be and walls in and around the plant. attached to the pay check or time card of all employes. ZERO HOUR NEW DRIVE FORVICTORY S.S.V APRIL 16 N N - 2918 BEVENUR REVISION OF 1982 HEVENUE REVISION OF 1942 2919 DIRECT-BY-MAIL PLANT PUBLICATIONS To intrigue the interest of every General Motors worker and his Articles of a teaser nature regard- entire family this Direct-by-Mail ing the campaign will be carried card, embodying teaser copy,will in all plant papers during the be mailed to all employes at their Pre-Announcement period. home addresses. %Olbsmobile Cannoncer BE Blogas Stress Rew Determinativa Velco Boings I 1 a 1 ET L THE NEWS BRAKER Ten - MIP the The , A I H , 1. 4 If / 11 I & dl 4P / 1 a OI - : 9 a o 2920 REVENUE REVISION or 1942 ESVENUE REVISION OF 1942 2921: -The right kind of organi- zation and execution of ANNOUNCEMENT pre-announcement activities will HelpInsure It is highly important that the Campaign announcement be made with all the force THE and drive that can be mus- ULTIMATE SUCCESS tered. The announcement must be inspirational and of the stirring. It should reach the BOND DRIVE majority of General Motors employes on forVictory ANNOUNCEMENT DAY APRIL 16TH and enable you to launch The following materials and suggested activities are provided to help you your Bond Sales Drive with make your announcement most successful an outstanding announcement 69003-42-pt. 30-0 2922: REVENUE REVISION OF 1949 URVENUS REVISION 07:1942 2923 Announcement Rallies ANNOUNCEMENT should be planned with care RALLIES and consist of 1 MARTIAL MUSIC *Announcement rallies 2-CAMPAIGN SPEAKER should be held at all plants The program should be of less than thirty and division locations on minutes duration, and it is highly important that the speaker have the ability to make April 16th At plant a stirring, inspirational address locations where more than one shift is involved, the GM announcement should be Multie repeated for each shift. BOND DRIVE In any event it should be made at a time when it will not interfere with production = I 2924 REVENUE REVISION or 1943 SEVENUE REVISION OF 3042 2925 APPLICATION CARD B Department heads and A In order to facilitate employes participation foremen should inform in the Bond Drive for Victory through authorized payroll savings, department heads and foremen employes that will distribute a specially addressed, sealed envelope containing: The Application Card BOOKLET GINERAL Menas MUST BE RETURNED BOND DRIVE FOR N UNITED USE FOR regardless of whether VICTORY GM the employe subscribes LETTER - to the Drive, increases RETURN DIVISION LETTERREAD ENVELOPE his participation in it or does nothing about it. » A return envelope is provided for this purpose. APPLICATION CARD - N AP M N c a " T CAMPAICH 2926 REVENUE REVISION OF TOUS REVENUE REVISION OF 1943 2927 Each new employe should be BULLETIN BOARD POSTERS given a On April 16th, immediately following the PAYROLL Announcement Rally, the teaser posters on time clocks, bulletin boards and other places where General Motors employes SAVINGS congregate, will be replaced with this attention-arresting announcement poster. APPLICATION GM CARD SA when he is signed up SER and an effort made to secure GENERAL Morons his participation in the plan at Employes that time * * If he does not DRIV enroll in the plan. he should TOR be thereafter followed-up each thirty days * * * PRIL 16th * n N e II n. I I M " CAMPAIGN 2028 REVENUE REVISION OF 1942 REVENUE REVISION 07/1042 2020. ILLUMINATED sign WINDSHIELD STICKER To serve as a constant re- This sticker on car windshields minder of the drive, this animated and illuminated sign will be is another means for publicizing placed near time clocks and the drive. at other points where it may A larger size sticker for be seen by large groups of home windows is also supplied. employes It will remain in use throughout the entire drive. BOND 1 DRIVE 0 VICTORY BERIRAL MOTORS BOND DRIVE GM for VICTORY A Bond Pays Off in Victory in Liberty in Cash 2030: REVENUE REVISION OF 19421 REVENUE REVISION - 2931 DIRECT-BY-MAIL QUOTA BOARDS TO EMPLOYE'S HOME Quota boards will be displayed on Announcement Day showing the established objectives for all divisions, plants and departments. In cases where plants operate on shifts, This attractive direct-by-mail folder additional boards will be supplied to record the percentage containing complete information of participation among the employes of each shift. regarding the Bond Drive for Victory will be mailed to the home address of A master Quota board will be displayed in the General all General Motors employes on Motors Building showing the Quotas established for all General Motors Divisions. Announcement Day. COME ON. (GO: JOIN THE GENERAL MOTORS EMPLOYES BOND DRIVE FOR VICTORY A = N o is 2 € Il 1 N - A L = 2932 REVENUE REVISION OF 1048 REVENUE REVISION OF 1049 2983 MAINAS NOTORS EMPLOYEE BOND DRIVE BOND for VICTORY APRIL VICTORY DRIVE 16 to PLANT PUBLICATIONS APRIL ID BOND DRIVE Current issues of all plant VICTORY papers will publish reports APRIL 16 on the progress and results of General Motors Employes' DISPLAYS "BOND ** To stimulate further DRIVE interest in the campaign- entrance, lobby and window displays should be used VICTORY" during the announcement period wherever possible. I = = - = AMNOUNCEMINT N CAMPAICH 2934 REVENUE REVENUE REVISION OF 1942 12985 NEWSPAPER PUBLICITY If Announcement activities Appropriate newspaper publicity stories will be supplied. These are properly handled.every should be released following the Announcement, accompanied employe will thoroughly by photographs of Bond Drive understand the entire activities at plant locations plan and be impressed with The photographs are to be taken locally. G.M. OPENS BOND DRIVE? the importance of each individual's participation. * DAILY NEWS A N o u DE e M T # T CAMPAICN 17. M H <, CAMBRICH 02936 REVENUE REVISION OF 1942 SERVICE REVISION 07:1042 2987 POST- GENERAL ANNOUNCEMENT BOND DRIVE 518 While the Announcement of the campaign is important we cannot hope to attain our objective during the brief Announcement period. It is essential therefore that a well-organized. sustained MINUTE MEN RALLY Post-Announcement activity be carried on To maintain morale and keep interest To reach the ultimate goal of at a high pitch, Minute Men Rallies should be conducted in all plants 100%-EMPLOYE PARTICIPATION and divisions * * * * in the BOND DRIVE FOR VICTORY Programs conducted at these rallies should be short, carefully planned, and the following Post-Announcement include reports on progress made to date. Activities are presented N COCOS 12 pt. 30 0 2938 REVENUE REVISION OFSIGN2 REVENUE REVISION OF 3042 2939 MONTHLY POSTERS PUBLICITY Following the Announcement posters, Following the Announcement, NEW POSTERS a continuous flow of publicity will be furnished monthly. will be directed to employes. through * NEWSPAPERS JUNE APRIL JULY PLANT PAPERS BONDS my DONE Note: BUY G.M. FOLKS and BULLETS SALES NEWS BUY BONUS SM EMPLOYES DRIVE ALL OUT THE SALEY IDEAL SEAL IN BOND ONT LEADE BOND DRIVE ₹ SOME pay BONDS AMERICA _ MUT - un MAY AUGUST Everyones / BOND - N ANBOUNTIMINT CAMPAICN 2940 REVENUE REVISION OF 1942 BEVENUE REVISION OF 1942 2941: QUOTA DEPARTMENTAL ATTAINMENT AWARD AWARD$ Each department securing 100% participation will be given this special General In Recognition Motors Award. * * * of individual, plant or * * * 100% * * departmental participation, * GeneralMotors Employes * these special awards will * BOND DRIVE be made: * * , , * FOR VICTORY * * * * * * POST ANNOUNCEMENT CAMPAISN N of EAMPAION 2042. REVENUE REVISION 07/19421 REVENUE REVISION 07:1942 2943: PLANT AWARDS THROUGH ENTHUSIASTIC AND UNIFIED EFFORT Each plant attaining Every individual employe 90% in General Motors will EMPLOYE PARTICIPATION gain full knowledge of OR MORE the urgency"the purposes" will receive this special flag from the the excellence of U.S. War United States Treasury Department. Bonds as an investment-and THE SUCCESS OF THE S.S.V. CAMPAIGN ASSURED WILL BE POIT A N N u u N < E M 1 N CAMPAION 2944 REVENUE REVISION OF 1942 HEVENUE REVISION OF 1942 2945 - and General Motors and AN General Motors' employes will Urgent APPEAL SAVE AND * in serve * OUR NATION'S VICTORY FOR * * FIGHT * FOR LIFE * * * : 2946 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 294 GM GENERAL MOTORS General Motors Corporation has been called upon to play a vital part in today's national emergency. THE UNITED STATES GOVERNMENT We have accepted that has asked that our production responsibility * RESOURCES and TODAY * PLANTS ARE PRODUCING THE EQUIPMENT » and ESSENTIALS of WAR * PERSONNEL We are making the machines and fabricating materials for be geared to the production of essential instruments of war in ever war materials needed to protect our increasing quantities homes and defeat our enemies 2948 REVENUE REVISION OF 1949 REVENUE REVISION OF 1942 2949 Mr. Jun. I thank you, gentlemen. Mr. BOARRTSON. Mr. Jerpe, do you have B. dealer in each city and county in the United States Mr. June Yes; we do have, air. Mr. ROBERTSON. The Secretary of the Treasury has a voluntary com- While everyone in the main mittee for the sale of bonds in each country and city. Would it be practicable for you to send a. set of those wonderful charts to each one understands the importance of your dealers, to be used in each county and city to give them an idea of how you are putting this campaign onl of an "all-out" production effort Mr. JERPE We have already agreed, Mr. Robertson, to provide the Secretary and his Department with 1,000 of these charts, done in desk easel form, 14 by 11, that Mr. Gamble will take out in the field to his in armament building regional people. And if Mr. Gamble wants any more help, we will very gladly supply him with all the printed material he asks for through the corporation or through my organization. Mr. THEADWAY. I want to say if there is anything lacking in the VERY FEW PEOPLE campaign of General Motors, for one individual here, I fail to see it. I think you have covered the case wonderfully. Mr. Jeare Thank you, sir. Realize the Mr. TREADWAY. I want to ask you just one question: The repre- sentative of the C. I. 0. made a very definite statement as to what members of the C. L O. intend to do and have done, and I wanted to ask whether or not there is any likelihood of duplication between your efforts and their efforts among your employees? ADDED FINANCIAL Mr. JERPE I am not qualified to answer that, sir. I think Mr. An- derson might answer that for you. Mr. ANDERSON. I think there will be some duplication of effort. However, I do think their effort will be joined with our effort, and RESPONSIBILITY the employees in our plant will join in the purchase of bonds. Mr. HEALEY. It is very likely that during the progress of this cam- paign you will coordinate your efforts with the efforts of the repre- sentatives of the employees! Mr. ANDERSON. That is right. they must now share Mr. HEALTH. And undoubtedly some means will be found for coor- dinating the efforts of all the people in this particular plan. Mr. ANDERSON. It is not a General Motors plan; it is a General Motors employee plan. TO PREVENT OUR Mr. HEALEY. I want to congratulate you on this splendid advertising campaign connected with this drive. I am sorry every Member of Congress could not have been here this morning to have heard all you DESTRUCTION gentlemen. Mr. REED. I just want to say to you gentlemen that I think you made a marvelous presentation. AND RUIN I wish to make this further comment, that if the employees of Gen- eral Motors do as magnificent a job in this drive as they did during the first World War I know of no institution that will surpase them. Mr. June That is very kind, sir; thank you. Mr. ROBERTSON. If the gentlemen representing General Motors are through, I would like to ask the Secretary one question. Secretary MORTENTHAU. I just wanted to say to the gentlemen of the committee that I appreciate very much your courtesy in letting us come here this morning and explain this plan to you. I also appre- ciate Senator George coming over. 2950 REVENUE REVISION OF 1942 Géneral Motors have done a very fine job. As Tenid eartier, we have MAVENTO REVISION DOP 2945 265L some 54,000 other business concerns that have established a plan, and We expect to get the benefit of the success of this very carefully Chought- house yellow, soil we do not expect to put them behind barbed wire if out and elaborate plan of General Motors and apply that, We hope. to they do not subscribe to these bonds. all of those 54,000 corporations. That number in constantly, increas- Those people who do not will have to decide in their own conscience ing. We now have enough corporations who have established such a why they do not, and the community itself will be able to judge then plan that we are reaching 20,000,000 out of the 80,000,000 employees But I am hopeful, and I have sufficient confidence in the American in industry, and our program is to reach the entire 30,000,000 people people to believe that the number of people who have the money but in industry 80 there will be regular pay-roll deductions every wook on refuse to buy the bonds will be such a small number that the good of a voluntary basis, this campaign, I believe, no far outweighs the possibility of an un- The thing I wanted the opportunity to show was that it in not only favorable effect that, as far as I am concerned, and Congress belog a question of the amount of money, but it is the amount of enthusiasm willing, we will Continue along this path, unless Congress directs us to which goes into the plan, and which can only be instilled if it is do otherwise. voluntary. If it is B. matter of legislation, with an antomatic deduc- Mr. DINGELL. Mr. Secretary, I am not advocating any stockade or tion, then all of this thought and effort which is going into this work coercive, repressive methods, but the Treasury did make a recom- naturally would not be necessary. It would be very much easier from mendation here, I think the last time you appeared before the com- the Treasury's standpoint, if there were a law which provided for the mittee, which led me to ask that question, and I was wondering deduction of a certain amount each week. But I personally, feel that whether you would be satisfied with skimming off what you could obtain from a volunteer effort, with the cooperation of labor and man- when each employee decides in his own home that this is what he wants to do, then that will go IL long way toward helping win this battle agement and the Government, and if so, with that percentage, how- ever small it may be, the Treasury may be willing to pass that by, we are facing. or make certain recommendations. Mr. COOPER Mr. Secretary, I am glad to join with other members of Mr. COOPER. I do not think he meant the Treasury recommended a the committee in congratulating you and the General Motor Corpora- compulsory plan. The Secretary recommended the installment pay. tion and the employees of that corporation for this splendid, patriotic ing of taxes. effort, and for this excellent presentation which has been made, here Mr. DINGEL. That in right. today. Mr. ROBERTSON. Mr. Secretary, when you appeared before us on I am likewise interested in the effort which I am sure you are exert- March a I asked you about compulsory savings, and you very strongly ing to reach the other 100,000,000 people of the country, in, addition recommended that we do not nb this time adopt compulsory savinga, to the 80,000,000 employees in industry. but give you an opportunity to try out the voluntary plan. Do you desire to give us any information at this time along that When you returned on March 6 and we had the debt límit bill before linel us, I again brought up the subject and asked you how long you Secretary MORGENTHAU. I do not want to try the patience of the com- thought it would take you to arrive at a conclusion ILB to whether OD mittee, but we have plans we are preparing now whereby we hope to not the voluntary plan would successfully function, and to that ques- fix a definite amount that we expect from every county and town in tion you replied as follows: the United States, and in this plan we will use not only the voluntary organization which the Treasury has built up, but we have some 5,000 I would any between now and the 1st of July. committees already organized with over 100,000 volunteer members of Are you still of that opinion? the committees, and we expect to go into every community and ring Secretary MORGENTHAU. Yes, sir. every doorbell in the United States at least once a month. Mr. ROBERTSON. You realize that you only have 2 months and 14 Mr. DINGELL. Mr. Secretary, I am still persistent in trying to obtain days before the 1st of July. some answer to the question I raised with Mr. Reuther. Mr. CARLSON. Mr. Secretary, I could not let this opportunity go by The vountary side of the game is well and good, and I presume that without referring to one large voluntary sales organization in the probably the number of slacker dollars will be very few as the cam- United States for the sale of bonds, and that is the triple A organi- paign develops. But would you recommend in that connection, or zation under the Department of Agriculture. would there be any coercion whatsover directed toward certain people I am personally acquainted with this program in the State of who may scoff at the plan and not have anything to do with it! Kanans, They hold a State meeting and decided to sell $1,000,000 Secretary MOBIENTHAU, Mr. Dingell, when you have A trpe volunteer worth of bonds between January 1 and March 1, actually they sold plan you cannot have coercion, and we cannot bring pressure to bear $8,000,000 worth of bonds between January 18th and April 15th. on the people. This means that the Kansas farm organization has sold on the over- We in the Treasury very carefully weighed two alternatives, the age one $25 bond for every form in the State during this period. volunteer plan, with the possibility that there would be is residue in The 13 States that comprise the western region of the A. A. A. have each community who will not subscribe, ILS against forced savings. sold at least $20,000,000 worth of bonds during the same period. I We made a very close study of the various campaign hods used do not have the figures for all of the States but do want to mention during the First World War. We do not expect to paint anybody's that the State of Wisconsin has sold over $5,000,000 worth of bonds 2952 ISVENUE DEVISION OF 1943 REVENUE REVISION OF 1948 2958 end this is an average of six $25 bonds per farm. This value gressing very entisfactorily without much noise or fanfure. There in 1 am very happy to have been invited this morning to strend this no more patriotic group in the United States than the farmers of hearing and to have heard About this plan. this Nation. I thank you very much, Mr. Chairman, for giving me the privilege. Secretary MORGENTHAU. Under the triple A organization they have The CHAIRMAN, Let me say, Mr. Secretary, I am 100 percent behind their county committees, and the National Grange had & meeting in the voluntary program. Worcester and gave us wholehearted support of the farm organiza- The committee will take a recess at this time until 1:30 c'olock this afternoon. tions, and they have been perfectly magnificent. Of course, I do not need to tell you that this is B big country, and (Thereupon, the committee took a recess until 1:30 p. m. of the inmo while it might be questioned whether it would be generally followed, day.) AFTERNOON SESSION you can see that if we could make a drive like this in industry and labor it will not take very long, and the thing that gives me 80 much (The committee reassembled, pursuant to the taking of recess, at satisfaction is that in 8 drive like this, which must have cost General 1:30 p. m., Hon. Jere Cooper presiding.) Motors many thousands of dollars to prepare, they are perfectly Mr. COOPER. The committee will please come to order. Mr. Paul, willing, not only to put the literature at the disposal of any other you may proceed. company, and also their men who are very familiar with it and are perfectly willing to do anything they can to assist, They want to ADDITIONAL STATEMENT OF RANDOLPH E. PAUL, SPECIAL TAX help us to present this to other companies and show them its tech- ADVISER TO THE SECRETARY OF THE TREASURY trique which they, on account of their experience and intelligence, are able to devise. Mr. PAUL Mr. Chairman and gentlemen, in his statement to your Mr. TREADWAY. Mr. Secretary, pardon me for intruding again, but committee on March 8, 1942, the Secretary of the Treasury recom- Mr. Healey, a member of our committee, made the observation a few mended the taxation of interest from outstanding AS well as futuré minutes ago that he wished every Member of Congress could have issues of State and local securities. I should like now to discuss this been present to hear this presentation this morning. recommendation more fully and to present supporting evidence.¹ I offer the suggestion, and, if it is in order, I will make it in the 1. THE ECONOMIC ISSUES form of a motion, that the clerk of the committee be authorized to secure from the Government Printing Office a thousand copies of this The present war emergency makes the immediate elimination of hearing for distribution. tax-exempt securities an important step in sound war finance. Un- If that is in order, Mr. Chairman, I make such a motion. der war conditions the withdrawal of the tax immunity from future The CHAIRMAN. Whether it is in order or not, without objection, issues alone will not be enough. What is required now is the imme- it. will be acceded to, diate removal of tax exemption in all cases in which the Federal Gov- Mr. Secretary, I want again to congratulate you and each of the ernment is not bound by its own pledge. witnesses who came with you for the fine presentation that has been 1. The revenue loss from tax exemption is aubstantial.-The annual made of this subject, and also for the splendid exhibits you have shown loss in revenue from the tax exemption of State and local securities us. I want not only to congratulate you but thank you, because the under the rates proposed by the Treasury is estimated at $275,000,000 chairman believes it will be most helpful to the committee, and the at 1942 levels of business, publicity will have a calutary effect throughout the length and breadth 2. The revenue loss from tax exemption will continue to increase- of the land. This is a large amount, but the continuance of the existing tax exemp- We are glad to have with us this morning Senator George, the chair- tion would not stabilize the revenue loss even at that large figure. If man of the Senate Committee on Finance, and we will be very glad the tax exemption were removed only from future issues, a consider- to have a statement from him at this time, if he desires to make one ably larger revenue loss could result merely from the shifting of ont- standing issues from holders subject to little or no income taxes to those STATEMENT OF SENATOR WALTER F. GEORGE, A SENATOR FROM subject to higher rates, THE STATE OF GEORGIA Of the $20,000,000,000 of such securities outstanding on June 30, 1941, $12,000,000,000 were held by tax-exempt institutions, governments, Senator GEORGE Mr. Secretary, I simply want to say that I think banks, insurance companies, and, to a small extent, other business cor- the job done by General Motors and the workers in General Motors was porations (table 1 and chart 1). The securities of these holders are a huge reservoir from which individuals could increase their tax-free most thorough, and I believe it will be productive of great enthusiasm throughout the country for the voluntary program. holdings by as much as 150 percent, even if the tax-exemption privilege were immediately removed from all new issues. Additional shifts are I think a voluntary program must be all voluntary, or else the pro- gram must be compulsory, and if it can be worked out on the volun- possible from individuals in low-incomo groups to individuals in high- income groups. tary basis-and I am convinced it can be-it will be infinitely better for the country and better for the Treasury in the long run, although Some of the detatled evidence is supplied In appendises there is more work involved. At (mont rates the loss le estimated at $184,000,000, 2954 REVENUE INVISION or 1948 REVENUE EXVIRION OF 1943 2955 All much transfers of outstanding fax exempta to individuals with large incomex yield nothing by way of lower interest rates to State or securities in generally below 8' percent (table 6 and chart 8), For 1941 local governments. The benefits of such transfers are confined mainly the average coupon rate onall outstanding State and local government to the willers, who obtain windfall capital gains, and to the buyers, who emmition Was just over 4 percent, while the Standard Statistics Co.'s obtain exemption from regular and wartime income taxes. index of municipal-bond vielde for April 1942 was only 2.49 percent. 8. Tax rate increases otimulate law avoidanon.-Even before 1941, 6. Tow exemption results in inequitable trantion.-Tes-exempt secu- the trend toward the concentration of tax-exempt securities in the rities produce sharp inequalities in tax burdens, Persons with income hands of individuals in the upper income brackets had become notice- from property are in a position to benefit most from this meanx of tax able. State and local securities have constituted an increasing per- avoidance; persons who derive their incomes from earnings benefit centage of the total assets of large estates, and there has been a pro- inequalities. least, Every increase in tax rates increases the importance of these nounced and consistent tendency for tax-exempt securities to constitute The discrimination individuals and between classes of indi- a greater percentage of the larger then of the smaller estates. For viduals constitutes, from an equitable standpoint, the most funda- net estates of $1,100,000 and over, State and local securities averaged mental of all the objections to tax-exempt securities A survey of 25 6.2 percent of the grows estate in 1928 and 15.1 percent in 1940 (table â actual returns for the taxable year 1940 reveals how striking are the and chart differences in burden resulting from tax-exempt securities. If the rate. We may reasonably expect n. further increase in the movement of schedule proposed by the Treasury were applied to the tax-exempt, AS tax-exempt securities into the hands of those with large incomes well as the taxable, income reported on these returns, the aggregate tax because the recent and anticipated tax rate increases provide new liability would be almost donbled-$21,400,000, instead of $12,500,000. and powerful motives to individuals with large incomes to use this Several of the cases summarized in table 7 are spectacular. In one means of tax avoidance. Under the 1942 tax rules proposed by the case, out of 26. total reported'income of approximately $974,600, no lear Treasury, an individual with a surtax net income of $100,000 from than $668,700 came from State and local securities. The tax liability other sources would obtain as large a net return, after taxes, from I under the proposed'rates would be $254,300, if the tax-exemption privi. 21/2 percent municipal bond BE from n. taxable investment yielding 20.8 lege were retained, but $856,100 if the tax-exemption privilego were percent. Other illustrations are presented in table 3. removed. In a second case, $817,400 out of a total income of $1,106,300 4. The outstanding tom-emempt socurities were not purchased in (M- was in the form of State and local interest. The tax liability of ticipation of wartime tna rates.-The continuance of the tax exemp- $289,600 under proposed rates would be raised to $975,300 if the entire tion of interest on State and local securities enables the holders of income were taxable. these securities to avoid not only the pre-war scale of income taxes, T. The premium poid for tax-exempt securities does not reflect the but also the tax rate increases necessitated by the war. Most of the value of the tax exemption.-The differences between taxes paid by outstanding bonds were issued long before there could have been any recipients of taxable and tax-exempt income would be less inequit- serious expectation of wartime tax rates. Of the $20,000,000,000 of able if the holders of tax-exempt securities had paid a premium that State and local securities outstanding, $14,400,000,000, or almost three- reflected in full the value of the tax exemption. This is not the case. quarters of the total, has been outstanding for 5 years or more, and The price that is got upon the tax-exemption privilege in the open $10,700,000,000, OF over half of the total, for 10 years or more (table 4). market differs substantially in most cases, and spectacularly in the Tax exemption enables the holders of State and local securities extreme cases, from the value of the exemption privilege to the to enjoy an exemption for which few, if any, can be said to have paid individual purchaser. The current murket value of the tix-exemp- a price nt all commensurate with the benefits received. Insofar as tion feature of State and local securities is roughly, one-half of 1 the coupon rates of interest and the market prices of State and local percent. This means that (if) investor who purchases a municipal securities reflected the tax exemption privilege at all, they reflected bond must content himself with a yield that is about one-half of 1 exemption from much lower tax rates than those in prospect, and, in percent lower, before allowance for taxes, than the yield he could most cases, than those already in force. A person with income from obtain from n corporate bond of comparable quality. But to an other sources of $100,000, who purchased 0 4-percent tax-exempt se- individual with a surtax net income of $150,000, under the rates curity in 1929, obtained therefrom the equivalent of a taxable return proposed by the Treasury, the tax-exemption feature of the municipal of 5.20 percent under 1929 rates. Under the rutes proposed by the bond is worth five times as much as he has to pay for it. A high Treasury this individual would derive IL# much benefit from his 4-por- grade 3-percent corporation bond purchased at par would yield him cent tax-froe bond ne he would from n. taxable security yielding 33½ only three-tenths of i percent after income taxes, compared with the percent (table 5). 2½ percent tax-free yield that be could get from a municipal bond 5. Boldern of tax-exempt accurities have enjoyed substantial unind- of at least comparable quality. The investor pays a half percent. It falls during recent years-Because of the rise in Inx rates, and also would be worth hia while to pay BE much as 2.7 percent. because of the decline in interest rates, most holders of tax-exempt The value of the tax-exemption privilege varies with the size of securities have enjoyed substantial windfulls during recent years The individual incomes. To a person with un income below the personal most common rates of interest on State and municipal bonds now out- exemption, n 3-percent tax-free security is worth no more than a standing are 4 to 41/2 percent, whereas the present market yield of such texable security of compurable cost. To n married man with no 2956 REVENUE REVISION OF 1942 REVENUE REVISION OF TOSS 2957 dependents, with a net income of $10,000, the same 3-percent tas, free security is equivalent, under the proposed rates, to A taxable Further, in subjecting interest from State and local securities to the insue yielding 4.84 percent. To il similar individual with a net income same tax laws that apply to other kinds of income, the Federal Gov- of $100,000, the 8-percent tax-free security is equivalent to a taxable ernment would only be doing what all of the 89 States Imposing per- security yielding 25 percent; and to an individual with a taxable soual income taxes already do themselves with respect to the obliga- income of half a million dollars, to a taxable security yielding no tions of other States and the subdivisions thereof (tuble 10). percent (table 3). 9. Elimination of too exemption would only moderately increase If the volume of State and local securities were 80 small that the State and local interest costs.-The removal of tax exemption is fre- whole amount available was purchased by individuals in the upper quently opposed on the ground that it would greatly increase State income brackets, the premium paid for these securities in the form of and local interest conts. These fears appear to be exaggerated. Tax lower interest rates might reflect roughly the value of the tax exemp- exemption is only one of the many influences affecting the market rate tion to the purchasers. However, the larger part of the outstanding of interest for State and local securities. Some persons mistakenly securities was held by Federal and State trust funds, banks, insurance ascribe the whole difference between corporate and municipal bond companies, and other corporations (table 1). Some of these institu- yields to the tax exemption privilege. But a large part of the differ- tional investors enjoy a tax-free status, To them the tax exemption ence is due to the superior quality or greater sufety of State and local feature has DO value at all. Others are subject to effective rates of obligations. The differential in yield in favor of municipal bonds was taxation much lower than the rates imposed on income received by greater in 1900, before the adoption of the Federal income tax, than it is today (table 9). individuals in the upper income brackets. Normally, the price paid for IS privilege of this sort in the open market will reflect the impor. Although the precise effect of the tax-exemption privilege on the tance of that privilege, not to the most urgent, but to the least urgent, market interest rate is subject to some difference of opinion, the Treasury believes that it is somewhere between one-fourth and five- of the actual buyers. That is to say, the premium paid for the tax- exempt security will reflect the importance of the exemption privilege eighths of 1 percent. Hence, it is reasonable to suppose that the removal of the tax-exemption privilege would increase interest rates to those among the buyers to whom the privilege is worth the least, Purchases to avoid taxes are not the only factors affecting the yield on new State and local issues by something less than one-half of 1 percent on the average. of State and local securities. Some investors, because of legal re- The interest costs of outstanding obligations would not be affected quirements, their desire for greater safety, or ignorance of superior unless and until the obligations were refunded by new issues. It will alternatives, purchase or retain State and local securities even at some sacrifice in interest rates and without any regard to the tax exemption. be 1970 before 90 percent of the outstanding State and local obligations have matured (table 11). Many wealthy individuals do not choose their investments solely with If other interest. rates remained at approximately their present an eye on net yields after taxes. They are also influenced by the desire levels, the refunding of outstanding tax-exempt obligations with tax- to control particular business enterprises, and reluctance to alter radi- able securities would not increase the interest costs of State and local cally the composition of large bequesta or other large boldings, par- governments in the vast majority of cases since the removal of the ticularly when such an alternation would entail the liquidation of tax exemption would be more than offset by the drastic decline that properties with poor markets. has taken place in the general level of interest rates, The net balance of these factors has been such that wealthy indi- In recent years new and refunding State and local issues have viduals have consistently been able to purchase tax exemption at bar- averaged about $1,000,000,000 annually. If this volume should con- gain prices. This fact is reflected in tables 8 and 9 and charts 4 and tinue, the immediate effect of the elimination of the tax immunity 5, which show the spread in yield between corporate and municipal would be an increase in State and local interest costa of about $5,000,- bonds is small relative to possible tax benefits. 000 during the first year. Eventually, the annual difference would 8. The removal of the tax exemption will not reduce State and local reach about $100,000,000 if the daht of State and local governments www.ignty.-The claim is frequently made that the removal of tax remained at its recent level. exemption would undermine State and local sovereignty. Some per- The net cost to State and local governments would be less than sons have argued as if the adoption of this proposal would give the $100,000,000 since they would obtain increased revenues from the Federal Government the power to levy special or discriminatory taxes application of their income taxes to new Federal issues, if Congress upon any or all operations of State and local governments. Nothing consents to such taxation. could be further from the truth. The elimination of tax exemption 10. Tan exemption should be approised (M a joint Federal, State, would not give the Federal Government the right to tax State and and local problem-The individual citizen is not only a citizen and local interest at rates any higher than apply to other forms of income. taxpayer of his city and State: he is no less a citizen and taxpayer of It would give the Federal Government no new powers over the opera- his National Government. He is subject n.t. one and the name time to tions of State and local governments. The securities of local governments in Great Britain do not enjoy The fact that new Issues have boen approvide al the rate of e billion 4 exemption from the income tax of the central government, nor do year must not be made ibn heats for The that the entitle outstanding debt will have been refunded in 20 years. A porvion of the refunding lesune morely replace securities those of the local governments and provinces of Canada or Australia. which in themselves were refunding 2958 REVENUE REVISION OF 1042 REVENUE REVISION OF 1948 2059 taxes imposed by all governments-Federal, State, and Ireal. The Groves Y. O'Keets (300 U. 8. 466 (1030)) to be subject to Federal additional burden impowed on the State and local governments must income taxation on their salaries. Like the State employee, the bond- be balanced against the now revenue that would be derived from Fed- holder offers services, his capital, to the State at A price and like the oral texation. The net burden on the taxpayers of the Nation as a employee that price must pay its contribution to the Federal revenues, whole will not be increased by the removal of the exemption privilege. Third, the theoretical baxis of the Pollock decision, that a tax on the Whereas the immediate difference in interest costs to State and local income from State obligations in equivalent to a tax on the bonds governments would be about $5,000,000 a year and the ultimate dif- themselves and thus is a tax on the power of the State to borrow ference in the neighborhood of $100,000,000 a year, the Federal Gov- money, has been flatly rejected by the Supreme Court. In Graves V. errument would, under the proposed rates for 1942, avoid nn immediate O'Keste, Justice Stone said: "The theory, which once won a qualified annual loss in revenue of $275,000,000 and the possibility of even approval, that a tax on income is legally or economically a tax on its Inrger future losses in revenue, Finally, the taxpayers of the Nation source, is no longer tenable." In place of that disearded theory there no a whole would be benefited by the elimination of no important has been substituted by the Suprame Court the view that a nondie- source of (ax avoidance, and by a resulting increase in the equity with criminatory Federal income tax, directed at all citizens alika, is valid which the total tax load is distributed among our citizens. as against any claim to constitutional immunity based upon dealings with State governments. That the economic burden of a State sales n. THE LEGAL AND CONSTITUTIONAL ISSUES INVOLVED IN THE PHOPOSAL OF tax upon materials sold to a cost-plus-s-fixed-fee contractor with the THE TREASURY MARCH 8, 1912, TO ELIMINATE THE EXEMPTION or INTER- Federal Government "is but a normal incident of the organization XST ON OBLIGATIONS OF STATES AND THEIR POLITICAL SUNDIVISIONS within the same territory of two independent taxing soverelgntion" was recently announced in Alabama v. King & Boozer (314 U. S. 1 The Congress possesses the power to Jevy a tax on incomes. Internat (1941)). From this case it would follow that any burden that may be paid on State and municipal obligations clearly constitutes income passed on economically to State governments because of . tax upon It would follow, therefore, that such interest is subject to the Federal the interest derived from bonds issued by such governments is but income tax. Certainly there is no provision of the Constitution which the normal incident of the existence of two governments within the prohibits the imposition of a Federal income tax upon the interest same territory. Such an indirect and incidental effect. does not war- derived from State and municipal obligations. The only possible basis rant $ restriction of the Federal taxing power. for questioning the constitutional validity of such a tax is therefore Fourth, great emphasis is placed by the Supreme Court in its recent the assortion that the holders of such obligations are cloaked with an opinions on the duty of all individuals to contribute their share to the immunity that may be implied from the Constitution. In 1895 the costa of Government. Equally streased is the recognition of the Supreme Court in Pollock V. Formers Loan di Trust Oo, (107 U. 8. dangers inberent in placing restrictions upon the Federal taxing 420; 158 U. S. 001) stated that such not immunity existed. But the power. The Court has thus clearly recognized that recognition of any foundations of this opinion have been 80 weakened by subsequent de- immunity on the part of the holders of State obligations would relieve eisions that it cannot withstand a direct uttack. With it fulls the one group of taxpayers from the duty of financial support to the only barrier to the validity of a Federal income tax on the Internet National Government and curtail the sovereign power of that govern- received by such bondholders. went to maintain its existence. When the issue is BO viowed, the ur- A. The belief that the Pollock decision has no validity today rests gency of our present needs for revenue, granter than ever before, upon these bases: First, it may be argued that the adoption of the compels the conviction that the Supreme Court will refuse to exampt. sixteenth amendment to the Constitution affirmatively sanctioned tax- the holders of State bonds from their obligations to the Nation. ation of the income from State obligations, through the express grant B. Some individuals have asserted that while the Federal flovern- of power to the Congress "to lay and collect taxes on incomes, from ment may possess the power to tax the interest on future issues of whatever source derived." State and municipal obligations, such power does not extend to the Second, every other claim to private immunity from Federal income interest on the outstanding obligations. They support this assertion taxation, even those formerly recognized by the Court has now been by claiming that G contract of exemption exists between the Federal rejected. The income derived by Government contractors from their Government and the holders of such otustanding obligations. contracts was denied immunity in Metcalf di Eddy V. Mitchell (269 However, no such contract exists. Although the various revenue U. 514 (1926) ) and James V. Drave Contracting Co. (302 U. 8. 134 acts have excluded from gross income the interest upon such oblign- (1937)); the income derived by lessees of Government property from tions, the exemption provisions in these acts cannot be regarded as con- their leased property was denied immunity in Belvering V. Mountain tracts between the Federal Government and the States or the bond- Producers Corporation (303 U. S, 376 (1936)); the income derived holders. This exemption, like any other exemption, is simply an by Federal judges from their salary was in effect denied immunity expression of legislativo policy which may be changed at any time. in O'Malley V. Woodrough (807 U. S. 277 (1939)). Most significant If such a provision were said to be tx contract, on like grounds a Bnl- of nll, State employees, who had enjoyed under Collector V, Day (11 aried taxpayer might claim he had B. binding contract right to the Wall. 113 (1870)), an immunity from Federal income taxation ante- earned income credit, a father to the credit for dependent children dating that given to the bondholder by the Pollock case, were held in and so on. In short, to these taxpayers, and to the taxpayer who pos- 2960 REVENUE REVISION OF 1942 BEVENUE REVISION OF 1942 2961 ansess State and local obligations, the Federal Government has made no promises that existing laws would not be changed. of the sixteenth amendment, But the rule of the Pollock case has But, it has been asserted, while no contract exists, at least there is 5 since been rejected by the Supreme Court, BO that there is no immunity moral obligation upon the Federal Government not to tax such in- afforded by the Constitution to the interest on these obligations. In terest in view of the exemption existing at the time of their issuance. this light the references to the sixteenth amendment become wholly But here again the granting of an exemption does not carry with it irrelevant. the understanding that it will be forever continued. No doubt many TAME L-Tor-erempt diate and toml securities, by classes of holder, June investors expected a continued tax-free yield when they purchased the 30, 1941* obligations. But it has been pointed out previously that such expecta- tion did not extend to the high rates necessitated by emergency con- (In Millons of dollars) ditions. And every taxpayer takes the chance that the rates of tax Class of holder: Relimated amounts of pur value and the exemptions thereunder will change. Any other view of the Individuals* 7.8 situation would turn the tax laws into static rules and by thus strait- Commercial banks 3.T Insurance companies jacketing revenue legislation make it impossible for the Congress to 21 Corporations other than banks and Insurance companies .6 adapt its tax polícies to changing conditions. Tax-exempt holders: C. Finally, it has been contended that the history of the ratifica- Federal funds T tion of the sixteenth amendment proves that at that time it was the State and local government funds' 4,1 Mutual savings banks o understanding that the words "from whatever source derived" did Other tax-exempt Institutions 6 not give to the Congress the power to levy a tax upon interest from State and local obligations. The communications and speeches of All tax-exempt bolders. 5.9 Senator Borah, of Idaho, and Root, of New York, have been cited All bolders 20.0 in an effort to show that Congress did not intend to tax the interest on Including securities of Territories and tosular posselons. State and municipal obligations. It should be noted that this issue a Including estates and trusts. was not raised until after the amendment had been submitted to the # Including trust, Investment, and stoking funds, and holdings of Territorial and totalar governmental funda. States for ratification. In fact, there is nothing that was said in the Source: Treasury Balletin, February 1042, and Annual Report of the Becretary of the course of the debate in the Congress from which it may be inferred Treasury, 1041. that a single Member expected or intended that the income from State TAULE 2-State and local government securities de a percent of gross estate,¹ and municipal bonds and the salaries of State and municipal officers by size classes of not estate, estate-tax returns filed in 1928-40 and employees should be constitutionally immune under the proposed amendment. Net estate il (In thousands of dollars) When the sixteenth amendment was before the New York State Filling your Legislature for ratification Governor Hughes recommended its rejec- 100 under 200 under 300 under 500 under 1,100 and 300 an 500 1,100 ᵃ over tion on the ground that the amendment gave to the Federal Govern- ment the right to tax the interest on State and municipal securities. Provel Perced Perent Promit Pertent Senator Root took the position that the amendment merely dealt with 1929 LS 11 2.7 4,2 4.2 IVS L6 1,8 12 4.5 8,0 the problem of apportionment and did not affect the inherent power 1000 L4 14 10 1.6 7,3 nas 19 24 4.2 4.8 0,2 of the Federal Government to tax incomes. In other words, the 1032 22 20 5,0 R.D. 11.3 sixteenth amendment simply permitted Congress to levy an income 1833 25 5.1 8.6 11,0 21.9 NM 14 4.4. 5.3 10.0 23.0 tax without apportionment among the several States, and that there- 3955 3.0 &7 6.7 11.0 ILI 1936 1.0 5.4 6.8 4.2. 18.0 fore the amendment did not give to the Congress any power that it 1917 11 sa AF 0,2 IL4 IMM did not previously have, so that the rule of the Pollock case WAS un- 29 44 LI 6.0 10.1 1939 12 = 7.1 11.0 227 affected by its passage. This WAS also Senator Borah's position. IND 11 3.0 4: 5.5 15.1 While the New York Legislature rejected the amendment on Governor Hughes' advice, it Was ratified by that State after his departure from I Grom estate includes tax-exempt insurance. Before specific examption. office. It is thus apparent that at the time of the ratification of the Include securities of Territories and Insular possession, sixeenth amendment by the several States there was reputable authority Boarm: Complied from Statestics of locome: on both sides of the question with respect to the taxability of interest upon State and local obligations. There is, however, a stronger answer to this contention. As in- dicated above, the observations of Senators Borah and Root amount to the assertion that the Pollock name was unatfected by the adoption 2962 REVENUE REVISION OF 1942 REVENUE REVISION OF 1042 2968 TABLE B.-Gross annual yields from a tamable security equivatent to specified yields from o soholly security' TABLE 8.-Gross annual yield from a famable security equivalent to a 4-peroent yield from 6 scholly 102-crempt security, under for rates in effect in 1920, 1935, and 1941, and proposed for 1942' Chrose annual yisld from . taxable wourity equivalent to . tax-sumpt yield of- Net tecome from other access 1009 1962 (pro- IM 1941 proed Net Income from other 234 persons I permit 316 perosat 4 persont rates , sources I 1941 Proposed 190 Proposed 1041 Proposed 1941 Proposed Peroni Perent Percent $1,500 Personal rates rates I niel ratos a rates rates I nie 4.00 The 4.00 4.00 $2,500 6.00 4.00 4.00 La $5,000 LIS 4.02 4.17 4.00 $1,000. 2 50 2.50 8.00 1.00 1.50 1.30 $10,000. AM 4.00 4.12 4.00 4.37 5,33 $30,000 6.45 $2,500 177 3.31 3.32 3.83 3.87 4.49 LO 4.40 AB 4.71 6.90 $50,000 AM LM 4.00 4.85 0.80 $5,000 287 3.47 3.45 4.17 4.02 5,M 9.75 $100,000 14.67 $19,000 1.32 4.03 4.00 4.67 & 65 5.83 5.36 4.84 6.70 5.45 13.50 $500,000 8.88 $20,000 4.81 5.85 5.17 6.67 6.03 7.78 6,00 5.26 10.00 8.80 16.87 $1,000,000 40.00 850,000 10.43 7.82 12.30 8.64 14.08 9.75 5.26 16 67 10.63 0,10 18.19 40.00 $100,000 7.81 20.83 9.38 15.00 10.94 20.17 12.80 33.82 $500,000 10.42 15.00 12.50 30.00 14.55 38.00 16.67 40.00 $1,000,000 ILM 35.00 13.04 30.00 18.91 35.00 18.18 FDL le assumed that both the taxable mid the tes-exempt security are bought at par: and that the income 40.00 from additional investments, if taxable, would not be large spough to besome subject to & higher rate than that applicable to the first dollar of the additional Income, The esleulation spoir to a married person WILD 1 It in assumed that both the tarable sod the tex-exampt security are bought at par; and that the income DO dependents, and take Into account veriations In the personal exemption and earned income credit a well from additional investments, If taxable, would not be large anough to become subject to a higher rate the as to tax rabe. The earned Income credit in areumed to be malfacted try the additional tasable income a arpt la those cames where by statutory definition a net is delimed that applicable to the first dollar of the additional (noome, The calculations apply to a married person Befure personal exemption. with DO dependenta, and take Into account variations in the personal exemption and earued Income eradis If As presented by Steritary Morganthaus to the Ways and Means Committee, Mar. a, 1942. - well as in tax rate. The earned income credit ta essumed to be (madected by the additional tarable to- some shorpt in those caste where by statutory definition all net Income is deemed named. . Before personal exemption. TABLE 0.-Becurittes of States, and of cities with more than 100,000 population, , As presented by Hocretary Morgenthau to the Ways and Means Committee, Mar, 3, 1942. by interest rate, 1989 TABLE 4.-8tate and local government securities, by length of Name outstanding' (Ameunts in thousands of dollars) June 30, 1941 Becurities outstanding, at par value (In hillions of dollars] Btates, sad dities over Natimated Interest reta (perosal) 100,000 population States Citten over 100,000 Length of time outstanding: amount pupulation Less than 1 year 2.8 Amount Percent Less than 2 years 8.1 Amount Persent of total Amount Percent of total of total Less than a years 4.2 Less than 4 years. 4.9 1.80 $74,980 0.8 $75,980 Less than 5 years. 5.6 24 7.70 45,888 4 45,398 1.4 Less than e years 6.5 131,814 L8 65,158 21 466,661 1.0 2.35 Less then 7 years 7.3 233,516 24 140,870 44 92,040 1.4 5.50 149,174 1.5 50,188 1.0 98,968 1.0 Less than 8 years 7.9 2.75 177,007 1.8 72,000 28 100,307 16 Less than 9 years. 8.4 718,118 7.3 200,121 0.0 412,007 6.3 3,26 Less than 10 years 17 0.3 136.539 43 265,572 4.0 3.50 848,107 5.6 195,601 6.2 652,495 9,6 3,75 230,617 24 117,488 5.7 113,134 1.7 Total amount outstanding 20.0 2,267,298 12 782,670 34.7 1,484,025 211 4.25 1,580,000 JAT 349,700 IE 0 1,281,240 18.5 - Interest-bearing securities only. including those of Territorios and ingular possessions. 4.50 1,770,479 17.6 435,455 13.7 100°MS'T 10,3 4.75 Bource: Complied from data supplied by the Bureau of the Census, Division of State and 294,000 a.e 124,284 8.0 170,615 16 5. Local Government. 700.704 7.2 227,626 7,2 479,078 7.9 3.25 10,800 is 18,800 ,1 5.50 61,962 be 81,000 1.2 5.75 14,764 .2 14,764 .2 6. 120,671 1.2 42,328 LB 08, 042 1.0 Total 9,619,812 100.0 2,170,145 100.0 Other rates 6,040,000 100.0 1,086,470 100,790 919,681 Rates not reported 8,00 1,187 AMI I Secrities outstanding at class of fiscal years ended to 1039. Debt with original maturity of les than . year La not included. Boarca: Burow of the Cennis, Division of State and Local Government. 2964 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 2965 TABLE 7.-Tas liability assuming interest from Etate and local government securi- Her, (a) las crempt and (6) facable, under present and proposed individual TAILE 0.-Yields of corporate and municipal bonds, aproad, and Federal indf- income-las rates, for 25 selected individuals vidual income tor rates. 1900-42 (In thousands of dollars] Annual average annual Present nie Proposed Tales yield Tax rais Field un brack- Tax rate Terable State Your Spread et Immé- un brade- ail In- Tax liability Reve- Tat liability High- diately Yes and Total Here. Municl- Bigh- Spreed et Imme- Car come from Income aue loss cos Ines gade por- local pal above prede con Moold- distaly Imm porate $100,000 pal above interest other the parale sources Interest tax ex- bonds bonda il bonds bunds I $100,000 Intenst Interest exempt taxable emp- Interest laxes- Non essergt taxable / Lies 1900 4,00 12 0.90 e 100 8.10 12 1911 3.90 8.13 .77 0.57 66 a 1923 5.12 1 201.6 001.0 595.7 171.5 ALL 2,56 4.25 3.91 .67 434.2 771.0 two .00 43 123.8 16.6 e 1025 1.00 4,20 1 26.2 297.9 444.1 126.4 101.2 176.1 194.6 123 4.07 LE .69 ,90 a 377,2 2116 e 100 4.68 4.00 2 200.4 148.9 400.2 87.0 276.8 113.6 348.0 4.00 3.45 .79 34 IVM ,68 201.4 0 1926 4.73 S.00 230.9 3.89 3.40 is as 4 1,337.5 1,008.4 000.2 1,181.0 182.4 1,182.7 1,390.5 3.000 .6 207.8 0 1027 4.57 3.00 § 226.0 1,081.0 1,507.0 706.6 076.8 001.0 L.156.0 1906 3.00 3.57 .m .43 as 204 : 0 1928 CM 4.05 9 215.0 147.8 302.8 83.8 241.8 108.9 110.2 303.7 1007. 4.27 3.80 .NO as All 284.5 0 1029 in 6.27 .46 7 340.5 164.5 493.7 82.6 $89.0 TVD6 4.22 3,98 ,20 H 257,0 107.8 4224 314.0 0 1930, € M 1.07 à & 820,7 SIA.0 1,656.3 605.0 1,251.6 04/1.6 731,7 1009 4.00 3.78 as 1,470.3 .25 708.0 0 1011 4.M 4.02 67 2 162.7 269.8 #12 5 158.1 279,2 191.1 904.4 350.9 He 4.16 3.97 .10 as 0 1922 TAB & AGL 4,60 275,1 1911 4.17 3.08 .00 56 10 351.7 036.8 175-0 442.7 2018 220.0 543.0 ..EM 310.8 0 1932 4.48 6.7) -.22 11 330.7 $78.6 704.3 219,0 BILS 1912 4.21 4,02 .10 se NO.0 253 1 315.8 2011 0 3904 4.00 4.00 -.0% 12 778.0 768.1 1,538.1 549.4 1,157.7 608.3 667.6 1,363.2 1013 4.42 4.22 M .20 NET a 1985 1.01 8.45 ,19 M 13 MALT 305.9 974.0 198.0 7128 614.2 254.9 854.1 3906 4.45 4,12 .M 5 1930 GOLD 3.21 3.07 .17 DI 34 817.4 288.0 1,106.3 186.6 817,2 630,6 230.6 4.64 4.38 975.3 A8 a 784.7 1937 3.21 3.10 ,16 be 15 394.6 876,46 771.2 250.7 553.2 302 5 316,8 1966 4,49 3.04 072.0 55 7 355 1 1982 3.19 2.01 ,3 o 16 296.8 603.0 899 5 423.2 651.0 229. K 820.2 1917. 4.79 1.20 A 787.0 31 206.8 1989. 3.01 2.78 ,25 e 17 404.3 160.1 684.4 04.8 395.3 the 200.5 123.7 0.30 4.50 467.6 .70 04 343.9 1940 2.84 2.50 ,34 316,8 915 1 1,231.4 001,8 915.8 Tulle 18.49 240.0 803-1 4.40 1.03 66 18 1,087,8 B2 1941 24.7 3.77 2.10 ,67 6.12 99 19 313.4 278.7 5921 170.2 416.0 287.4 230.4 1950 4.08 L14 M2 6 00 190 ( 2821 2.94 1.40 .M 20 356.5 135 € 391.9 75.1 236.0 1921 261,8 5.97 98 9 5.09 419 7 .88 6) 330.8 21 1,088.7 4,221.4 1,405.1 3,340.3 4,251.3 871.0 8,858.8 6,846.2 975.4 31 172.6 170.7 341.) 102.2 227.2 125.0 133 2 288.0 155.1 R 20.2 100.0 301.1 99.6 264.5 105,0 129.8 333 € 203.6 I From 1900 through 1918, Standard Statistics Co. Average for as high-grode refired bouds; other years 34 214.8 331.7 04/5 217. # 447,3 239.8 276.9 500.1 283.1 Moody's Investore Bervice everyou las bigli-grade eurporate (Am) bunds. N OLE 218.0 64X T 186.2 366.3 230.1 116.5 I Standard Statistics Ca. average. RLI I Standard Statistics Co. average of yields of high-grade railmed bonda was 5.20 percent for IN, and the Total 0,009.4 14,41.7 24,411.1 10,348.8 17.914.1 7,655.3 12,470.5 21,442.9 5,972.1 spread based upon this average was 0,83 percent. Apr. 1, 1942. Il Exclusivo of net long-term capital gains und losses. . As presented by Secretary Morgenthatz to the Ways and Means Committee, Mar. 1, 1942. TABLE 10.-Treatment of interest from Federal, State, and local government Source Interna lierns from returns on Form 1040 für 1049. obligations under State individual income taxes, or of January 1, 1948 TABLE B.-Comparison of the vields of high-grade corporate and municipal bonds Internets from obligations of the- Yield on first day Yield on first day of month of month Political State of the Federal Month Home Illgh- High- Other Epread Month Govern- High- High- Spread States States grade prede meut and grade grade Home munici- Other lta aprocks corporate, corporato munici- States pal States bends bonds pal bonds bonds 1 Alabama Exempt Timed Exempt Taxed Exempt.A Arisona 1999: Kumpt 4 Tand Exampt Taxed Breupt* Arkanam January 3.01 Brampt Taxel 2.86 0,65 Exempt Taxed 2.89 20 0.68 California Exempt, October February 2.94 Exempt Tsand Exempt Taxed 2 83 .61 November Krempt. March 2.70 1.04 N Colorado Taxed Taxed Tared 2.86 2.38 Taxed .48 December 2 11 1.12 N Delaware Resempt April 2.03 Exempt Taxed Exempt Tund 2 M 63 1041 Osorgia Krempt. May 2.00 Exempt Tund Exempt Taxed 2 87 as Exempt. January 15 1.10 n Idabo June Tared 1.82 Taxed Taxed Taxel 2.20 Resupt -50 July February 2.01 1.07 64 town 278 Taxed Tund Tered Taxid 2,36 -82 March 270 218 63 Kansas Aunust Texed IN Taxed Taxed Tatel 2.27 Exampt* .47 April September 1.72 1.00 ,70 Kentucky 2 28 2.79 Exempt Tased Exempt Tuxed Prempt. .19 October May 2.75 1.92 ,0 1.29 2.04 Exempt Taxed 274 Maryland Exempt Tand Exempt .M November June 1.77 OF 1.00 Premps Tead Exempt Tixed Prempt.* 2.85 .45 Denember July 2.05 1,09 is Massachosetts 1.90 2.25 Enroupt Taxed Exempt Tued Aggust 2.64 1.70 IN Minmeita Exempt. 1040 .M Resempt Taxed Exempt Taxe) January 2,83 Suptember 2,65 H Mississippi Exempt LTI 2% Krempt Taxed February 2.68 97 Mineari Exempt Twint Exempt. 59 Ontober 1.65 2.68 Exempt Taxi Taxed 12 Exempt Eximpt. 36 March November 2,80 18 1.87 1.01 Muntans Toard Taxed Tured Taxed 23 45 April December New Hampshiro Exempt.* 1.60 ,99 2.72 - 46 New Maxico Exempt Taxed Tared Taxed Exempt.* 187 May 1942: 2.74 New York Emempt Taxed Exempt Tend Exempt. 2 21 June January 2.00 271 L.91 50 à February North Carolina Exempt Twind Exempt Teard 2.00 Exempt. July 2M 2.10 2.04 20 2.34 M a North Dakita Exempt Taxed Exempt Tand Essept August March 2.12 2.61 2 19 Exempt Texed Oklahoma Emergt Turrd Exempt. 1.17 JES September April 2.75 277 2.08 71 Teard # Teard Taxed Taxed 2.17 Exmje* et See footnotes at end of table. 1 Triamiry Department STATEMENT of high-prade corpurate honds, Bond Buyer 11 first grade bonds. 2966 REVENUE REVISION OF 1943 REVENUE REVISION OF 1942 2967 TABLE 10.-Treatment of interest from Federal, State, and local government one potions under Blate individual income tases, 68 of January 1, 1948-Con. Internets froms obligations of the Political subdivisions State of the Federal Home Other Govern. States States ment and 501 Ilcms Other Its namelas States States Organo Trand Taxed Taxed Tward Exampts OTHER Bouth Carolina Exampt Taxil Taxed Email Booth Taxed a Taxed Tard Exampte CORPORATIONS 2500 MAL Krempt Texad Utah Exempt Taxed Tated Taxed Exempt Vermont Exempt it Taxed Exampt 19, Texad Exempt Virginia Exempt Twed Tand Tward Writ Virginia Exempt Taxed Exempt Taxed Except Wisconsin Taxed Tared Taxed Taxed Exempt I Recent Indisiation (199) to 1842) provides that Interest from obligations of the United States shall be In- cluded la prom Income Insofar M the State la constitutionally or legally authorized to tax such (noome. I Exemption la restricted to interest from bonds I Exempt by regulation. COMMERCIAL BANKS $2700 MIL I Restricted to bonds Issued after 1002. I Excludes from EFORE income all Income which the State is prohibited from taxing under the Constitution or laws of the United States. . Recent legislation (1839 to 1942) repealed the section which excluded from grow Insume the folerast upon obligations of the Unlied States. 1 Restricted to post-tens State and post-1908 local Issues marked "tatempt" # No specific exemption in statute or regulation. # Applicable to post-1923 issues. LA Exemption la moditional upon Internet upon obligations of the State of North Camlins or of its political aubdivisions bilog exempt from United States Income taxes. - " Interest on mildlers' compensation bonds and na rural credit bods Issued prior is July 1, 1987, la exempt. at Exempt when the rate of Interest does not exceed 5 percent pm ADDITIL standing June 30, 1941 Outstanding June 30,1941° INDIVIDUALE $7,800 Mil. TABLE 11.-Estimated maturities of State and local government accurities out- PLANO Millians held by [Amounts to infllines of dollars] Yearly maturities - Comulative maturi the Date of maturity, fiscal years ended June 20 OWNERSHIP OF STATE AND LOCAL GOVERNMENT SECURITIES INSURANCE COMPANIES 12/00 Mil. Amount Percent of total Amount Percent of total 1942 $2,021 10.3 2021 10,2 1943 00A 4.6 2,930 14.8 1944 RM 4.6 3,830 16.8 IDES Hi 4.1 4,679 SS.9 1945 T25 1.6 5,404 27.3 1947 787 1.7 6,141 31.0 1948 MI 3.8 6,799 34.3 1949 $ 2.4 7,465 $7.7 1950 582 3.4 8,147 41.1 EXEMPT INSTITUTIONS NZ 00/71 I I - 1951-55 3,246 17.1 11,543 56.9 1956-60 2,770 14.0 14,322 721 1061-68 2,267 11.4 16.689 03.6 1905-70 1,138 6.7 17,727 88.3 1971-75 - 1.8 15,418 020 1976-80 1,234 6,2 10.648 90.0 1981-85 132 ,9 19,870 00.0 1984-00 X ,1 10,859 100.0 1991-95 1 E 10,800 100.0 Total 19,900 100.0 - Reduding sveurities of Territories and tomier possemions, 1 By maturity dates, without reference to optional etriler call dates, I Includes $1,144,000,000 short-term interest-bearing securities, . Les than 0,00 percent. Engine: Bursata of the Center, Division of litate and Local Government. 2968 REVENUE REVISION OF 1942 REVENUE REVISION OF 1942 2969 , Chart a 0-285-1 PERCENTAGE OF ESTATES IN STATE AND LOCAL SECURITIES Estate Tax Returns Filed, 1928-1940 PERCENT PERCENT IS 15 1928 1929. 1930 1931 1932 10 : 10 5 5 PERCENTAGE DISTRIBUTION OF STATE AND CITY DEBT. BY INTEREST RATES. 1939 if € N # # No 2 WE F1 NE 4 , : 4 - INTEREST RATES IN PERCENT Cities Over 100,000 Population N 2 2 Na X NO e If 4 NPI = 4 = . in If . INTEREST RATES IN PERCENT o o 25 States 25 20 1933 1934 1935 1936 1937 20 15 15 PERCENT 30 25 20 15 to $ 0 Chart 3 PERCENT 30 25 20 is 10 5 0 10 10 I I I % I 5 5 0 0 25 25 20 20 1938 1939 1940 15 15 10 10 5 5 0 100-200 200-300 200-500 500-1100 00/7 I I 100-200 200-300 300-500 500-1100 1,100 and over 200-800 300-500 1100 and over 200-300 300-500 500-1100 1,100 and over 100-200 200-300 300-500 500-1100 1,100 and orer Includes Obligations of All States and All Cities with Over 100,000 Population INTEREST RATES IM PERCENT o 100-200 500-1100 100-200 e # # N No N2 114 M % is 4 NY . $ WHEN - MS = 1 . . / I = 2 1 " 1 . NET ESTATE, BEFORE EXEMPTION. IN THOUSANDS OF DOLLARS - - - - - PERCENT 32 28 [ 24 20 16 12 - 4 0 HIH 60663 42 pt. 30 8 Regraded Unclassifie Charl 4 2970 COMPARISON OF THE YIELDS OF HIGH-GRADE CORPORATE AND MUNICIPAL BONDS First Day of the Month Figures, 1939 to Date 1939 1940 1941 1942 PERCENT PERCENT 125 3.25 am High Grade 100 Corporate Bende Treasury Average 275 175 c.se 234 1.13 2.25 2.00 High Grode 2.00 Municipal Bonde Bond Buyer (N LM 1.75 1.50 1.56 REVENUE REVISION OF 1943 PERCENT PERCENT LDO - Spread .75 PE - so 11 29 a . 1931 1940 mai DAE Chart 5 COMPARISON OF THE SPREAD IN YIELD BETWEEN CORPORATE AND MUNICIPAL BONDS WITH THE FEDERAL INDIVIDUAL INCOME TAX, 1900-42 (Yielde Are Annual Averages) I the ISIS PERCENT mas 1930 - BM 6.00 PERCENT Corporate Bondy 4.00 5.75 Moody's Any E 550 5.50 5.25 Carporate Bande Item/and Invoice &25 500 Asis 100 475 4.75 4.50 ASS $ 425 4.00 Municipal Bonds 490 175 - Retains 1.75 aso 150 in as 3.00 see 2.75 LN ase 250 125 us REVENUE REVISION OF 1942 zos 2.50 1.35 1.75 1.50 LBS Spread PERCENT 1.00 Individual income Tox Income Tax 35 Street Revie - frasher - PEACENT - RED 000 - - # so - so 25 is # o -.B - nos - ISIS mes not NM - 1940 2971 - - - 2972 REVENUE BEVISION OF 1042 REVENUE REVISION OF 1943 2978 Mr. PAUL Mr. Chairman, I would like to mourt in the record an had sustatard . Federal DEL upon the salaries received by employees of the Port opinion dated April 14, 1942, addressed to me and signed by the Assist- of New York Authority The claimed Immunity, If allowed, would to the Court's ant Attorney General of the United States with respect to the constitu- opinion ID. 4247 have imposed "to 4.0 Inadmissible extent a restriction upon the tionality of imposing an income tax on the interest from State and custog power which the Constitution has granted to the Federal Government." The Imposition of e State tax upon the nainry of a Federal employee was etc.- municipal obligations. Harty held in the O'Keefe case not to place an unconstitutions) burden upon the Mr. Rem. Who was the Assistant Attorney General who wrote that employing sovereign. Collector V1 Day (11 Wall. 113), another landmork doclaion opinion! like the Pollock cose, WILL thus overruled. The express dental in the O'Kecle case Mr. PAUL That is Assistant Attorney General Samuel O, Clark, Jr. that a tax on income was the equivalent of R. tax upon the writee represented DO new thought bur was rether a reiteration of a principle which had been Mr. Cooran. Without objection, the letter may be inserted to the applied in the Court's prior declarem in New York (VP mL Cohn Y. Groves (S00 record. 17. 8. 208), and to Hole Y. State Buned (302 D. N. 16). There, too, It had been (The letter referred to is BE followe:) recognized that "larmine in not necossarily elothed with the tax immunity enjoyed by Its source." DEPARTMENT OF JUSTICE The opposents of the pending proposal urge that M would produce an uncon- Washington, dyril 14. 1942. aritutional "interference" with State governments. Translated Into practical How RANDOLFH 10. PAUL terms, the Interference compleined of la merely the Increased cost of tuture Tea Adviser In the Secretary of the Treasury, public borrowing which might be occasioned by the NEX It La significant that Washington D. 0. this inereased cost Involves Du discriminatory burden. Rather, It represents DEAR MR. PAUL: On June 24, 1988, Him. James W. Morrie, Aesistant Attorney the effect of placing Income from private and public sources upon the same General In charge of the Tax Division of the Department of Jostice, transmitted plano of equality. The absence of any element of discrimination would be help- to the Honorable Herman Ollphant, General Counsel of the Treasury Department, ful in sustaining the constitutionally of the proposed last n comprehensive study of the constitutional expects of the taxation of Government Until the Supreme Court hunded down the declaion in Alabama Y. King é Bouzer bundholdere and employees. Copies of this study were also made available to the on November 10, 1041 (314 C. IS, 1), there was room for the View that despite appropriate congressional committees. the declaions affecting public employees, a constitutional Immunity from taxation You have requested our opinion on the constitutionality of The proposal by might possibly be accorded to Government bondholders. Mr. Justice Stone had your Department to subject to Federal Income tax the Interest received here stated In the O'Koote opinion, D. 480, that there WHO no basts "for the nasamption after m outstanding and future lesues of State and municipal bonds, with spenial that any tangible or certain economic burden 1st imposed on the gov- emphasts on legal developmente subsequent to the publication of our study. We ernment concerned ILB would Justify" a decision that the tux upon the employee's ore pleased to comply with your request and submit the following views salary was invalid. On the other band, It la no doubt true that the insuing Dr UTIP earlier study we expressed the following conclusion: government would hear a part of the economic burden of an income tax Imposed "It in believed that there can BO longer be found to the decisions of the Supreme upon the boodholder. Nevertheless, this Department did not attach to the state- Court and rule of continuing authority which would ralee a constitutional pro ment of Mr. Justice Stone the significance urged for It by those who have opposed bibition egainst applying the Federal Income tax to State hondbolders, officers. the legislation now suggested. The recent declaion in Alabama V. King di Booser and employees." confirms our view. It la now clearly established that the validity of a lax upon You are no doubt aware Due since that time the declaions of the Supreme bond Interest will not be affected by the Increased likelthood that the oconomie burden will In some measure be passed 00 to the Government. Court on the question of constitutions] lax immunity have all served to reinforen and conflem that conclusion. The trend toward a limitation of such Immunity. The question in the Alabama case was whether an Alabama miles las, which which had developed when we published our study in 1938, has continued without was to be collected from the buyer, was unconstitutional In its application to purchases made by a contractor engaged by the United States under a interruption to the present date. fixed-fee contract. It was quite clear, of course, that the entire burden of the We are, of course. no longer concerned with the power of the Federal tax would be borne by the Government. In fact, the Government bad agreed Government to (as the locome of State officers and employees. The declaton with the contractor that State taxes, If valid, would constitute part of the cost of the Supreme Court In Graves Y. N. Y. na rel. O'Keefe (300 U. S. 4/15), ond of the project and would be assumed and borne by the Government. Hence there the ennerment of the Public Salary Tax Act of 1909, have removed that problem was no uncertainly ns to the economic effect of the tax as in the earlier case of from the field of controversy. Taxation by both State and Federal Govern- James v. Drawn Contracting Co. (302 D. 8. 134), which Involved a lump sum ments of the sularies of public employees 18. now no accepted Incident of our contract. The Supreme Court nevertheless sustained the State exaction. In Doral system. The only remaining question tal whether the Income received from the course of Its opinion the Court made the following olvervation (pp. 6-9) State and municipal obligations may be subjected to Peteral invorion. In our "So far as such a nondiscriminatory State tax upon the contractor enters view, the answer to as clear and certain as the solution of any legal problem into the cout of the materials to the Government, that le but a. normal Incident CAD ever be prior to N final determination of the precise imstie by the Supreme of the organization within the anno territory of two Independent taxing HOT- Court. Il la our considered opinion that the Congress does have the power to eruignties. The asserted right of the one to be free of taxation by the other does fax such Income not wpell Immunity from paying the added costs, attributable to the taxation of It Is, of course, true that the Supreme Court concluded in Pullonk V. Form. those who furnish supplies to the Government and who have been granted po mg Loan di Trust Co. (107 U. 8. 429, 158 U. 8. 601), that a Federal las could tax immunity." not validly be imposed upon Income derived from municipal obligations. That Thus, the Supreme Court finally laid to rest the theory that En oconomic declaration WILA Insed upon the theory lbst a tax on Income who a tax upon the burden in terms of Increased governmental conta Invalidates a laz The earlier sonrce from which the Income Was derived. Thus, n tax on the Income from opinions In Panhandle Oil co. 9. Know (277 U. 8. 210). and Grüves 9. Teras Co. unmicipal bonds Will the equivalent of a tax upon the bonds themselves, and, (208 U. 8. 303), were held untenable BII for no they supported the contrary therefore, an unconstitutional burden upon the power to borrow, However, this conclusion, reasoning has been completely discredied in later opinions of the Supreme A. declaion which supporta State tatation of Federal con- Court. With the destruction of the premise of the Pollock case, Its concluston tractors would operate at loast equally to mustain a Federal tax imposed upon must also fall State bondholders Both relationships rest upon contract: one Involves the "The theory, which once will " qualified approval, that If tax on Income in furnishing of supplies and services, the other money. The tax to each Instance Irgally or economically n tax on Its source, la no longer tenable sold would increase the cost of governmental operations: In the Chan of the State las the Suprome Court in March 1000, to Graces V, N, Y. of nil 0'Krefe (306 U. 8. on the Federal contractor, to the full extent of the 143 exacted: in the cam of 480). Lem than n. year earlier in Helvering V. Gerhardi (804 D. 8. 405), (he Court 2074 REVENUE REVISION OF 1942 REVENUE REVISION OF 1943 2070 the Blate bondfiolders, to some agtent which is difficult of procise Peraphrasing the Isnguage of the Supreme Court in the Alaboma 0688, No my At the bearings Tast month before the Committee on Usja and Means of the Cherefore conclude that so for sa e nondiscriminatory Federal Income IRE upon House of Representatives, reference WE made tax the fears expressed to 1910 by & holder of 4 State obligation enters into the cost of borrowing that la but - then Governor Hugber, of New York, that the proposed signamth amendment normal meldent of the organization within the mme territory of two Independent would suffiorise the taxation of Interest received from State sed municipal abil- gations. Reforence was also made to the subsequent associations of Sensior Hoot Insibe sovervigns. What mid thus for es to the power of the Federal Government to and Benntor Borah loading to the conclusion that the emmdment was adopted by Impowe a TAX upon trentan received from State obligations applies with equal the legislatures of all views.of-the latter two to mind. The force to all Interest herenfter received whether upon future Inmice or upon statements of Governor Hughes and of Benators Boot and Borah, and of many outstanding obligations No constitutional question 0.0 to the validity of 6 Fetro- others, were gathered and commented upon in our study, It is significant that n active DUE is Involved- Bee United Blates V, Hudson (290 U. 8. 408), and came large number of public officials (some agreeing and others diengreeing with the cited therein. The proposed tax reaches only future Income, and to (Derefore construction placed upon the emendment by Governor Hughes) urged that If the entirely prospective in operation. It possesses the arme constitutional validity Hugbes construction was correct, If furnished AS additional ground for the adop- se the Income tax Imposed by the Public Salary Tax Act of 1900. upon the tion of the amendment. Amoug chose was Frederick M. Devenport, to whom income received after 1988 by all Federal judges, Irrespective of the date of Benator Root's letter had been addressed, and Senstor Brown, of Nebraska, who wes the father of the joint resolution submitting the aucondment to the States. their appointment to office. The assumption, which was formerly prevalent that interest received upon It to along significant that the New York Legislatore rejected the amendment in State securities was Immune from Federal taxation, Le aualogous to the assump- 1910 after the message of Governor Hugbes, hot retified It subsequently under the tion of many years standing that under Boans V. Core (253 U. B. 245), an income administration of Gov. John A. Dix, who vigorously champloned the brondest Interpretation of the amendment. Ins upon the salaries of Federal judges would be unconstitutional es a diming- The foregoing and ao abundance of similar evidence permitted the conclusion Non of their compensation. The salaries of some Federal jodges were tende to be reached In our study that the preponderant understanding of the States at subject to the Income-tax laws by the Revenue Act of 1932, which required that the time of the ratification of the stxteen(b ninendment was that Its adoption all compensation received by judges taking office after June & 1082, the effective would in all probability carry with It the power to tax the Income from State date of the net, be Included In grows Income. Judges who had taken office prior and municipal bonds to June 6, 1882, were thus given e statutory tax immunity. In the case of the We should Uho to reiterate, however, Chat the constitutionality of the proposed bondbolder, express statutory exemption was included In the act of October 3, legistion does not depend exclusively upon the acceptance of our construction 1918, and this provision was repeated to later acts. With the realisation that of the eixteenth amendment, namely, that the words "from whatever source tax Immunity of judges who had taken office prior to June 6, 1932, was not M. derived" mean exactly what they say, and ne 20 Interpreted clearly embrace constitutional requirement, the Congress, by the Public Salary Tax Act of 1039, Income from Government securities. With full confidence, the validity of our look the final step to remove It. The present proposal to tax future income may rest upon the Deste proposition previously discumed that DO Im- of all State securities Le therefore consistent with the procedure and objective piled constitutional Immunity from Federal texetion attaches to Interest received of the Pablic Salary Tax Act of 1989. & further illustration of the applention from State and municipal obligations. of the Income-tax laws to future Income arising out of transactions which were Very truly yours, closed before the particular taxing provision was adopted may be forms in SAMURL O. CLARK, Jr., Burnet V. Wells (289 U. 8. 670). The grantor of an irrevocable trust was there devistant Attorney General. held constitutionally taxable upon the trust Income although the trust bed botte created before the enactment of the statute Imposing the tax Mr. BUCK. Mr. Paul, I rather think I am in sympathy with the There for no eonstitutional basis for contending that Income herenfter received proposition of the Treasury that income on State and municipal bonds upon outstanding State bonds must be free from Federal toxation Decause the hereniter issued should be taxable, I certainly am not in sympathy obligations were issued and purchased on that implied or expressed understand- with any attempt to tax income from similar bonds which have been log. The Federal Government was not B. party to such contracts and The power of the Congreso to enact a revenue measure is not rettered by any agreement issued hitherto. This Treasury proposal covers the latter as well as between Individuals or between an individual and a State. There are mmy the former class of securities. Illustrations of this proposition. Thus, In Louisotile di Nashville R. R. V. Mottley Mr. PAUL The Treasury proposal covers both outstanding and (219 U. 8. 467). an net of Congress which prohibited the enforcement of certain future State and local securities. The opinion of Mr. Clark, of the contracts for transportation WOR upheld, although applied to n preexlating con- tract. In New York V. United States (257 D. 8. 501), an order of the Interwate Department of Justice, covers the constitutional issues with respect Commerce Commission which increased no intrastate vallroad rate wee upheld to both outstanding and future issues. even thought the State charter had provided that B Inster mile should be charged Mr. BUCK. Then he does not agree with Daniel Webster. by the company. Bee niso Norman V. n. di 0. R. Oo. (204 U. 8. 240). Mr. PAUL, I do not know what you are referring to in Daniel Web- It accordingly appeare that no objection DE constitutional grounds can be ster's statements. successfully mised apainst (De proposal to tax the Income bereafter received upon outstanding State obligations. foderd, the assistant secretary of the Conference Mr. BUCK. I mean the fact that any obligations entered into, any on State Defense has admitted that If Peteral insention of trenme artstog ont contract entered into, is inviolate, of future feaues of State bender le constitutional, "there remains no constitutional Mr. PAUL. I do not see any inconsistency between the two state- bar to Federal taxation of the Income received from the bonde now outstanding" ments, Mr. Buck. The Federal Government is proposing to respect (Tar Immunity and the Revenue Bood, by Daniel B, Goldberg n. printed memo- randrum distributive by the Conference on State Defense, March 1040.1 its own contractual obligations, The Department's study of 1088, reforred to above, reached n. mecond and afterns- The Federal Government never made any contract with respect live conclusion that Irrespective of the weakened vitality of the Pollock COME and to State obligations. Collector v. Day, there la sound baste for a construction of the statements anound- All that the Federal Government has ever done is to put into the ment which would remove the fmmmity of the State Bondholder and officer. We IDere examined at length the history or the refilication of the amendment and statute AD exemption provision, and surely there is no taxpayer- presented no exhibits the evidence which would support that conclusion. Accord- Mr. BUCK. I want to raise as much money (LE we can, but I want to Ingly, we refrate from entering Into that rhano of the problem in detail. One do 10 legitimately. The States have made contracts with their citizens betef observation, however, seems appropriate. 2976 REVENUE REVISION OF 1042 BEVENUE REVISION OF 2942 2077 who have bought securities, have they not I do not know whether you own any State bonds, OF whether any of my conferees own any of Mr. PAUL The Treasury To also opposed to that bill and completely tham, but if they do they bought them under the assumption that they agrees with you about that bill, and objected to its pamage. were going to be tax free, did they not? Mr. BUCK. For heaven's sake, do I find that I and the Treasury are Mr. PAUL The purchasers of these bonds may have thought when in agreement oncel Thank you for that they bought their bonds that they would be exempt. They bet on the On page 3 of your statement you my: continuance of the exemption provision. Those who bought such For 1041 the average coupon rate on all unistunding Miate and local government bonds, I would add, before the O'Keefe case WILS decided in 1939, securities was frist over 5 percent. bought their bonds in reliance upon an erroneous interpretation of statement! Is it not & matter of fact, Mr. Paul, that that is a misleading the Constitution. When we buy such bonds we must take those riske At any rate, there in no contract between the Federal Government Mr. PAUL. I certainly did not intend it to be misleading, Mr. Buck. and the purchaser of State securities. Mr. BUCK. Is it not. a matter of fact, Mr. Paul, that if you go to any Mr. BUCK. I do not think that the Dartmouth College case had responsible dealer in municipal or State securities to buy such securi- anything to do with the Federal Government. It did have to do ties you will get what they sell you, regardless of what the coupon with one of the clauses in the Federal Constitution, and I think that rate is You will get just about 11/4- or 11/6-percent interest. applies as much to any attempt on the part of the Federal Govern- Mr. PAUL. You will get more than 13/2 percent. The index of the ment to tax hitherto issued securities. Understand, I am not talking 21/2. Standard Statistics Co. for April 1942, WILE 2.49, or approximately about anything which may be issued hereafter, but about hitherto issued bonds issued by the States. Mr. BUCK. How does a man with an income, say, of $150,000, know I have not had an opportunity to read the opinion you have put that be can go ahead and pick up some of these great bargains on into the record. I shall do 80 with great care and painstaking under- which he can get an income-tax exemption. I may want to buy some municipal securities for safety. standing as soon as I get the opportunity. But it seems to me that, after all, what has happened hitherto Mr. PAUL I mentioned the fact that a great many people have bought them for safety. must be taken as something that has gone off and is water over the dam, Mr. BUCK. Do you not think that is B mislending statementi and we cannot go back there and recapture taxation from people who Mr. PAUL I do not think it is misleading because in the same sent- have bought bonds and securities or anything else on the basis that was authorized at that time. ence I refer to the average coupon rate which ix 4 percent- Mr. BUCK, That is what I am speaking about. What is your opinion about that? Mr. PAUL. And we give the yield rate for April 1942. Mr. PAUL. Of course, I would not be here urging this recommenda- Mr. BUCK. Do you think that the yield upon municipal and State tion of the Treasury if I did not believe it was the right thing to securities bought is 2.49 on the price the individual has to pay? do, I do not believe that the Dartmouth College care affects the Mr. PAUL It is the average of 15 municipal bonds included in the issue here, because there are no contracts here that have been made Standard Statistics Co.'s index. Of course, some of the very finest of by the Federal Government. those will have A lower yield. Some of the weaker bands will have a Mr. BUCK. A contract has been made between the State of Cali- higher yield. fornia, let DS say, and the man who buys the bonds. Mr. BUCK, May in inquire whether you included in the list of mu- Mr. PAUL That is true; but that contract is not a contract with nicipal and State securties bonds of water districts. irrigation the Federal Government, and the State has no right to make any districts, and so forth? contract with respect to what the Federal Government would do by Mr. PAUL We are not using any average of our own. We are tak- way of future taxation. ing the Standard Statistics index which, I am told, is accepted by the Mr. BUCK. How far do you want to advance the authority of the market, Federal Government to override contracts that States make Mr. BOCK. Suppose you were like I am. Suppose I wanted to buy Mr. PAUL I do not think it is a question of overriding a contract, $5,000 or $10,000 of municipal bonds, and I get IL quotation from a Mr. Buck. The two Governments, Federal and State, are both sov- responsible firm, and I find that the average WILS under 1 percent. ereign under our system, and neither has the right to make any Mr. PAUL Well, I do not see how one could get such a low rate. contract except within the limitation of its inherent sovereign ca- The Standard Statistics Co.'s index for April 1942, the average rate pacity, and it cannot bind the other. is 2.49 percent. Mr. BUCK. I am glad to hear you say that. Every proposal that Mr. BocK. Mr. Paul, what is the interest that the Treasury is pay- the Treasury has made so far in the last 2 months has been one to ing on the last two offers they made to the public? override the authority of the States to make their own tax rules. Mr. PAUL. It is paying 21/2 percent on some of its offerings. 1 do There is a bill pending now in the Committee on Rules, which not know whether you are referring to Defenso bonds or not, but on I am going to try to defeat when it comes on the floor of the House, long-term securities generally it is higher. But, of course, on their if it does, which tends to destroy the States' rights in taxing matters. short-term securities it is around one-half of 1 percent. It will de- Mr. PAUL You are referring to the Cochran bill. pend, I think, on the length of the maturity. Mr. BUCK. Yes. 2978 ILEVENUE ESVISION OF 1945 SEVENUE REVISION OR Jeg 2070 Mr. Brook. The interest you can obtain from Treasury securities ranges from one-half of 1 percent to 1½ percent; I think that in the Mr. Paul. The remark you quoted and asked me to amplify was made with reference primarily to the question of how much it would correct figura. Mr. PAUL We will check the figures. cost the States. It was only secondarily with reference to the question Mr. BUCK. I read that in the paper this morning. of the elimination of the outstanding examption. In other words, I Mr. PAUL. We will check those figures. I am quito sure the average was trying to answer the argument made that it would be costly to the States, and I answered it in part by anying with respect to now is 21/2 percent. Mr. BUCK, Is it not fair to assume that you cannot sell any munici- issues the interest will be at present rates and would be at much less than the rate they are now paying on outstanding issues. pal or State bonds with any greater return to the investor than that! Mr. PAUL No; the situation with respect to municipal bonds in Mr. BUCK. I am not particularly worried about the States, but about what it will cost the individual who has already entered into his much more complicated because we have in the market special de- mands for those bonds because they enjoy tax exemption which our contract with the State for these bonds, where he has built up his own individual income basis. What will it cost. him Federal bonds do not anjoy. We are issuing no more tax-exempt Mr. PAUL In table 9 we give, in the next to the last column on the Federal bonds. How that affects the equation I could not say pre- right, the spread between high-grade corporate bond yields and mu- cisely. But the situations are not comparable. nicipal bond yields, and I think that, generally speaking, that spread Mr. BUCK. On page 7 of your prepared statement you say that- represents what it cost the individual investor to purchase a tax-exempt the removal of the tax exemption would be more than offset by the drastle bond rather than 21. taxable bond. decilne that has taken place in the general level of interest rates. Mr. BUCK. Mr. Paul, would it be any trouble for you to put into I wish, for my own information, you would emplify that & little the record a statement showing what is used as A basis of the April 1, bit. I do not get the theory, because I do not believe there has been 1942, average yield of municipal bond interest? any drastic decline in interest rates; and in the second place I do Mr. PAUL. We can only put that in the record if we can get that not know where the tax exemption would be offset by such a thing, computation from the Standard Statistics Co. if it occurred. (The information requested is as follows:) Mr. PAUL I said in my statement that them bonds of States and List of bonds included in Blandard Ellatistics Municies] Band Indom municipalities were issued B. number of years ago, in great part carry- Baltimore, Md., 4's, March 1, 1061. ing coupon rates of about 4 percent. Boston, Mass, 4's, June 1, 3961. For instance, if you will look- Clocinnati, Ohio, 4's, September 1, 1081. Mr. BUCK. So far as coupon rates are concerned, that in probably Dallas, Tex., 4½'s, April 2, 1961. correct. The State may have issued their bonds at 4, 41/2, or 5. But Donver, Colo,, 4½'s, June 1, 1961. that does not mean anything to the investor who goes in and buys Los Angeles, Callf., 4'a, March 16, 1961. Memphis, Tenn., 41,4's, September 1, 1961. them at 120 or 125 as against $100 at which they were issued, dom it? Newark, N. J., 4's, June 1, 1961. Mr. PAUL That is correct. If you will look at table 9 in my state- New York City, N. Y., 4½'n, March 1, 1942 ment you will find an answer to your question. Philadelphia, Pa., 4's, November 1, 1980. Pittsburgh, Pa., 0%'s, April 1, 1961. Mr. BUCK. I have looked at table 9. Providence, R. 1, 4's, July 1, 1061. Mr. PAUL You will see there in the third column from the right, Richmond, Va., 4½'s, July 1, 1061. municipal bond yields, from 1922 to 1942, and you will see that the St. Louis, Mo., 3%'s, October 1, 1955. yield on those bonds has dropped from 4.23 to 2.49 percent. For San Francisco, Calif., 4's. June 1. 1061. instance, at its peak, in 1933, the rate was as high as 4,71 percent. Mr. BUCK. Mr. Paul, I have investigated this subject somewhat That clearly indicates is drop in the interest rate, and as long as the thoroughly, with the idea in my mind that income of this kind ought interest rates stay at their present level there will be a considerable to be taxed from now on. less interest load on the States because they can issue bonds now at I believe you think it should go back, to be retroactive with respect to about 21/2 percent as against 5 percent in 1933. contracts hitherto entered into. Mr. BUCK, Let us not quarrel about future issues. What have been If you cannot get that information from your own organization, talking about is those which have been issued, and which you my the but get it from this organization known as the Standard Statistics Co., Treasury also wants tax-exempt. it seems to me you are not utilizing your full ability. Mr. PAUL, That is right. I am not very much of an authority either in the committee or else- Mr. BocK. You want to base that on the fact that the bonds have where, but, Mr. Chairman, I am going to nsk authority to insert in been issued with 4-pereent coupons or percent coupons on them. Is the record a list from a very reputable bond house that deals in munici- not that right? pal and State securities, which indicates that the 2.49 percent figure Mr. PAUL Those remarks about 4 percent were addressed- time. inserted in table D by Mr. Paul is entirely out of line at the present Mr. BUCK. Regardless of what the purchaser may have paid for them and whether he is earning 4 percent, 1½ percent, OF one-half of 1 A great many people have invested in these securities, Mr. Paul, percent. Is not that true? and, as you know, they are dependent upon their interest from them for their income. 2080 REVENUE REVISION OF 1942 ENVENUE REVISION OF 1862 2981 Future income should be taxed thoroughly-there is no question Mr. Cooren. You believe it is the only reason? about that-whether it is my salary or anybody else's salary. Mr. PAUL That is right. But it seems to me that if you propose to go back retroactively and Mr. COOPER. Following that line of reasoning little further, there take away something that they have invested their life savings in, you have also been other exemptions in the Federal income-tax law all are doing something that is entirely wrong. through the years? Mr. BOEHNE. Either in your main statement, Mr. Paul, or in one Mr. PAUL A great many; yes, air. of your answers to a question, you said that a citizen of this country Mr. COOPER. A great many exemptions! is IL citizen both of the State and the Nation. Mr. PAUL That is right. Section 92 contains & list of quite a num- Mr. PAUL That Was in my main statement at the end, ber of statutory exemptions or exclusions from gross income, Mr. BOEHNE And you said that both the State and the Nation are Mr. COOPER. I now remember that the first income tax act exempted sovereign. a thousand dollars for single persons and two thousand dollars or Mr. PAUL That is correct. twenty-five hundred for married persons from individual income lix- Mr. BORHNE. Is it not true, however, that the Nation is sovereign ation. Is that right? only in the regularly constituted delogated powers? Mr. PAUL The first act? Mr. PAUL, That is true. Mr. Cooper. Was it not the first? Mr. BORHNE. Which the Constitution gives to the Nation Mr. PAUL, I think they were higher in those days-$3,500 or some- Mr. PAUL That is true. thing like that, as I remember it. Mr. BOEHNE. And the burden of proof, therefore, rests with the Mr. COOPER, Anyhow, whatever the amount of the first not was, Nation to show that this is proper constitutional legislation! every net since then has given specific exemptions for individuals! Mr. PAUL. Well, Mr. Boehne, I realize that the Federal Govern- Mr. Paul, That is right. ment is n. Government with delegated powers, and I am perfectly will- Mr. COOPER. Of course, the exemption now stands at 5750 for single ing to take the constitutional burden. That is why I called upon the people and $1,500 for married people. Assistant Attorney General of the United States for expression of an Mr. PAUL Yes, sir; that is right. opinion on that point. Mr. COOPER. That exemption has been changed many times through- Mr. BOEHNE. That was my next question. And the opinion of the out the years? Assistant Attorney General AS written is based on that point, is it not! Mr. PAUL That is right. Mr. PAUL It is. It is quite a thorough discussion of the whole Mr. COOPER. And is subject to change at any time that Congress may see propert subject. Mr. COOPER. Mr. Paul, without intending to reflect any views that Mr. PAUL It might even be eliminated altogether, I should think. I may have on this subject, I would like to inquire of you briefly in Mr. COOPER. Because in line with your position it is only a specific exemption provided in the law? order to get a clear understanding of the Treasury's position. Is it Mr. PAUL That is right. the position of the Treasury Department that there is no legal or moral obligation on the Federal Government to continue the exemp- Mr. COOPER. Then, of course, under section 101 there are quite it number of corporations that are exempt? tion that exists in law now with respect to the State and municipal Mr. PAUL That is right. securities? Mr. COOPER. From the income-tax law, I mean, Mr. PAUL That is & correct statement of the Treasury's position, Mr. PAUL That is right. which was somewhat stated just below the middle of poge 10 of my Mr. COOPER. I just happen to have that section before me. In statement, which I did not bother to rend to the committee this after- section 101 there are 19 different paragraphs covering various types noon. And then, Mr. Cooper, the Assistant Attorney General's opin- of corporations that are exempt under this section. That is true, is ion also deals with the legal issue. it not Mr. COOPER. It is correct that the income from these bonds is not Mr. PAUL That is true, Then you might also refer to section 23, now taxed, because there is IL specific exemption in the income-tax which has a list of deductions, which may be equivalent to exemptions. lawl Mr. COOPER. Under this section 101, No. 1 under that is labor, agri- Mr. PAUL That is right. In section 22. cultural, and horticultural organizations; 2, mutual sivings banks; Mr. COOPER. And that exemption has continued throughout the ex- 3, fraternal beneficiary societies; 4, domestic building and loan as istence of the Federal income-tax law? sociations: 5, cemetery companies; 6, corporations and any community Mr. PAUL. Yes. It was put in originally, I think, in the 1913 act, chest fund or foundation; 7. business lengues, chambers of commerce, and has been in every act since that time. real estate boards, and 80 forth; 8, civic leagues or organizations; Mr. COOPER. All right. And it is by reason of the existence of that 9, clubs organized and operated exclusively for pleasure, recreation, specific exemption that the income from these securities is not now and other nonprofitable purposes; 10, benevolent life insurance M- and has never been taxed by the Federal Government! sociations; 11, farmers' or other motual hail, cyclone, or gasoline fire Mr. PAUL I believe that that is true, Mr. Cooper. Of course, that insurance companies or associations; 19, farmers', fruit growers'. or is subject to the question of constitutionality. I believe it is the only reason. Unclassified 2982 HEVENUE REVISION OF 1942 EAVENTIE REVISION OF 1943 2983 like amociations; 18, corporations organized by any association exempt Mr. McLass. But your approach to the proposition is one that has from the provisione of paragraph 12 or members thereof; 14, corpors. entirely to do with revenue, is it not ? tions organized for the exclusive purpose of holding title to property, Mr. PAUL. No. It in not. collecting the income therefrom, and turning over the entire amount Mr. McLEAN. It is not! thereof, less exemptions, to any organization which itself in exempt Mr. PAUL Our approach is from the revenue and-- from the tax imposed by this chapter; 15, corporations organized under Mr. MOLEAN. What object are you weeking to attain? an act of Congress, and so forth; 16, voluntary employees' beneficiary Mr. PAUL Two things. The first thing in that we are trying to ob- associations; 17, teachers' retirement fund associations; 18, religious tain il just distribution of the tax burden, and we think this exemption or apostolic associations or corporations; 19, voluntary employees' prevents us from making that just distribution. Secondly, we are beneficiary associations. interested in the large amount of revenue which would energo from the As I understand it, it is the position of the Treasury that this exemp- taxability of this interest. tion now in the law as to income from State and local securities standa Mr. MOLEAN. It goes without saying that you are more interested ne an exemption in many respects like all these other exemptions now in revenue than you are in other considerations, does it not? included in the income-tax law. Mr. PAUL I do not think that it goes without saying. Mr. PAUL That is right. Mr. McLeAN. Isn't this true: that in the approach which you have Mr. COOPER. And may be altered, changed, or removed at any time just stated on the two grounds which you have mentioned you abso- if Congress would see proper to do so? lutely disregard the danger of placing the weapon of taxation in the Mr. PAUL That is the Treasury's position. hands of the Federal Government, with its threat against the preser- Another thing that you might mention by way of analogy is the vation of the sovereignty of the States dividends which were formerly exempted from the normal income Mr. PAUL Mr. McLean, I do not think it is is question of placing it tax. We took that exemption out in 1936. We had it in the statute, one place or the other. I think Congress has this power, and the As- and we took it out of the statute, and we may do the same thing with sistant Attorney General's opinion, which I have just put in the record, respect to this exemption of income from State and municipal bonds, agrees with that view, always assuming that we are correct in our constitutional position, In other words, with no constitutional barrier the responsibility is which we base on the Assistant Attorney General's opinion. on Congress to exempt or to tax. Mr. Coorer. I thank you. Mr. MOLEAN, Would you in the light of what has happened under Mr. MOLEAN. Mr. Paul, do I understand you to say that the only our experience under the Constitution of the United States place all reason why State and municipal securities are now exempt from taxa- power and authority in a strong centralized government In other tion is because of a statutory enactment of the Congress in the income words, would you call a constitutional convention today to reconstruct tax law of 1918 our Government in the light of the experience that we have had in Mr. PAUL No. It is a provision in the Internal Revenue Code now. the last 150 years? Mr. McLean. Well, ns reenacted in the code. I mean to say, do 1. Mr. PAUL. I think, if I may say so- understand the Treasury's position to be that the only reason why Mr. MCLEAN. Supplementing that question In reaching the con- State and municipal securities are now not subject to taxation is because clusion to call a new constitutional convention would you disregard of the exemption in the statute, disregarding the decision in McCul- the doctrine of McCulloch V. Marylond and the wisdom of John Mur- lough Maryland, which established the immunity rulei shall and Daniel Webster! Mr. PAUL That provision is the only thing that bars the taxation of Mr. PAUL. Answering the first part of your question, Mr. McLean, the interest on those bonds. In other words, there is no constitutional I would not call a constitutional convention nt this time. I am per- barrier to taxation, and the only thing that keeps them exempt is this fectly satisfied with the Constitution as We have it. exemption provision of section 22, Without that exemption provision The question here in, What doos the Constitution mean, the Consti- they would be swept into the orbit of taxation by the beginning of tution that we now havel It is not the Constitution that might section 22 (a), which refers to the taxation of gains, profits, and in- emerge from some convention, I am saying that the Constitution that come from any source whatever. we have today unables DR to tax the interest on State and municipal securities. Mr. McLEAN. What I want to get at is the approach of the Treasury Department to this proposal. There are two schools of thought. Mr. MCLEAN, Is it any different from the Constitution that we had in 18181 Your school of thought is that State and municipal security holders are now evading taxation because of this situation? Mr. PAUL In this respect it is no different. It is no different in that Mr. PAUL. I do not say that they are evading it. I think they are there in no provision in the Constitution anywhere about this subject. enabled by the statute to avoid their just share of the tax. Mr. McLean. We can argue about that. But isn't this doctrine one of the principles we have in mind when it is said that John Marshall I do not blame any holder of these bonds for not paying a tax. I hung the Hesh on the skeleton of the Constitution and gave it life, and simply say that the statute ought to be changed NO that they cannot avoid their just share of the tax burden. which became end have been recognized as fundamentals of our con- stitutional system, and recognized and restated as constitutional provi- sions right on down nutil BS recently as Collector Y, Day? 2984 REVENUE REVISION OF 1948 REVENUE REVISION OF 1945 2986 Mr. PAUL. That doctrine that you refer to, Collector Dog-that case was decided a great many years ago, too. Mr. McLEAN. They said, "You cannot imme notes unless you print Mr. McLean. How many years ago! them on paper provided by the State of Maryland." Mr. PAUL That is right. Mr. PAUL About 70 years ago, Mr. McLean. And the other case WAS decided 150 years agol Mr. MOLEAN. "And that paper must have a stamp on it" Mr. PAUL. That is right Mr. PAUL The question is not how long ago that decision wan, Mr. McLean. The question in what the Supreme Court will do. Mr. MOLEAN. "Which represents A (ar" Mr. PAUL That is right, Mr. McLmax. When you tell us that a case is not good because it was decided 70 years ago and then tell us that another case is good be Mr. McLEAN. "A tax 80 high that you cannot do any business in cause it was decided 100 years ago, I do not understand your legal bank." Maryland. Therefore we will have the State of Maryland for our ow)) philosophy. Mr. PAUL. I did not mean to any that Mr. PAUL. That is right. That in a correct description. Mr. MCLEAN. Let us put it this way: You think that the doctrine Mr. MOLEAN. And when Daniel Webster wrote the brief didn't he of Collector V. Day was good doctrine at the time it was decided? say that this was an illustration of how the power to tax is the power to destroy! Mr. PAUL I think it was probably an unwise decision. But I can- not question the Supreme Court. I say that now it has been overruled Mr. PAUL. It is B. good many years since I have read the case, and I will not quote by the Supreme Court. Mr. McLEAN. And McCullooh V. Maryland was good doctrine? Mr. McLean, That is what he said, and John Marshall accepted it. Mr. PAUL I know that John Marshall seconded the opinion, Mr. PAUL I think so. It emphasized the power of the Central Gov- ernment, and was probably a. wise decision at the time. I am not Mr. McLEAN. And he also said this: He said "that the State may tas mails, may tax the mint, may tax patent rights, may tax the papers questioning it. m the customs house, may tax judicial process, may tax all the means Mr. McLean. Would you disregard McCullooh V. Maryland today? employed by the Government to an excesse which would defeat all the Mr. PAUL I do not think I would. ends of government. That was not intended by the American people. Mr. MOLEAN. Didn't that decide that the power to tax was the power They did not intend to make their government dependent upon the to destroy, and that you put a dangerous instrumentality in the hands States." That has been B. principle of our Government ever since, and of concurrent governments when you gave them the power to tax the that was the idea when the sixteenth amendment was adopted, instrumentalities of each other? When the sixteenth amendment was proposed, Governor Hughes Mr. PAUL The case did not decide that question, Mr. McLean. It said, in effect, "The danger about this thing is that it will open the had a statement in it. You are quoting one of Mr. Justice Marshall's door to the Federal Government taxing instrumentalities of the statements, which is n very general statement and which has been some- State of New York and thereby affect its sovereignty, and I withhold what criticized by the late Mr. Justice Holmes in his opinion in the my approval of it." Panhandle case. It is such a broad generalization, that the power to It WBS not until the now famous letter of Senator Root, and the tax is the power to destroy, And Mr. Justice Holmes said, "Not while argument of Senator Borah, convinced the governor of New York and this Court sits." the governors of other States that the immunity rule as recognized Mr. McLean. Let us lay aside words and phrases. Let 08 look at the would prevent the Federal Government from interfering with in- principle. Were not these the facts: The Government of the United strumentalities of the States and that the immunity rule would con- States established B. bank, and the State of Maryland wanted to keep tinue that New York and New Jersey and some other States gave their that bank out of the State of Maryland, and they put such a big tax approval to the sixteenth amendment. on it that the bank could not come into the State? That was their pur- In everything that I have read that has come to me from the Treas- pose, was it noti ury before you came on the scene, and in your brief today, there is a Mr. PAUL The Court held that it was discriminatory taxation. That strained effort to explain away the circumstances surrounding the is true. Root letter. For instance, in your brief you say that the State of New Mr. MOLEAN. I am not asking you the nature of the tax. That is York did not approve of the sixteenth amendment until Governor what happened in that case, WNB it not! Hughes had retired from office. Mr. PAUL There was a statute passed. That is right. Governor Hughes' retirement from office is a very slim reason to Mr. McLean. There were two banks. There was B bank of the advance as to why the State of New York approved the sixteenth State of Maryland. There was a bank of the United States. The amendment, State of Maryland desired to keep the bank of the United States out In this situation, why does the Treasury not consent to the people of Maryland. Isn't that truel by a constitutional amendment deciding that the immunity rule be Mr. PAUL. I think that that was the purpose: yes, eliminated, and the Federal Government given the right to tax State Mr. McLEAN, And the State of Maryland put A tax on any business instrumentalities? done by the bank of the United States in the State of Maryland. Mr. PAUL The reason why the Treasury does not urge a constitu- Mr. PAUL That is right. tional amendment is because it deems such an amendment unnecessary. 05001-c2-pt. 20-0 2986 REVENUE REVISION OF 1943 REVENUE REVISION OF 1442 2987 That same line of discussion was before us at the time we had BO much in the forefront the question of taxing State salaries, and the the bent interest and preservation of my Government, irrespective Supreme Court held in the Gerhardt case that that amendment was of John Marshall OF Daniel Webster or any Supreme Court decision. not necessary; that we had the power. We are in the same position I am nsking you to tell me if you think it is safe for two concurrent with respect to municipal bond interest that we were before with governments to have equal power of texation, and I am giving you respect to State salaries. And we were upheld by the Supreme Court. situation. an illustration and asking you if you think there is any danger in that Mr. MOLKAN. Then, laying aside all judicial determinations and all decisions, the Congress is faced with a broad question. Let us set all Mr. PAUL The answer is that I do not think there is any danger in other considerations aside, and face the broad question: Is it good that situation; that it is entirely safe to follow the Treasury recom- mendations insofar as the point that you raise is concerned, governmental policy to allow two concurrent governments to lusve the Mr. McLEAN, You do not think that the Federal Government might right to reciprocal taxation? Mr. PAUL. I think it is. The position of the Treasury for some time coure along and put a las on a State authority 00 high that they could not do business! has been in fnvor of eliminating these intergovernmental immunities Mr. PAUL, I would have confidence that the Congress would not applicable to obligations. do that, in the first place; and in the second place, that if the Congress Mr. MOLEAN. Let us lay aside the question of the Treasury's position, did do it, our Supreme Court would hold that the tax Was discrimina- and let us argue this thing academically from the standpoint of the tory and therefore unconstitutional. experience of the Nation and of the people, Does your proposition Mr. McLean. Well, Mr. Paul, when we studied the Constitution contemplate that the State of New Jersey shall have the right to fax we were taught that it was to protect against human frailties; that Federal instrumentalities! it was to preserve certain principles which experience bad taught Mr. PAUL. Yes, it does. We want to have the immunity of both were essential to human freedom. And therefore there were put. eliminated as to their obligations, in the Constitution certain restraints and certain limitations. Mr. MCLEAN. You would give the State of Tennessee the right to It does not make any difference what we think individually. The tax the Tennessee Valley Authority on its bonds! fact is that certain things had happened. And one of the things Mr. PAUL. We would insofar as we had not already made u contract. that had happened was the abuse of the power of taxation by the I don't know about the Tennessee Valley bonds. In some bonds, in IL government in power; and with those thoughts in mind the Consti- great many of our previous Federal issues up to about a year ago, we tution was adopted, and with those thoughts in mind the Constitution contracted the exemption. was accepted. And over all these years we have had this immunity Mr. McLean. You contracted the exemption with the Tennessee ensetment. rule which you do not dignify AS anything more than M. stautory Valley Authority! Mr. PAUL. I nm not sure about that particular one. For instance, Mr. Cooper has cited a. number of exemptions under Mr. McLean. I am asking you- the Federal Code. And I can understand that there is a reason for Mr. PAUL. I am not familiar with the Tennessee Valley bonds. them. For instance, there is a reason why a man should be exempted Mr. MCLEAN. Let us suppose now, no matter what you did-1 am for the dependents in his home. just talking academically-let us suppose that you found it desirable Mr. PAUL, That is right. to exempt bonds of the Tennessee Valley Authority from Federal Mr. MCLEAN. That is quite is different reason from that upon which taxation, and suppose you did not find it 60 desiráb e to exempt the the taxation of State securities is exempted, is it not? bonds of the South Carolina Power Authority. You could tax the Mr. PAUL Yes. bonds of the South Carolina Power Authority. You could tax them Mr. McLean. There is 8. reason for agricultural products to be out of existence, could you not, and still leave the Tennessee Valley exempted to some extent. The mere fact that there are a number of Authority the beneficiary! Could you not by that means drive out exemptions mentioned in the Revenue Code does not give them any of existence the South Carolina Power Authority and turn all of its particular dignity or importance. Nor does it drag down the great assets over to the T. V. A.I iti time-honored rule of immunity to the level of those other things, does Mr. PAUL I do not think that you could. I think that that would be discriminatory taxation, and would be therefore unconstitutional. Mr. PAUL I quite agree that those exemptions in the statute have Mr. McLEAN. No matter what we may think, it is possible, is it not! a different history and 8 different underlying cause, Mr. PAUL. I do not think so. Mr. McLean. The mere fact that there are a great many of them Mr. McLean. Given n friendly Supreme Court, what in going to does not add any importance to the argument for this exemption or prevent in add any relevancy at all to the taxing of bonds. Mr. PAUL. I cannot do anything but accept the Supreme Court Mr. PAUL. There were different reasons underlying each different exemption, of course, that we have. Mr. MOLEAN. Don't let us hide bohind the present Supreme Court Mr. McLeas. That in what I any. The mere fact that there are or any others. I am asking you now, and I want you to tell me as 15 or 16 exemptions does not mean that they have any relevancy to a Member of the Congress what is the thing for me to do now for each other, 2988 BEYENUE REVISION OF 1982 REVENUE REVISION OF 1949 2989 Mr. PAUL I think what Mi. Cooper had in mind - not that Mr. DISNEY. I remember very distinctly Mr. Sullivan made a speech but, rather, that be was trying to show that there were other es- at St. Louis a year ago at a conference of mayors in which be stated emptions in the statute, and he was trying to show that any provi. Hatly that it would be a breach of 11. moral obligation. mion of the statute which in nothing more than an exemption could Mr. PAUL Of course, I do not have the speech to which you refor. be changed. But the answer to your question as far as I am concerned in that con- Mr. MOLEAN. I gathered from his enumeration of 80 many UX- siderations of equity and morale with our increased tax load today and emptions that he was lending importance to the fact that this im- the various other considerations that I have mentioned in my state- munity from taxation did not amount to anything more than a mere statutory enactment. But I put it on a much higher plane, I put before. ment make it altogether a different question today from what it WILH it. on the plane of a fundamental principle which goes to the preser- Mr. DISNEY, I would not think personally that the advent. of the vation of our institutions, the sovereignty of the States, and the in- war would make is difference in the moral aspects of a contract, expiress portance of the States; and to protect the States, as well us the Federal OF implied. Government, from putting into the hands of any governments with Mr. PAUL Neither would I, I do not think that there is any con- concurrent jurisdiction an instrumentality by which one can destory truet, express or implied. the other or ruin its institutions. Mr. DISNEY. We will pass that. I still remember the very broad And I may say and I do not have to tell you-I sympathise with assertions of there being a moral issue involved, and I do not think you in your position-a distinguished member of the bar, who has that they should change NO suddenly, although we do need money, and written 8. number of textbooks, who is called down here to argue I believe that we ought to go out and get it by all the different methods against this fundamental proposition before B. committee of Con- and means that we ean. Did I understand you to say in unswer to Mr. gress, and I am satisfied that you must know that underlying the McLean that you would dispose of the immunity on both sides, that of whole argument is this rule of immunity and the reason for it, the the States and of the Government? reason which actuated Governor Hughes and Senator Root and Sen- Mr. PAUL. I think we should be consistent, Mr. Disney. ator Borah, the reason that actuates me in my opposition as I under- Mr. DISNEY, How far, now, would that got Would it go so far that stand the constitutional law of our country, and the reasoning that the State and Federal Governments could indirectly tax each other! actuated Marshall and Webster and all the rest. For instance, would you permit a State to put IL tax on a Federal build- And in your brief and in your statement here today, I have not ing and the Federal court pay a special assessment for that Federal been able to find to my satisfaction sufficient explanation of how building? you can give the Congress the right to say that this great immunity Mr. PAUL. I think we may leave that to the legislatures, which will rule, coming down to us from McCulloch V. Maryland, has only the certainly not pass IL statute that will go to too great extremes. weight of 8 mere statutory enactment, which Congress can legislate Mr. DISNEY. If you turn loose this doctrine of immunity, the legis- luture could do it, could it not! out of the way. That is all, Mr. Chairman, Mr. PAUL Mr. Disney, it is not a question of turning loose the doc- Mr. BOLAND, I ask unanimous consent, Mr. Chairman, to have trine of immunity. It is loose. Under the present interpretation of inserted in the record a statement by Mr. Friedman in answer to the the Constitution there is no immunity with respect to these obligations. statement made by Mr. Paul, in regard to the capital-gains tax. That, at least, is our position. Now the only question before us is The CHAIRMAN. Without objection, that may be inserted. whether we shall pass a particular provision in this statute, (The document referred to will appear in the revised edition.) Mr, DISNEY. I want to clear this up and see whether I am thinking Mr. DISNEY. Mr. Paul, first, I wish to satisfy myself that you are clearly. If it is loose, as you say, what is to prevent the Oklahoma right on this proposition, and then I want to ask you about some Legislature from passing B State statute saying that Oklahoma may have 8. right to put a tax on the Federal building there? other things. Last year, when we had this proposal or another related proposal Mr. PAUL The only thing that we are talking about is taxation of before us, when the Treasury was down here, an odor of sanctity income from obligations. We do not have the question of imposing a spread over the room which suggested that the Treasury would be INS on the Government. horrified at any attempt to upset this immunity. But now in less Mr. DISNEY. I am coming to that a little later. Now I want to stick than 15. year's time we are confronted with that very proposition. How close to this theoretical waiver of immunity on the part of both Gov- ernments. do you explain that? Mr. PAUL I think December 7 had a lot to do with it, Mr. Disney. It seems to me-and my idea on it is rather nebulous, I agree-that Mr. DISNEY. It becomes a need for money instead of a moral obli- if we do proceed on that theory, you do give leave to the legislature to permit such an action, though it sounds pretty far fetched and rather gation? Mr. PAUL. No. I think the Secretary in his original statement to ridiculous; but you make it possible. this committee made reference to the point that you have in mind. 1 Mr. PAUL I do not think that you do. The question here is the think he said that the war had changed the situation 80 ILS to make a question of whether to tax certain income. It is not a question of taxing the Government. gradual elimination of the exemptions insufficient in his opinion. 2990 REVENUE REVISION OF 1942 REVENUE REVISION OF 1043 2991 Mr. DIANET. But I am taking you nt your word on what you aid to Mr. DIRNEY. On this question of discrimination, how far ear you Mr. McLean about disposing of this mutual immunity. go in taxing the income of States and municipalities? Can you go Mr. PAUL What I said to Mr. McLean may have been pretty broadly further than the subjects that I have indicated? stated, as frequently happens when one is talking extemporaneously. Mr. PAUL I do not think you could, because you would be prevented But all that 1 meant to say there was that I thought there should be by various provisions of the Constitution. You would be discriminat- complete reciprocity as to the right to tax income from these obliga- ing if you made any unfair distinction between issues. In other tions. words, all classifications must be reasonable, and I think a classification Mr. DISNEY. Let us take that proposition, then. I do not want to to distinguish unreasonably between different issues would be uncon- take a lot of time. If there is that complete reciprocity, then the illns stitutional. tration that I suggested would not be inconceivable, would it! Mr. DISNEY. But suppose that the Supreme Court sustained it? Mr. PAUL It would. Mr. PAUL, Of course, if the Supremo Court sustained it, that would Mr. DISNEY. Of the State taxing the Federal Government's real answer the question. That seems to me to beg the real question here. estate, Mr. DISNEY. I am not trying to beg the question. I am trying to Mr. PAUL I do not believe that the Constitution would be inter- find out whether I am correct or not. preted so broadly as to enable one government to tax another govern- Mr. PAUL I do not base our position merely. or the question of ment directly. I am talking here, as I say on page 8, about private revenue. I think it is a question of revenue, as I told you before, but immunity from Federal income tax. I would also put it on morale. Mr. DISNEY. I want to stick to that subject. I want to see if I can Mr. DISNEY. In the old declaration there is something said about B. follow this thing through and do a little thinking on the subject. Evj. swarm of Federal agents. I can visualize that if you carry this thing dently Congress thought it was sound that neither government should far enough you may actually see sitting down at the city council a fax the other directly or indirectly. Evidently the earlier decisions of swarm of Federal agents telling them what kind of bonds to issue, and the Court were to that effect. not letting any county issue bonds that do not come up to specifica- Mr. PAUL Of course, the King and Booser case is the most recent tions. case, Mr. PAUL I have not considered that precise apprehension of yours, Mr. DIANEY, Yes, I agree that Mr. Justice Marshall was wrong but I think it is pretty far removed from the question that we have when he announced that the power to tax was the power to destroy. before us, of taxing the income. Mr. PAUL Of course, the position of the Treasury is that the States Mr. DIENET. If we tax the income of the States and municipalities, ought to have won the Boozer case. it seems to me that we do not have much further to go to let us tax Mr. DISNEY. What was that? each State directly or indirectly or let the States tax the Federal Mr. PAUL The position of the Treasury is in favor of the right Government directly or indirectly. of the States to tax also. That is all. Mr. DISNEY. To tax what? Mr. KNUTSON. Dons the Treasury recommend reciprocal taxation? Mr. PAUL, To tax the income, for instance, of Federal employees. Mr. PAUL. It does, Mr. Knutson. To tax the income of Federal securities where there is no previous Mr. KNUTSON. Would you confine such right to Federal and local contract made by the Federal Government. securities! Mr. DISNEY, It seems to me that that leads into a taxation by one Mr. PAUL. I do not believe I understand that question. That is all Government of the other sooner or later, whichever one seems to be that we have involved here. the most powerful. And, of course, you and I know that the central Mr. KNUTSON. Would you confine the right to tax on the part of the government finally geta to be the most powerful. States only to Federal bonds, like victory bonds and liberty bonds? Now, let me ask you this: Were you before the committee here a Mr. PAUL. I would say that if this Congress should remove this week or so ago when we were speaking about this? exemption from the statute now contained in section 22, it ought to Mr. PAUL. I do not think so, consent to the taxation by the States of Federal bonds. In other Mr. DISNEY. Suppose we do give the Federal Government the right words, all we have here is a question of taxing the interest on bonds. to tex the income from State and municipal issues. We will suppose Mr. KNUTSON. I understand that. I am speaking of the incomo, that the Congress would decide to put some regulations on those issues the interest on the bonds. I thought that it was understood that that and determine what particular issues that income should come from. was the subject that we are discussing. Then let us say that after a while some other Congress should decide What about the numerous bond ikanes that were guaranteed by the to make a difference between the issues and tax some and exempt Federal Government both as to principal and interest? To name a others. Certainly the Federal Government and Congress could decide few of them: The Federal land bank bonds, the Home Owners' Loan to take jurisdiction over the issues of municipal and State bonds, You Corporation bonds, Tennessee Valley Authority bonds, Columbia would have that authority under this doctrine, would you noti Valley Authority bonds, and others, of which I understand there are Mr. PAUL No. I would say, decidedly not. I think that the first nobody knows just how many, but I understand that there are twelve part of your statement would involve very definitely the discrimina- or fifteen billion dollars outstanding in those bonds, both in interest tion rule. and principal. 2992 REVENUE REVISION OF 1042 BRVENUE REVISION OF 1942 2993 Mr. PAUL I do not have those figures before me, Mr. KNUTSON, The figures would not make any difference. It Federal tax. What the State could do WILS to make an exemption MM would not matter whether it was two billion or twenty billion The to its own tax. principle in the thing that I am considering here. But, notwithstanding the fact that the Federal Government Was Mr. Paul. I want to be sure that I understand your question, created originally in a historical sense by the compact of One States, Mr. KNUTSON. What about the numerous bond issues that have been it is the sovereign government; and the whole doctrine of immunity, guaranteed by the Federal Government both as to principal and inter- indeed, is premised on the doctrine of sovereignty. esti To name AL few: The Federal land bank bonds, the Home Owners' Mr. KNUTSON. I agree with you that it in a. sovereignty question. I Loan Corporation bonds, the Tennessee Valley Authority bonds, the think it was settled very definitely back in the sixties. But what in Columbia Valley Authority bonds, and others. worrying me is if we have a moral right to tax bonds that have already Mr. PAUL, Wherever in connection with those issues we have made been issued us tax-exempt. a contract that the interest should not be taxable, I would not suggest Mr. PAUL Of course, I may be wholly wrong about it; but it seems that we break that contract. And 1 think that in a great many of to me that we have every moral right. Indeed, it seems to me that those cases we have so contracted. on the moral side of the question the shoe is on the other foot. Mr. KNUTSON. But, Mr. Paul, you are asking us to break contraste, We have a moral right to tax, in my opinion, because all the States You are asking us to have this bill carry X provision that would permit could do was to grant an immunity as to their own tax; and we are the Federal Government to tax outstanding State and municipal bonds not violating our own contract and we are not proposing to take away that were sold subject to being tax-exempt. from the holders of these bonds anything that the State issuing the Mr. PAUL But that was not our contract. That was not the Federal bonds had the right to give to those bondholders. Government's contract. Mr. KNUTSON, As I recall it, a year ago the Treasury Department Mr. KNUTSON. What is the Federal Government? suggested that only outstanding State and municipal insues be tased. Mr. PAUL Historically, of course, it is the Government that was Am I right? created under the Constitution, as somebody has said, with delegated Mr. PAUL That is right. The Secretary did take that position at one time, powers under the Constitution. Mr. KNUTSON. Delegated by whom! Mr. KNUTSON. The Treasury took that position a year ago, 11.M I recall it. Mr. PAUL. By the States. Mr. KNUTSON. In other words, those States were the creator of the Mr. PAUL About IL year ago, That is right. Federal Government? Mr. KNUTSON. I concede, of course, that this situation is vastly Mr. PAUL The States made a compact which resulted in a Federal different now; and if I can be persuaded that it is necessary to do Government. That is right. this in order to raise money to save the Republic, I am going to vote Mr. KNUTSON. The Thirteen States? for it. But you say that the primary purpose is not to derive more Mr. PAUL. Yes, sír. income, but, rather, to equalize taxation throughout the country, Mr. KNUTSON. The Commonwealth got together and drafted n. Con- Mr. Paul. Oh, no. want to make my position clear. stitution and set up a Federal Government. Tsn't that right? Mr. KNUTSON. I thought that that was what you told us. Mr. PAUL I may have said-I may have used- Mr. PAUL, That is right. The CHAIRMAN. There is too much confusion here. We cannot Mr. KNUTSON. So the Federal Government is the creature of the hear what is being said. States! Mr. PAUL, I may have used the word "primary." But if I did, I Mr. PAUL That is right. would like to make it clear that there are no scales by which I can Mr. KNUTSON. Now, if the States issue bonds which they say are precisely weigh the relative importance of the considerations that tax-exempt, that is the creator who says that. Then the creature says, go into our decision to make these proposals. "We won't pay any attention to the provision that those bonds carry I say this: That the revenue aspect of the problem in a very im- about tax-exemption." portant aspect. Two-hundred-odd-million dollars of revenue at this I am not a lawyer. I may seem very, very dense to some of your time is a very serious matter. legal advisers down there, who shake their heads. Nevertheless, I On the other hand, we are also motivated in making the proposal am interested in this thing from the standpoint of principle. And by the fact that we think that this exemption discriminates in favor I know that you are, and I have 8. high regard for you, Mr. Paul. of the high-income taxpayers and has a very bad effect on war morale Mr. PAUL. Thank you. at this time, and it is inequitable and enables a large number of tax- Mr. KNUTSON. But I am just wondering whether the Federal Gov- payers to pay no income tax, and that is particularly true at a time ernment would have the right, even assuming that it. is a legal right, like this. has it a moral right to take an action that would cause n. violation of Mr. KNUTSON When Mr. Disney questioned you, or, rather, ex- & contract that had been entered into between the State and its people! presesed the fear that in granting the Federal Government this power Mr. PAUL I think it has the right, Mr. Knutson, because the State of taxing the States, the income from State and municipal bonds, never did have any right to create un exemption privilege as to the he expressed the fear that it would serve to bring the States under 2094 REVENUE REVISION OF 1945 REVENUE REVISION OF 1883 2995 the direct control of the Government 80 far as their fiscal affaire are Mr. Reen. Mr. Paul, I believe you said when you were here about & concerned. You realize, I am sure, that you could wreck all the fiscal affairs year ago that the Secretary disclaimed any intention of tazing munici- pal bonds that were outstanding, State and municipal bonds. That is of the States, insofar as they were tired up with bond issues, through the way I understood your testimony here this afternoon taxation. You could impose a tax so high that nobody would buy Mr. PAUL [ was not here then. those bonds, which would result in an absolute stopping of future Mr. REED. Maybe it was Mr. Tarleau. issues of State and municipal bonds, which are badly needed for Mr. TARLEAU. I think that is substantially correct, sanitary and other purposes. I 30 not think that that is $ violent Mr. Rem. I wonder if you have a record of the number of State assumption at all. and municipal bonds that have been immed since that statement was Mr. PAUL. Mr. Knutson, I do not want to stop the States from made by the Secretary of the Treasury here before this committee. issuing any bonds. All that we are proposing is is statute which Mr. PAUL I am told that we can get an approximation of that. enables the Federal Government to collect a tax on the income from Mr. REED. I would like to have you do that and put it in the record. State and municipal securities. Mr. PAUL. I will do that. Now, we can certainly draw that statute in such a way that that (The information requested is as followe:) is all it will accomplish. Then these other things that may happen or will not happen as future Congresses may determine and accord- Bile and local rater of bonds and short-term notes, by months January 1941- ing to the Constitution as it may protect the States. March 1942 Mr. KNUTSON. That is where the rub is-what future Congresses 1941 1042 may determine. As Hamlet said, "There is the rub." 100 1013 Mr. PAUL. Not only that, but there is also in the equation the power LOND-ESSM LOANS SIGNATURE LOAN of the Supreme Court to decide any statute unconstitutional if it January $77,008.007 $118,540,246 Innuary violates the Constitution. February 190,174,023 $119,099,784 February March 177,087,444 104,227,335 26,453,120 08,276,816 Mr. KNUTSON. At the rate that we are traveling it is not a violent March April 63,074,007 101,658,500 April assumption to assume that we are headed for a pretty radical form May 115.081,023 May June 138,082,719 184,806,574 June of government in this country. July 81,044,523 151,000.087 Inly Aurtist 150,913,400 Suppose some administration should succeed this one that is even Aurost September 109,042,239 65,082,000 September more radical than this administration, and that they made up their October 75,473,642 October November 93,123,188 00,722.441 November minds that they wanted to break down the power of the States. You Documber 113,654.529 90,578,249 Destmber have your law on the statute books. One of the first things that they Total Total would do to put the screws on the States would be to increase the tax Number of lesses 1,407,783.154 MST 340,360,281 Number of was 346 on the income from these bonds. Mr. PAUL Then it would be discriminating against a certain type 17, IHZ. Hourse The Bond Boyer, FL II, Apr. 11. 1942. Treasury Department, Division of Tax Research, Apr. of income, which, I think, would be unconstitutional. Mr. KNUTSON. Who would stop them? Mr. REPD. Here is the statement by Mr. Morgenthau on that ques- tion that I referred to: Mr. PAUL I think that the Supreme Court would stop them. Mr. KNUTSON, You are more optimistic than I am, Mr. Paul. I Unfortunately, tax-exemption clauses appear to many of the outstanding lergee happen to have read some recent decisions of the Court. I think of Federal securities and these promises TOURK not be violated. In the case of State and local securities, however, there has nover been any contract or moral that this Court has in every case made the construction of the law commitment between the Federal Government and the security holders or the that they are told to make, State and local governmental authorities regarding Federal taxation. Bloce Mr. PAUL I, of course, disagree with you on that point. the Supreme Court decleton in the case of Grance V. O'Keefe to 1089 fair-minded Mr. KNUTSON. Some of the old Justices that have passed to their experts in constitutional law have had no doubt of the Federal power and moral right to tax the Income from State and municipal securities, reward must be turning over in their graves many times a month the That statement was made on March 8. way things are going as far ILS the Supreme Court is concerned. I do not want to depend on the Supreme Court, and I do not think I do not know how many bonds have been issued by State and that you do. It is no longer the anchorage that it used to be, in my municipal authorities based upon the assurance of the Secretary of the Treasury that these outstanding bonds will not be taxed, opinion. I do not want to indict the Court. It may be that I have not kept Mr. PAUL I would like to have it clear, Mr. Reed, that I do not step with the times. But as far as 1 am concerned, I think that Con- think the Secretary of the Treasury made any statement to the effect gress ought to keep as much of this power in their own hands 65 they that bonds issued could be eternally exempt from Federal tax. Mr. Reep. I do not claim that he did. I claim this: That in view possibly can. There is no question in my mind but what we can tax all these issues of the fact that the Supreme Court has held that a moral obligation that I have mentioned, like the T. V. A. and the Columbia Valley is a sufficient consideration upon which to base B. case in the courts, we should as Members of Congress, acting under an oath of office, Authority and others. give some regard to moral obligation. That is all, Mr. Chairman. 2996 REVENUE REVISION OF 1942 REVENUE REVISION or 1945 2997 Mr. PAUL. 1 certainly agree with you that we should. It in a eral situation. We certainly have not destroyed our own borrowing of this case. I would be the last person to say that we shoud din- question of whether there is a moral obligation under all the facts power by removing the exemption from Federal bonds. Mr. REM. No; but you see what you are doing now to the borrow- regard 8 moral obligation if I believed that one existed. ing power, You had an exhibition here this morning of high-pres. Mr. REED. Don't you think that when we have run along here over sure salesmanship. You call it voluntary, but I have had too much . period of years and have not taxed these municipal bonds, them experience in that line in the World War. That is a beautiful set-up. municipal and State bonds, and people have invested in them, many It is 8. perfect piece of work as campaign literature goes and as cam- times for patriotic reasons, many times because of local pride in paign pressure goes. But when we call it voluntary, I certainly can- some project out there-for instance, 1 know of one community with not imagine anything short of n. bombshell that would compare to less than 20,000 people who are going to bond themselves for $50,000 the pressure that is put on them to buy the bonds. And they ought in order to do their part toward building an airport, and the Federal to buy them. That is all right. I am not criticizing that at all. We Government to put up the rest. They never in the world in my have to sell those bonds in order to win this war, judgment would pass that bond issue if they thought those bonds But I would like to know what would have happened to the develop- were going to be taxed by the Federal Government. And yet they ment of our cities and our States if this idea of taxing municipal be- are going ahead on the theory that we never have taxed those obli- curities and State securities bad been involved, say, for the Taxt 75 gations in the past. Now, when you start taxing these obligations, years. you are attacking the borrowing power of the State and municipal Mr. PACK That is a prettty big question, but I think that our cities and States old not have suffered had we had the rule that we now authorities. Mr. PAUL. I do not doubt, Mr. Reed, that a great many people propose. have invested in municipal securities in the manner that you suggest. Mr. REED. They had that immunity taken off during the Civil Wer I also would like to point out, however, that a great many have in- 90 that they could tax those securities; did they not Y vested in municipal securities for no such motive at all, but rather Mr. PAUL I think they did tax the securities at that time. What simply to avoid their share of the tax burden. And I think that that Was that date? in very definitely proved by these figures contained in my statement Mr. Rreo. The 20th of October, that we had an income tax. The n.H. to the increased amount of these securities in the larger estates. reason that wy didn't do it then was because the Court at that time Mr. Rem. But we should not destroy the confidence of the people would not permit us to, in the Federal Government because a few have abused this privilege. Mr. TAHLEAU. That was in 1894. Mr. PAUL I do not think it is a few. I am sorry to any that I do Mr. PAUL, The whole question of the ability to impose this kind of not think it is a few that have. Neither do I want to say that it is fax arose by virtue of the Pollock decision about 1895 or something necessarily on abuse. As long as there is that provision in the statute like that. I think during the Civil War the income-tax law did tax I do not blame anybody for buying municipal bonds. incomes from State and municipal securities. Mr. REED. In some cases, for instance, in a community they were Mr. REED. I can see in this, if it goes on AS it has and there is no ambitious to go ahead. It may be that some very selfish persons may restriction on it-I do not know just how long this is going on or how have put thomselves in the light of patriotically minded individuals far we are going-but just BR sure as this philosophy is adopted in by taking over a large number of these bonds in that locality which this tax bill, you are just headed for is straight out-and-out central might not be readily salable on the market. They may take them government, with central taxing power, that will collect all of the taxes over. Nevertheless, the community benefits by that operation when eventually and then allocate them to the States; and they will allo- rate them on the basis of "You do thus and 80." That is exactly where they come to selling these bonds, you are heading, and I do not agree with the philosophy that we are Mr. PAUL I tried to show that in the average case there is a very an indissoluble union of indestructible States if this goes through, small interest differential. Mr. Rem. I do not think that that answers the question. I think Mr. TREADWAY. Mr. Paul, I hesitate to get into a discussion on can- stitutional questions from the standpoint of being just a very small that if you adopt this principle and make it possible for the Federal country businessman besides my membership up here. But isn't there Government to step in and practically destroy the borrowing power A case pending before the Tax Appeals Board that is likely to go to of A State or a municipality, you are then simply destroying the HOT- the Supreme Court that will decide this whole question? ereignty of the States. Mr. PAUL. There is a case, 1 test case. Mr. PAUL. 1 do not think we would be destroying the borrowing Mr. TREADWAY. Brought by the Treasury itself! power. 1 am sorry to disagree with you there, but it seems to Info Mr. PAUL That is correct, and I believe that it in now pending quite clear that we would not. before the Board, Mr. RESD. Let mo say, impair the borrowing power. You saw what Mr. TREADWAY. Before the Boardi happened to the bond market after the speech of the Secretary of the Mr. PAUL That is right. Treasury at Cleveland, did you not? Mr. TREADWAY. But there has to be a decision rendered there before Mr. PAUL I do not know just what happened to the bond market it gets to the Supreme Court. There has to be a decision of the Board after that speech. But one may make an analogy with our own Fed- of Tax Appeals before it can get to the Supreme Court! 2998 REVENUE DEVISION OF 1949 ERVENUE REVISION OF 1943 2009 Mr. Paul. That in right. That je the Idea of bringing the the Mr. PAIL. That would have 8. bearing on the interpretation of & before the Board. statute, yes; but I do not think it would have any bearing in connection Mr. Treadway. Why bring the question up here at this time when, with a constitutional issue of this kind. If we wait for the decision, we will have something définite to go by Mr. TREADWAY. I cannot see the difference between the case pending, one way or the other? We are going to find out from the Suprems that you admit yourself is there, and the relationship that it bears to Court that the position that you now take is constitutional, or you the case before un now. are going to be told that it in not constitutional. Why ask Congress That is all. to enact something that in so definitely uncertain ns to its constitu- Mr. REED. Mr. Chairman, I would like to introduce B. document, tionality in advance when such a decision is sure to come? The CHAIRMAN. Without objection, that will be done. Mr. PAUL Mr. Treadway, 1 do not want to get into a long discussion Mr. Reso. The document that I refer to is entitled "Power of Con- of the precise case- gress to Tax the Interest From State and Local Securities and the Mr. TREADWAY. We have been having a long discussion all afternoon Compensation of State and Local Employees," a report to the Joint here. Mr. PAUL I know it. But that case that you have mentioned in- Committee on Internal Revenue Taxation by its staff pursuant to section 1203, Revenue Act of 1926. It was published in 1039. I merely volves the taxation of certain bonds of the New York Port Authority. want to put in pages 1 to 35. Answering your question, "Why don't we wait?", my answer is that The CHAIRMAN. Without-objection, that may be put in the record. we cannot get il decision on the constitutionality of taxing State and (The document referred to is as follows:) municipal bonds unless we pass a statuto. The Supreme Court does not take up moot questions. POWER OF CONGRESS TO TAX THE INTEREST FROM STATE AND LOCAL Mr. TREADWAY. I do not know the procedure accurately; but in't SECURITIES AND THE COMPENSATION OF STATE AND LOCAL this true? You say that that case is before the Board of Tax Appeals EMPLOYEES na to the constitutionality of the taxation of the Port of New York SUMMANY Authority bonds? This study will consider four acpeals of the question nf tax exempt Income. These em as Mr. PAUL But, as I understand it, Mr. Treadway, that involves B follows, alightly different question. That involves the question of whether l'ABT I. WHETHER TRE Concerns HAD THE Power to APPLY rue FEDERAL (KCOME TAB these particular bonds are within the present statutory exemption. DIRECTLY TO THE INTEREST ON STATE AND Locat. SECURITION Mr. TREADWAY. Whether the Treasury wins the decision in that case It is the opinion of this office that a amendment la the only effective more or whether the other side wins it, that subject, which is the subject now by which lbe Federal Income tax may be applied to this Internet. before us hero in the broad sense, is going to the Supreme Court is it PART III. WHETHER THE RECIPROCAL OR MUTUAL TAXATION PLAN World Prove EFFICITY not! Mr. PAUL That is true, But it is only in the very broadest mense The basis of this plan la a walver DO the part of the Federal Government of the immunity of Federal bondbolders, officers, and employees. There are several vital points Incident to that that may be said. the plan that should be kept in mind. The Drit of these la the lack of deparance that the Mr. TREADWAY. It seems to me that it would save Congress 11. great States may feel toward the possibility that a future Congress may not feel bound to sootique the waiver but may rescind it at any time: that la, that the received of the immunity. deal of trouble and save the people in the Treasury a tremendous being granted by A Federal statute and not through in compact outered Into between the Federal Gurermment and the States, would be subject to change at the will of Congress. amount of trouble when the cases are so nearly parallel, and it seems Secondly, the plan may work toward the Federal Government Itsulf If It can to me it would be the better part of wisdom on your part not to press be presumed that the walver, once granted, could net be withdrawn. There would be DO incresponding walver by the States, and the Federal Government would be taking the this subject matter here before Congress today and gut. a decision be- serious changes of relinquishing its own immunity and secoring in return only such breadth of taxing power with respect to the State and local governments as the court might see fit fore that question actually goes to the Supreme Court. to allow. Mr. PAUL. I am informed that the decision in that particular case Marenver, as the taxing powere of the Federal Government and the States rest on an entirely different basis, and as the rates and tax structure of those unita are TOTY die- may be such as to throw no light on this question. similar, It la felt that such a plan could never be truly restprocal or mutual. Mr. THEADWAY. You are surmising something. There is no certainty PART IV. WHETHER Cokonesa Has THE Power TO Tax Tusse SUBJECTS DT OTHER Menica about that being the case. But the parallel exists between what you Among these mothods of reaching tax-exempt interest are: are endeavoring to have Congress do and the possible decision, (1) The taxation. by each level of government, of aubsequent lasses of lts own secenties: (2) The adding of the tax-exempt Income to the taxable treome for the purpose of deter When we gret that decision, we will have something affirmative one mining the rate which would be applicable only to the taxable income (3) The entering Into . evries of mutual compacts or agreements between the Federal way or the other, either with the Treasury or against it. And I think Government and the individual States by which each level would be parmitted to tax the that it is very inopportune to bring this question up at this time while Interest from the securities of the other: (4) The Imposition of an exclae inx, based on the esercise of a privillege and pressred awaiting that decision. by net income from all sources I think another thing. I am inclined to think that one reason why (5) The subjecting of tax-exempt securities to a Maher vetate tax than would be appli. cable to offer property, on the theory that such securities had earaped the Income If: and this question is before us today is that you want to get this enacted (6) The adoption of A constitutional amendorent, With regard to each of them methods except the 100% Chere are serious rechnical and into law by Congress before the Supreme Court passes on the question, legal difficulties that render them Inexpable of providing a astisfactory solution to the problem, because then you can say to them, "Gentlemen, here is the attitude of With respect ta the Federal taxation of the asiarke of State and local employees, recent Congress." Of course that has weight. I am told that even testimony declaique of the Supreme Court have substantially brondened the Pederal power. In tion, extating law taxes such compensation ta the full estent allowed by fibe Constitution. submitted to a committee and remarks made on the floor of Congress However, If Ta the upinion of this office that 65 amendment to the Constitution provides the only way In which the compensation of all State and local officers and smplojem may The have a certain amount of bearing on the Supreme Court decisions, effectively subjected tir the Federal Income fax. 3000 REVENUE REVISION OF 1948 REVENUE REVISION OF 1042 3001 PAGE 1. WHETHER THE CONDERSE Bise THE Power TO APPLY THE FEDERAL IRCOME Tax Dissurer TU THE INTEREST ON STATE ARM LOCAL Boxes property BE. In fail, this tax has been referred Bix by the Court on afteral occusions as an Income tax and not an a property tax. In the Pollums came, Mr. lo consideration of this question, an exhaustive study was made by the Depart- Justice Fuller, to writing the majority opinion, held 10 to the 80 Income lax In ment of Justice In June of 1088. The conclusion reached In that study be That Hole Y. State Roard of Assessment and Neview," decided November & 1087, Mr. "the Congress apparently has the power, under the present trend of declatous a Justice Cardono, In distingulabing between A tax on the bonds and The Includes lax the net Income arising from the Interest paid on State bonds." Wilb this of the Income from the bonds in a general Income fax, maid: conclusion, we are mable to agree. "Nothing In this opinion la at was with Weston % Charleston CII Pet. 440) or In treating this question, the subject will be divided Into two subparte, follow- other cures declaring the Immunities of governmental agencies. In the came Ing. to this compeet, the Hue of approach as that contained hi the Depart. elted and Its congeners the problem for dectaton was whether il fax upon In- ment ME Justice study. come, even though put B. property tax to strictness or for every purpose, was Subpert A will dont with the question independently of the Sixteenth absol- one In such If sense or in wuch a meanure as to bamper the freedom of the Central ment. and subpart B will denl with the question 118 affected by the adxteenth Government through the interference of the States or the freedom of the States amendment. through the Interference of the Central Government The limitations declared in thom decisions were gathered by implication from the structure of our Federal SUBPART A. yower INDEPENDENT or THE SIXTEENTH AMENDMENT at stake." system, and were accommodated, 48 the Court believed, to the public policy (1) No express prohibition Eyen If the Weston case cab be regarded as preventing the States from levying an Income tits ou the Income from Federal securities, It did not settle the question There le no provision In the Federal Constitution expressly prohibiting the as to whether or not the Federal Government could tax the Income from State Federal Government from texing the obligations or the Interest (berefrom of a and local securities in the form of n. general net Income tax. State or political anhilivision. This prohibition is implied from the Independence (b) First Pottock Oase'-That question was not decided until the Pollock case of the National and State Governments within their respective spheres and from holding the Income-tax provisions or the act of 1894 unconstitational. The Income- the provisions of the Constitution looking townrd the maintenance of OUP due) tax provisions of the net of 1894 in Imposing a general tes on net Income, included as Income Interest from State and local bonds. system of government; and was developed through judicial Interpretation of the Constitution. The doctrine was first applied to limit State Interference with In the first Pollock care," Pollock, a stockholder of the Farmers' Loan & Trust Federal functions, and then extended to limit the Federal Government from Co., filed a bill in equity to prevent the Trust Co. from making returns and paying Interfering with State functions. Income taxes under the act of 1804. The records showed that the net income of the company during the year ended December 31, 189, amounted to orer $300,000: (2) Development of implied immunity doctrine that It derived rental of $50,000 from Its real estate, after deducting State and loen] taxes, and an Income of about $60,000 from Investments In municipal bonds. (a) Weston our-In the case of Weston V. Charleston,¹ the Supreme Court The following contentions were made AM to the onconstitutionality of the act: beld invulid (LD ordinance of the City Comeft of Charleston subjecting to taxe- 1. The law to Impoeing a tax on the income or renta of real estate impresed then "all personal estate, consisting of bonds, notes, Insurance stock, 6- and T-por- a tax upon the real estute Itself and, therefore, such 6 tax was # direct tax cent stock of the United States, or other obligations upon which Interest has been and void because Imposed without regard to the rule of apportionment or will be received during the year, over and above the Interest which has been 2. The law In Imposing a tas on the Interest or other Income of bonds or paid (funded stock of this State, and stock of the Incorporated banks of this other personal property le " the upon the personal estate Itwelf and in there State and the Unlied States bank excepted). 25 cents upon every $100." fore, apportionment. a direct tax and vold because Imposed without repard to the rule of Weston owned some of the 6-to-7-percent stock of the United States and claimed that BO for as such stock was concerned, the ordinance violated the Constitution In void, the whole law Le Invalidated 3. Because the tax on the income from real property and personal proporty of the United States, The majority of the bighest court In the State of South Carolina thought this tax was an Income tax and held that It was no Invalid as 4. The law for Invalid because imposing indirect taxes In violation of The applied to the United States stuck. The Supreme Coart of the United States, in constitutional requirement of uniformity. on optnion by Chief Justice Marshall, overruled the State court und held the tax 6. The law in Invalld ao far as Impostor n tax upon Income received from invalid. In this connection, the Court sald: State and municipal bonds la concerned. "Congress has power to borrow money on the credit of the United States." The The Court, la a mujority opinion by Mr. Justice Puller, passed upon only two stock It Issues la the evidence of a debt created by the exercise of this power. of the contentions raised in the case, It held The Income Tax provisions uneng The tax in question ta a tax upon the contract subsisting between the Govern- stitutional Insofar as they taxed the rents and Income of the real entate and the ment and the Individual It beare directly upon that contract. while subsidating income from municipal bonds. If did not pasa upon the question as to whether and in full force. The power operates upon the contract the Instant it 1a framed, and must imply a right to affect that contract." because of want of apportionment. The decision of the Court In regard to the a the 00 the Income from personal property was a direct tax and, therefore, void And the Court went on to state: The right to tax the coutract to any extent, when made, must operate bonds, was unablments, There were eight justices sitting in this case. However, inability of the Federal Government to levy e tax on the Income from mundelpal upon the power to borrow, before It la exercised, and have A sensible influence on there were two diasents, one by Mr. Justice White and the other by Mr. Justice the contract. The extent of this Influence depends on the will of n. distinct gov- erament; to any extent. however Inconsiderable, it in a hurden on the operations held that IL tax on the rente if Income from real property was 4 direct tax. Hartan, but these justices dissented from the unjority opinion only Insurer us It of the Government. It may be carried to an extent which shall arrest them While the justices were equally divided na to whether the Income true personal entirely." property Was B direct fax, and therefore, rendered no optnion as to this question, Chief Justice Marshall did not rest his opinion upon the conclusion that this they were in entire agreement that Congress had DO power to tax the Income tax was not an Income tax. He states "that the tax was a tax upon the contract the majority, enid: from State or local bonds. In this emmeetion, Mr. Justice Fuller, in spenking for subsisting between the Government and the Individual." The premise to pay interest la an essential part of the contract with the Government. Therefore, to tax the Interest IN not any loss a tax on the contract then n tax on the stock 202 n. a. un. For the reasone, we are unable to conclude that the optnion of Chief Instler 137 C. H. 429, Marchall can be regarded AM holding that the tax was ant an Income 103. but a 00003-42-pt. 10-10 Paters (40. 3002 REVENUE REVISION OF 1942 REVENUE REVISION OF 1948 3003 "The law under consideration provides That nothing contained Stall apply or sevenues of the Mintes of their Instrumentalities cannot be laterd, to States, countion, or It la contended that although the The Attorney General presented a suggestion that if any rebearing were granted It should embrace the whole caso, Treating this suggestion es amount. property neverthelem the Income derived from Atate, county, and municipal securities can be Ing In Itself to on application for rebeartog. the Court ent. down hotle applica- taxed. not we (blok the ABDIO want of power to tax the property or revenues of done to be heard before a full bench, Justice Jackson, who did not participate Marchall in Weston 1. Charication (2 Pet. 440, where the entd: The right to the their securities, and for the name reason, and that reason in given by Chief Justice State of Cheir instrumentallties estate in relation to a tax on the Income from In the first declaton; being present. Mr. Justice Fuller ulso delivered the optation of the Court in this Record CRM," The majority opinion adhered to the optates that taxes on real outate belog Letore It is exercised, and have n. acpaible Influence on the contract The extent I&E the contract to any extent, when made, must operate upon the power to borrow indisputably direct taxes, taxes on the rents of Income of real estate are equally direct (0328. No far as the taxation of Income from State and local brinds were of this Influence depends ou the will of a distinct government. To any estent, concerned, the Court also adhered to Its opinion to the first FREE, stating: however inconderable, It in a burther on the operations of government. If may "We have unanimously beld in this case that, BO The as this law operates on les curried to an extent which shall arrest them entirely. The tax un The receipts from municipal bonds, It entinot be sustained, because 14 in a tax Government stock la rhought by this court to no a tax on the contract, and tax on en the power of the States, and on their Instrumentalities to horrow money, and the to horrow money on the credit of the United States. and courequently consequently repugnant to the Constitution." in be power repugnant to the Constitution.' Applying this language to them monteipal accurities, it is obviews that rexation on the toterest therefrom would operate on (1) That taxes on the Income from personal property are direct texes: and the power to burreise before It la exercted. and would have a seosible influence on the contract, and that the 103 to question is a tax on the power of the States (2) That the Income tax. en far as It fell on the Income of real and per- and their instrumentallties to FOW money and consequently repognant to The sonal property, being a direct tax within the meaning of the Constitution, and, therefore, unconstitutional and vold because not apportioned, the entire Constitution." In other words. entirely independent of the question of whether a tax on the income-tax law, constituting one entire scheme of taxation, was necessarily Invulid, income from Depaonal property was a direct TAX, It was held that the general net Income tax insofur na H applied to the Income from State or municipal bends Four Justices dissented from the majority opinion. Mr. Justice Harlan dis- was a tes on the power of the States and (heir instrumentalities to borrow money sented from the majority opinion, except Insofar an it related to the Income from and consequently repugnant to the Constitution. With this view, both Mr. Jue Ditate bonds. He stated that-- (lee White and Mr. Justice Harlao agreed, Mr. Justice White stating: "I am of the opinion that with the exception of capitation and land taxes, and "In regard 50 the right to include in an Income tax the Interest upon the taxes on exports from the States and on the property and Instrumentalities of bonds of municipal corporations, I think the declatons of this Court, holding the State, the Government of the Union, lu order to pay its debta and provide that the Federal Government is without power to tax the agencies of the State for the common defense and the general welfare, and under Its power to lay and government. embrace such bonds, and that this settled line of authority la collect taxes, duties, Imposta, and excles, may rench. under the rule of unt- conclusive upon my judgment here. It determines the question that where formity. all property and property rights In whatever State they may be found." there to no power to tax for any purpose whatever, no direct or indirect tax Mr. Justice White dissented In regard to the holding that the Income nn real can be Imposed. The authorities elted In the opinion are decisive of this quest and personal property was a direct tax, but agreed with the majority opinion tion. They are relevant to one case and not to the other, because, in the one as to the inability of the Congress to tax the Inenme from State or municipal there la full power In the Federal Government to tax. the only controversy timeds. In this connection, be sold: belog whether the tax Imposed 18 direct or indirect; while in the other there "I deem It underwary to elaborate my reasons for adbering to the slews in no power whatever In the Federal Government, and, therefore, the levy, hitherto expressed by me, and content myself with the following statement of points." whether direct or Indirect, Le beyond the taxing power." And Mr. Justice Harlan concurring in the following statement: Mr. Justice Jackson dissented Insofar as the Court held the las on Incomes "While property, and the gains, profits, and Income derived from property, from reul or personal property WHA a direct IAS and agrond with the discripts expressed by Mr. Justice White In the First Poltock nan belonging to private corporations and individuals, are subjects of taxation for the purpose of paying the debts and providing for the common defense und the Mr. Justice Brown dissented an to the bolding that the Income from real control welfare of the United States, the instrumentallttles employed by the or personal property was a direct tox. but he agreed with the majority that States in esecution of their powers are not subjects of by the General an Income tax on municipal bonds was Invalid. In this connection, he stated: Government, any more than the instrumentalities of the United States are the "Tho tax upon the Income of munteipal binds fulls obvionaly within the other subjects of taxation by the States: and any fax impowed directly upon Interest valegory, of nn indirect tax upon something which Cougress has no right to TAX at all, and bence la Invalid. Here in IL question, not of the method of taxa- derived from bonds tssued by a municipal corporation for public purposes. tion, but of the power to subject the property to texation In any form. It under the authority of the State whose instrumentally If 1a, In a burden upon the exercise of the powers of that corporation which only the State creating serm to be that the cases of Collector V, Day (11 Wall. 113), holding that IL It may impose, In such a case It La Immaterial to Inquire whether the TAX 18. la not competent for Congress to Impose a tax upon the onlary of a judicial in Re nature or by Its operation, n direct or an Indirect tax: for the instru- officer of A State: McCulloch V, Maryland (4 Whent. 316), holding that a State could not Impose B. tax upon the operation of the Bank of the United States mentalities of the States-among which, na to well settled, are municipal corpo and United States Y. Railroad Co. (17 Wall. 822). holding Chilf a munteipal are not subjects of national taxation in any form or for any purpose, while rations, exercising powers and holding property for the benefit of the public- enporation is A portion of the sovereign power of the State, and is not subject to taxation by Congress upon the municipal revenues: Wisconsin Control Ratt- The property of private corporations and of individuals le subject to taxation rued V. Prim (188 U. B. 496), holding that no State has the power to tex the by the General Government for national purposes. So 11 has been frequently property of the United States within Its limits; and Van Brocklin V. Tennessee Adjudged and the question le DO longer an open que In this Court" (117 U. S. 101), to the same effect. apply mutatis mutaridis to the bonds In the appellant filed a petition for rehearing for the reason that the Court had (c) The Record Pollock Cose'-After the declaion m the First Pollonk are question. and the tax upon them must, therefore, be Invalid." (d) Bffect of Pollock cosst-From this discussion, It can be neen that the expressed no opinion in regard to the following contentions: Court, while not unanimous In Its conclusion that a tax on the Income from real 1. That the act was unconstitutional as to incomes from personal prop- and personal property was a direct tax and subject to the rule of apportienment, enty as laying direct taxes without apportlement. Was unanimons in Tin evectuation that the Congress was without power to levy 41 2 That the void Income tax provisions Invalidate the entire Income-tox tax on the Income from State or municipal bonds. inw. 3. That If any part of (he income tax in considered is direct tax If is 158 U. 6. 601, invalid for want of uniformity. On the questions upon which the Court had rendered no doctaton to the first case, it held In the second case- 3004 REVENUE REVISION OF 1945 REFENUE EDVISION OF 1945 3005 personal property is regarded ae a direct OF indirect Law, II is will en applied It appoars from these declaions that regardieme of whether the information LAE we to the Income of State and local bouds because It constitutos an interfurence with purposely and directly to tex litate obligations by refusing to their owners doductions allowed to others" the borrowing power of the Mates. This covelusion ME in harmour with the de- elaton of the Supreme Court in Collector v. Day* and fipringer Vi United Giates." The following example will show how this system results la taxing the Interest from State securities: It abould be noted fisat in the Apringer cose rendered under the Clvil War Acts, the Court upheld the Cirll Wer Income tax VLM applied to the professional earn- COMPANY A COMPANY a Titgs was recognized as an indirect tax. not only in the Bprtnger certify but Also to Ingen of Springer. no at law, as not Indirect tax. The tax on ench earn- Income from taxable sources. $100,000 Income from taxable sources. $100,000 the Pollock 06858, Mr. Justice Fuller stating that an Income tax ou goine OF Theome from Inx-exempt Income from tax-exempt profits teven business privileges, employments, and secations enuld he statement (uterest 20,000 Interest 0 ne an exclse tax. In spite of the fact that it has always recognized that " tax all earnings to not B direct tax, but no Indirect tax, the Court. In Collector 1. Gross Income 120,000 Groun forme 100,000 Day." held that the CIVI) War net Income tax was not applicable to the Income Deductions: Deductions: of 6 State judicial officer because If Interfered with the resential ranctions neces- Miscellaneous Miscellaneous sources $10,000 sources any to the existence of the State. $10,000 The conclusion to be drawn from the cases up to rhis point IP that the income- Tax-exempt In- Tax-exempt In- from State or local bonds could not be taxed, because to do so would Interfero ferest. 20,000 terest 0 with the borrowing power of the State 4 percent of the 4. percent of the (e) The National Life Insurance Co. cose,"The Revenue Act of 1912, es mean of the re- mean of the re- empted from the Federal Income 185, interest upon the obligations of States OF serves Terms tax- serve 50,000 their political subdivisions. This exemption was continued in the Revenue Act exempt Inter- 60,000 of 1921 and subsequent revenue acts, except with respect to the special method eat 30,000 provided for the tasation of life Insurance companies under the Revenue Acts or 60,000 Net Income subject to this 40,000 1921, 1924, 1929, and 1928, Prior to the endelment of the Revenue Act of 1921. Ife-Insurance companies were taxable like ordinary corporations Up to that Net income enbject to tax 60,000 time. gross Income included premium receipts and capital gains. The companies were allowed to deduct the amount puld on policies (except as dividends), and It will be seen that under this eystem a company with 10x-xempt the amount required by law to be added to their reserves. At the annual meeting securities is forced to pay a higher the by reason of the ownership of of life Insurance presidents in December 1920, It was stated that the law was securities. It has been claimed that the National Life decision must be coultned hi Its discriminatory features. However, the absence of discrimination WGF unantisfactory both the companies and to the Government. After much cound erotion, Congress, upon consultation with the life-insurance compunies and with relied upon by the dissenting Justices in this came to sustain It. A subsequent the approval of at leust must of them, substituted A new plan for computing their decision will show that the dental by the full deduction of 4. percent of the menn taxes. The new plan defined gross Income BE the gross amount of Income received of the reserve to companies receiving Income from tax-exempt securities WAS during the taxable year from Interest, dividends, and rents This definition auto- because It, le effect, taxed the Income from such securities. This plan of taxing matically excluded from taxation any portion of the premiums paid by the policy. companies gave them an advantage of tax exemption in the case holders to the company, as well B.S. capital gains. Included within such definition of premium receipts and capital gains, This distinction in forethly brought out of gruss Income was interest derived from tax-exempt securities. From the grass In the case of Helvering V. Independent Life Insurance Company." That case also concerned the plan for taxing Ilfe-Insurance companies, Innugurated in the Income this arrived at. there were allowed certain deductions: Revenue Act of 1921, It was pointed out that the Revenue Act of 1921 defines (1) Interest derived from tax-exempt securities, If any. grows Income as that received from Interesta, dividends, and rents. Premiums (2) A sum equal to 4 percent of the mean of the company's legal reserve and capital guins were excluded and the net (noome WOR ascertained by making diminished by the amount of the tax-exempt interest, and specified deductions from gross Income. These deductions included (1) 4 percent (3) Other Items not important here, of the company's reserve already discussed In the National Life ense; (2) taxes and other expenses paid during the taxable year exclusively hpon if with respect Under this plan a life-insurance company which had an Income from State to the real estate owned by the company, and (3) a remeonable allowance for the and municipal bonds was not entitled to the full amount of the deduction of exhaustion, wear, and tear of property, including a reasonable allowance for 4 percent of the WHRO of the reserve funds, but was required to reduce this amount obsolescence. This law then provided that the deductions under (2) und (3) by the Interest derived from tax-exempt securities. The reason for allowing the should not be allowed on account of any real estate owned and occupled le part deduction of + percent of the reserve is that a portion of the interest, dividends, by a life-insurance company tinless there was Included in TEN return of groun and rents received have to be used each year in maintaining the reserve: that In, Income the rental value of the space so necupled. Such rental value under added to It on the basis of u certain Interest rate varying from 3 percent to 4 the law could not be less than a sum which in addition to any rents received percent, according to the statutes of the several States. from other tenants should provide n. net Income (after deducting taxes, depre There were two contentions In this case: clation, and other expenses) at the rate of 4 percent per annum of the hook First, that the Ufe-inanrance companies were discriminated against and value at the end of the taxable year of the real estate so owned or occupled. made to exact payment on account of their tax-exempt securities, and It WAS claimed that this limitation on the deductions was unconstitutional Second, that the diminution of the ordinary deduction of 4 percent of the because the rental value of the space occupied by the Insurance company owning mean of the reserves because of interest received, In effect, defented the the building WILE not income, and that the exnetion WBR, therefore, n direct tax exemption guaranteed to the owner. on the land Itself and void for Inck of apportionment. The Court In Hs opinion specifically held that the rental value of the building uned be the owner does not The Court held that to directly tax the Income from the securities amounted to constitute Income within the meaning of the sixternth amendment, first then went 1 taxation of the securities themselves and that the United States may not tax on to state: State or municipal obligations. It then concluded that "Congress has no power "Earlier nots taxed companies Incomes mistentally the mme ne l'huso of other corporations. Because of The character of the truntmens, that "II Wall 118 (1670) method proved uneatlefactory to the Government and to the companies. The *102 U. H. 580 (1880), T11 Wall. 113, 277 U. 5. 508. 202 U. N. 171 (1034), 3006 REVENUE REVISION OF 1943 REVENUE REVISION OF 1989 3007 provisions ander conditionstion were eaucted upon the recommendation of Mprs. gentatives of the latter. As rente received for buildings were required to be the power of the States and op their Instrumentalities In burrow money, and Included in grown and expenses chargeable to them were allowed to be deducted consequently repugnant to the Constitution." it is to be inferred that Congress found-as concededly the fact was-that the Clearly, the declaion w.o.e not on the theory that 1 tax on the Income unnual net yields from Investments In such buildings ordinarily assounted to at Perms municipal bunds was a tax on the hunds themselves, for at least four of least 4 percent of book value, Where an Insurance company wwite and occupies the Judges were unable to conclude, even to the second cluse, that a LAX our The the whole of a building. it receives no rents therefor and in not allowed to deduct Income from personal property was a les on the property Itselt. the expenses chargenble to the buildings. Where part in used by the company and In Code V. Graves, Mo Justice Store, who rendered the majority optation, part let, the rents are required to be Included in the gross, but expenses may not pointed out that the declaion to the Pollock our DU fur as If related to n. TAX on be deducted unless, If It be necessary, there le added to the rents received an the rents of lood, did not reat прои the ground that the 10% WAR a tax un the land amount to make the total sufficient. after deduction of expenses, to leave 9 percent or that II was subject to every limitation which the Conditition Improvem on of book value. All calculations contemplated by section 245 (b) are made audges property taxes. It determined "only that for purposes of apportionment there to that limitation. Congress intended that the rule should apply only where rents WILL almilarities In the operation of the two kinds of tax which made 11 appro- exceed such 4 percent. Where they are less than that, addition of the prescribed printe to classify both as direct and within the constitutional communit Bo rental value and deduction of expenses operate to Increase taxable Income The far ALS the Pollock cases concerned the Taxa(lon of Income from anicipal bunds, classification in not without foundation Mr. Justice Stone and: "The company la not required to Include in gross any amount to cover rental "It la by a parity of reasoning that the immunity of Inconse-producing Ibstru- value of space used by it, but in order that, subject to the specified limitation. It mentalities, one government, State OF National, from taxation by the other, may have the advantage of deducting n part of the expenses chargeable to the has been extended to the moune. It WHO thought that the tax. whether on the building. It is permitted to make culculations by means of such 80 addition The Instrumentality or on the income produced by it, would equally burden the statute does not prescribe any lazia for the apportionment of expenses between operations of government." space used by the company and that for which It receives rents. The enlculation To the same effect was the ennclusion of Mr. Justice Cardomo in rendering the Indicated operates 69 such no apportionment where the rents received are more dectaion to Hele V, Blate Board." He stated in referring to the Cohn V. Grouce than 4 percent of book value, but Jene than that amount plus expenses. In such declaion: cases the addition, enfled rental value of space occupled by the company, to "Pollock V. Formers' Loan & Trust Co. (157 U. 8. 420: 158 D. 8. 601), Was employed to permit A deduction on account of expenses. That. as is clearly considered and distinguished. Two rullings emerge as 0 result of the analysis shown in the dissenting opinion. supra, prope 473 of 1ST F. (24), le the arithmetical By the teaching of the Pollock cose no Income tax on the reuts of land (157 U. 8. equivalent of lessening the deduction by the amount of the so-called rental values" 429) or even on the fruits of other Investments (108 U. B. 601) is an Import upon The National Life Insurance Company care was distinguished on the ground property within the section of the Constitution (Art. I, me. 2, oL 3) giverning that the effect of the statutory deduction invalidated in that case was to Impose the apportionment of direct taxes among the States (800 U. H. at p. 315), By 6 direct tax on the Income of exempt securities, whereas the limitation on the tenching of the same case an Income tax, If unde to cover the Interest ou Govern- deductions discussed In the rental value case was In substance E. diminution or ment bonds, Le D. clog upon the borrowing power such 0.6 was condemned to Mo- apportionment of expenses to be deducted from gross Income, and that Congress Culloch v. Maryland (4 Whent. 316). and Collector V. Day (11 Wall 113, 124 had the power to condition. limit, or duny deductions. Of course, If the disnllow- 800 U. B. at pp. 315, 316). There was no bolding that the for is a property one nace of the deduction had been regarded 89. n. discrimination against companies for every purpose or to every context. We look to all the facts. owning their OWD buildings, a different conclusion would have been reached. "In Itne with that conception of the Pollark core in Brushaher V. Union Pasific In other words, in this came, life-Insurance companies owning office building and R. Do,, supra, where the court pointed out (240 U. S. at pp. 16, 17) that the con- necupying part of them were singled out for special treatment to the same extent clusion reached In the Pollock case did not In any degree Involve holding that that lite-Insurance companies owning tax-exempt bonds were singled out for epe- Income taxes generically and necessarily came within the class of direct Custom clal treatment. However, this singling out did not result In discrimination and on property,' but that to the contrary such taxes were enforcible BM excless excupt The provision singling out those with tax-exempt bonds for special treatment was to the extent that violence might thus be done to the spirit and Intent of the held invalid, not on that account, but on the ground that this special treatment rule governing apportionment." amounted to taxing the [neome from tax-exempt securities. By this eastysis, It serma clear that E tax on the Dienme Perm property WAS (f) Conclusion from Dolh Pollock cases and National Life Insurance Company treated as B. fax OB the property only for the purposes of applying the rule of enan-Coleme the Pollock cases and the National Life DOEP have been modified by apportionment and that a for on the interest im municipal bonds toda Condemned subsequent decisions, they stand as authority for holding that the Congress has as a plag upon the borroseing polocer of the State no power to subject the Income from State OF local securities to B. general income 10% (6) Effect of subsequent dentations NN modifying Mo Pollock cases (8) Analysis of Pollock cases by subsequent/deciations It has not been established that subsequent decisions have weakened the holding in the Pollock cases that the Federal Government has no power to tax the Income It in contended that the Pottnek came were decided on the theory that A tax DE from State or local bonds. The decisions retted upon 00 distinguishing the Pollock the income of municipat bonds was the equivalent of in tax on the bonds them- cases are summarised as follows: actves. This contenUes does not appear to be correct. In the first Pollock come (a) Bonaparte V. Tuz the Bonoparte case, the Supreme Court up- the Court and not decide the question na to whether or not the Income tax on per- held the right of Maryland to lovy a property lice ON bonds issued by New York. sonal property was a direct tax. Despite this, the Court hold that the Income tax Pennsylvania, and Ohio to oue of Its own citizens. This case was distingulabed ae applied to municipal bond» was Invalid because "the tax In question in a. tax on In the Pollock case (twelf, an follows: the power of the States and their instrumentalities to borrow money. and com "The question In Bonaparte V. The Court (104 U. 8, 502) was whether the rog. stantly repugnant to the Constitution." latered public debt of one State, exempt from taxation by that State or actually In the second Pollock case' Chief Justice Fuller stated in regard to the first taxed there, was taxable by another State when owned by 8 effilien of The latter, Pollork case: and It was held that there was per provision of the Constitution of the United "We have unanimously beld In this case that, for the ne Chis law operates nai States which prohibited such taxation. The States had not covenanted that this the receipts from municipal bonds, It cannot be sustained because II to a TAX on could not be done, wherean, under the fundaniental law, OF to the power to borrow money, neither the United States, on the one hand. nor the States on the other, 157 D. 8. 429. = 165 U. 5. 601. 18 POO n. 5, 915 (1987). 19 202 E. 9. on (1937), " 101 17. B 693 (1881). 3008 BEVENUE REVISION OF 1942 REVENUE REVIKION OF 1945 3009 luterfero with that power as possessions by each and 40 assential element of applied to any imme which Cougrees bas no power to IAS. It then the sovereignty of each." that If articles manufactured and Intended for export are subject to texation This conclusion la in harmony with the flow expressed by the Court to Burnet under general laws up to the time they are put In the course of exportution, V. Brooks pointing out that the Constitution, through the due-process claime, pro- the concinston 18, therefore, that the net Income from the venture when applied. vented the States from transcending the Units of there authority. and thus de after exportation and sale, Iv exercised subject to tasation under the general stroying the rights of other Rinter, for se la Impostido for one State to reach out Inwo and that the status of loceme In not different from that of the exported and tax property In another State without violating the Constitution, Time where article prior to exportation. It will be noted that the facts In This - show the power of 098 ends, the authority of the other begins. If. therefore, the State that the net Income of the texpayer was not derived exclusively from the ship of domiclle of the owner of the bond could not tax the bond or the income there usent and sales of articles abroad. from, no tax could be levied at all. not even by The State which Issued The bond, (d) United States Glue 4% Oak Dreek"-In this CRM the Supreme Court up- for the reason that It had no Jurisdiction OVER the owner of the bond Who resided held n State net Income tax on a corporation organized mider the Inm of the beyond lie borders. Thus the relationship existing botween the States themselves State of Wisconsin, having Its principal office and place of business In the town and the States and the Federal Government. is not subject to lbe vame constitu of Oak Creek, where It conducted an extensive manufacturing plant. solling Its products throughout the State, in other States, and to foreign countries. Tis tional Unitations or restrictions. (8) Flint Y. Stone Tracy 00."-Flint V. Blone Tracy Company does not conflict net bustness Income for the particular year amounted to about $124,000. Its with the Pollock cases. That case constrned the corporation excise the of 1000. business Income for the taxable year was derived from males within the State which taxed the privilege of earrying on or dolug business by corporations. The and sonie from anles without the State, and some form foreign countries. tax was measured by the net income of the corporation from all sources. Since The Court upheld the Wisinmeln tax an applied to this evaile, stating that the the subject of the the was the exercise of e franchise or privilege, the Supreme wet Income tas was applied TO the net proceeds of the platotiff's business from Chart held that Congress bad the power to Include in the measure of the tax the inferstate commerce together with a the tax Imposed upon Its tievime dorived Income from tax-exempt accurities, although such Income could not be directly from other sources, and In the same way That other corporations doing business taxed. It is cinfined that the Pollock case apparently resta upon weak founda- within the State were taxed upon that proportion of their Income derived from tom If 4L distinction so refined ns that between the subject and the meunire of business transacted 00 property located within the State, whatever the nature # tax Le sufficient to escape Its rullog. However, long before the Pollock declatous ne their bustness This case, like the Peok of Co. did not Involve e elttta- the Court recognized the distinction between a property tax and a tax on Trau- tion where the Income of the respayer was derived solely from Interatate com- chises and privileges. The Court has uniformly held Il tax upon the capital OF merce, However, In the case of Ourlee Clothing On. W, Oklahoma It was held The assets of corporations Invalid unless the value of Government bonds held by That a foreign corporation doing n. purely Interstate business was not eubjet to H State net Income tax. the corporation were dedocted. But this ruling La not applied to franchises or In commenting upon the U. 8. Glue Co. nase, Mr. Justice McReynolds, to privilege taxes where the bonds were not taxed directly, but were used as 1 measure of the the For example, in 1867, long before the Pollock cases, the writing the mujority opinion In Northwestern Ensurance Company V. Wirrensin." stated: Court uptield a franchise tax measured by deposits, even though HOME of the deposits were invested In tax-exempt securities Portety for Sevings V. Colle"), It le important to observe that withough a State statute may properly Impose a charge which materially affects interate commerce, without so unreasonably A like decision WAS rendered in Provident Institution V. where burdening It as to become a regulation within the meaning of the Constitution, the tax was measured by average deposita. no State enn lay any charge on bonds of the United States." In referring to these cases In the Stone Tracy Company cuse," the Court said: Specifically, the holding of the Court in the United States Give Company con "It la therefore well settled by the declsions of this enurt that when the nover- was that the net income tax Imposed by WIsconsin was not dermed to - di- eign authority has exercised the right to tax a legitimate subject of taxallon no rectly burden the plaintiff's Interstate business 08 to amount to a regulation or ao exercise of a fennehtse or privilege, it la no objection that the mensure of commerce among the States. taxation in found In the Income produced la part from property which of itself (e) Willoufts V. Bunn."-In this case, the Supreme Court apheld the right of considered is nontaxable." the Federal Government to subject to the Federal Income tax gnins from the anle There Le, therefore, no more basis for holding that the Stone Tracy Co our of county and municipal bonds The Pollock case was elted with approve), the permits the Income from State or local socurities to be taxed directly than for Court stated: holding that the Society for Savings and Provident Institution cases (as well as "In the case of the obligations of a State or of Its political subdivisions, the other cuses). permitting nontaxable property to be used as a memore of the tax, subject held to be exempt from Federal taxation to the principal and Interest of authorize the direct taxation of the nontaxable property Itself. the obligations. These obligations constitute the contract made by the State, OF The distinetion between taxing tax-exempt securities directly or Including by its political agency pursuant to Its authority. and a tax upon the amounts them as A measure of a privilege fax has also been recognized In inheritance payable by the terms of the contract has therefore been regarded BR benring and estate-fax cuses. directly upon the exercise of the borrowing power of the Government." In Plummer v. Coler." the Court permitted New York to collect as luberitance The Court distingulabed a tax upon the Interest from a bond from A tax upon tax upon a Despuest of United States bonds. The Court also upbeld the Federal the profits derived from the mile of a bood, in the following language: estate tax AM applied to municipal bonds, But It has never seriously contended "The tax upon Interest le levied upon the return which comes to the owner of that these declaions would permit the in'cation of the bonds themselves. the security secording to the provisions of the obligation and without any fur- (0) Peck di Co. V. Lawe."-In this cuse a domestic corporation Was engaged ther transaction on his part. The the falls upon the owner by virtue of the in buying and selling goods. Its Income from shipping goods stroad and selling more fact of ownership, regardless of use or disposition of the security. The them amounted to approximately $30,000 and Its Income from local sources 102 upon proûts unde upon purchases and sales la an exclee upon the result or amounted to approximately $12,000. Its total net Income WILD held taxuble the embination of several Inctors, Including espital Investment and quite gen- under the Federal Revenue Act of 1913, The Court held It was not IL tax on erally, some measure of sugnetty: the galo may be regarded as the creation of exportation and, at the most, affected exportation indirectly and remotely. It capital, Industry, and ekill." distinguished this camo from a case where a texpayer might have the exempt In other words, the capital gain arose from n. transaction separate and distinct Income by stating that a net income tas, although a general tax. cannot be from the transaction with the Government and was created by the taxpayer 241 D. 8. 321 (1018). 288 U. 6. NTH (1083)) 68 P. 2 354 (19AT). 220 U. 8. 107 (1011). 275 U. 8. 1M. e Wall. SIM (1687). 282 U. B. 216 (1031), " 6 Wall. 011 (1847). 220 D. B. 107 178 U. 8. 115 (1000). 247 U, 8, 165 (1018), 3010 REVENUE REVISION OF 1042 EXTENUE REVISION OF 1042 3011 timeelf, superate and apart from tas contract with the Government The Court conciuded that the burden epub the Ristes' borrowling power by has une extended to the Income, It was thought that the laz, whether on the Ing such capital gain was not real or substantial. instrumentality or on the Income produced by It, would equally burden The (7) Revenue Act of 1921 defining a deduction for Interest paid or OF In- Denmon V. Miayton."-In this case, the Supreme Court uphold accrded a provision operations of Government See Collector V) Duy (11 Wall 112. 124): Polloca V. Formers Loan di Trust Co₂ supro, MSD; Oillespic V, Oklahoma (257 D. 8. 201). of the incurred or reatinued to purchase OF carry tax-exempt instition socurities Rot as we have seen, It does not follow that a 10.8 on loud and a tax on Income debitedness provision was upheld as necessary to provent the except from with borrowed of decived from is are Identical in their Ineldence or real upon the am basis of The Income properly subject thereto by purchase of excurpt securities saxing power, which are controlling factors to determining whether elther lax infringes doe process" money. words, the laspayer was not permitted to reduce his taxable Income (4) Hale V. Rigte Huard"-Nothing to the above-mentioned case is In evulllet by out that this and not amount la the taxation of the follows: the to Interest other on money herrowed to acquire tax-exempt securities. Interest The from Court with the Pollock case. In that case, Town concled n law exempting its municipal and State bonds from trantion. Robsequently, II passed for the first time a tax pointed tax-exempt securities. The National Late case was distingulabed Co. as Y. on the net Income of residents in the State, and the Interest derived from such The circumstatices disclosed to National Life Ins. United bonds was included in an assessment made against the boodholders. The State 118 wore radically different from those new presented. and the doctrine upon court Interpreted the exemption from texation AB only applying to TAXES laid 40 States that cause turned does not control the present one. The respondent here property to proportion to its value, and not 4b touching taxes in The unture or which not to effect required to pay more upon his taxable receipts than WILD de an exclue UDOD net Income of the owner. The Supreme Court in an opinion manded WILD of others who enjoyed like incomes solely because he was the recipient by Mr. Justice Cardono, upheld the laz, stating: 118 interest from tus-free securities-a result which we found would have fol- Pollock V. Farmers' Loan di Truel Co. (157 D. S. (29; 168 U. X 601). lowed of enforcement of the literal provisions or section 245 (a), Revenue Aet was considered and distinguished. Two rulings emerge as & result of the analysis, this 1021, obligation in not Inconsistent with reasonable classification designed to subject 42 Stat. 227, 261. While guaranteed exemptions must be strictly observed, By the teaching of the Pollock name an Income tax DEL the rents of land (157 U. S. 429) or eren OB the fruits of other Investments (188 U. 8. 001) in en all to the payment of their just share of a burden fairly Imposed. Impost apon property within the section of the Constitution (ath 1, sec. of el. 8) "The manifest purpose of the exception to paragraph 2. section 214 (a), wes to governing the apportionment of direct (ages among the States (300 U. 8., at prevent the escape from taxation of Income properly subject thereto by the D. 315). By the teaching of the same case an Income tax, If made to cover the Interest on Government boods, to a clog upon the borrowing power such AM purcham of exempt securities with borrowed money. "Under the theory of the respondent. 'A' with an Income of $10,000 arising was condemned in McCulloch V. Maryland, 4 Whest. 816, and Collector V. Day, 11 Wall 113, 124 (DOD U. 8,, at DD. 015, 316), There was we holding that the from nonesempt securities, by the simple expedient of purchasing exempt clies all fax la a property one for every purpose or In every context. We look to all with barrowed funds and paying $10,000 Interest thereon, would escape the facts. taxation upon receipts from both sources. It WILE proper to make providon to "In line with that conception of the Pollock CG&E le Brushüber V. Union mukes no Improper discrimination, does not result in defenting any guaranteed prevent such a possibility. The classification complained of is not arbitrary, R. Co., supra, where the Court pointed out (240 U, 8,, DE pp. 10, 17) that The conclusion reached In the Pollock case did not la any degree Involve bolding exemption, and was within the power of Congress. The fact that remondent that Income taxes generically and necessarily came within the chros of direct onginged in the business of buying und selling is not important See Willoutts taxes on property' but that to the contrary, such taxes WOTE enforceable as Y. Runn. ante, page 216." excluse except to the extent that violence might thus be done to the spirit and cussed and distinguished In connection with the National Life Insurance Come (#) Retering V. Independent Life Insurance Oo."-This case has been die Intent of the rule governing apportionment. Nothing in this opinion le at war with Weston V. Charlesion (2 Pet. 449), or other cases declaring the Immunities of governmental agencies. In the puny (h) Cohn v. Quaves."-The reasons of the Pollock case has not been rejected cam elled and Its congebers the problem for declaion was whether n tax upon la the stove cited case. In that case, the Court held (hat the State or New Income, even though not a property DIE in strictness or for every purpose, was York may tux ber citizen upon Income be received from land situated in another mar to much & mease or in such a measure 4a to bamper the freedom of the State and from Interest 00 honds secured by a mortgage on land situated In Central Government through the Interference of the States or the freedom of another State It was stated that the incidence of n tax on Income differs Drives the States through the Interference or the Central Government. The limita- a. tax op property. Neither tax being dependent upon the possemini, by the tions declared in those declaions were gathered by implication from the struc- taxpayer of the subject of the other ture of our Federal system, and were Accommodated, as the court believed, to The Pollock case was distinguished from this struation дл follows: the public policy at stake. What the Court la now concerned with, however. to "Nothing which was said OF decided in Poltock V. Farmers Loon di Truil the not the preservation or protection of any governmental function. Iowa cannot (107 U. 8. 429). onlin for a different conclusion. There the question for decision be held to cripple in an uncopatitutional way her own privileges and powers was whether a Federal tax on Income derived from reuls of Innd is a direct LEE when whe levies an Income or even 8 property tax upon bonds Issued by hermit. requiring apportionment under article I. section 2, clause % of the Constitution the The Court Is now concerned with the meaning and effect of particular contracts In holding that the tax was 'direct,' the Court did not rest Its declaton upm of exemption to be read narrowly and atrictly, There la no room at such a ground that the tax was a tax on the land, or that It WILL enbject to every time for the freer and broader methods that have been thought to be appro- Ilmitation which the Constitution Imposes on property texes. If determined only of priate in the development of the doctrine of Implied restrulots." that for purposes of apportionment there were similarities In the operation and (f) James V. Drave Contracting Company."This case uphold a 3-percent gross within the constitutional command. See Pollock V. Farmers Loan di Trust On, to the two kinda of tax which made it appropriate to classify both AN direct, receipts tax Imposed by the State of West Virginia upon gross receipts received by an Independent contractor for work performed for the Federal Government supro, PD. 580, 581: Arusholer V, Union Pacific R. Co. (240 U. X, 1, 10). And 10 la West Virginia. This case was clearly distingulabed from the bondholder Union Transit Refrigerator Co. V. Kentucky (100 U. H. 104, 204). decided came, Mr. Chief Justice Hughes in the majority optuton, stating: years after the Pottons care, the present question was thought not to be foreclound. "There la DO Ineluctable logic which nurkes the doctrine of immunity with mentalities of OTHI government. State or National. from texation by the ofber "It la by a parity of reasoning that the immunity of incoma-producing instru- respect to Government bonds applicable to the earnings of an independent contractor rendering services to the Government That doctrine recognises the direct effect of B. tax which 'would operate on the power to borrow before 11 in exercised" (Pollock Y. Parmers Loan di Trust On, supro) and which 282 U. 8. 514 (1981). would directly affect the Government's obligation as a continuing security. 295 U. B. 371. 277 U. 8. 506. 300 U. 5. 308 (103T). 202 U. 8. 95 (1937), 802 U. 8, 154 (1938), 3012 REVENUE REVISION OF 1941 REVISION OF 1943 3013 Vital considerations are there lovalved the permanent volative of the Government to (uvestore to He securities and Its ability to methidin I/W 16 6. Dt. 67a. a L Ed. 769). the sale of the bunder by Chetr owners after eredlt-couelderations which are not found in connection with contracts muster they have besto fusued by the State or invelcipality in regarded as . transme- from time to time for the services of independent contractors." Don distinct from the contrants made by the Government in the bonds them There are also other features Involved to the Draveo can which distinguish adver and the profits of such salon. are subject to the Vederal Income Ins." It from 15. Federal ins on State bonds or employees. In this came, the Pederar In other words, the forume la this case, from Transactions emparate and Government, although not a party to the proceeding. interceded and Informed diatiner from emptracts made with the Government. Therefore, they 6.00 clearly the Court that the Federal Government did not regard the collection of work distinguishable Trum the above Pain where the Interest to received as a part of the contrac with the Government. a TAX (LIF an interforence with its governmental functions (1) Heleering y, Gerhardt."-This CHAP held (hat the Federal locome tax as In this connection, the Court mold: apendent's right la of best et derivative one, He asserts an immunity which applied to the salaries of employees of the Port Authority, a bl-Mtate surporation local faxation and the more fact that the tax In question burdens respondent created by company between New York and New Jersey, was valid on the Henry in no dofeneo, The defense in that tax burdens the Government and re that the tax neither precluded nor threatened unreasonably to obstruct any fune spondent's right for at boxt et derivative NDC. He asseria an immunity which tion committal to the continued existence of the State government. In that case, H It extate, pertains to the Government and which the Government disdatms the Court distinguished this situation from taxing the Income from fitate bonds, Of enurse, in the case of an action by the Federal Government to collect en stating that the formunity doctrine was applied where the function Involved was income tax from a State bondbolder, we ennnot rely upon the proposition that thought to be evantial to the maintenance of " State government, as where the the State will disclaim that the levying of such B tax interferes with The bor- Intent was "to Ins Income received by a private Investor from State bonds, and thus threaten impairment of the horrowing power of the State, Pollock V. rowlug powers. Another point which distinguished the two classes of CLUBER Is brought relit Formers' Loan of Trust Company (152 U. R. 429; d): Weston V. Charleston, supra (465, 486). in the following quotation from the majority opinion: (m) Allen V. Regents of the University System of Georgia (May 25, 1938)- "There is the further suggestion that If the present tax of 2 percent in uphold. This case upbeld the right of the Federal Government to collect an adminions the State may lay 6 tax of 25 percent or 50 percent or even more, and make If tax on admissions charged by the University of Georgia to Its athletic contests, difficult or Impossible for the Government to obtain the service It needa, The The Court pointed out that, although the university was an Instrumentality of argument ignores the power of Congress to protect the performance of the the State of Georgia. if the State embarks on a bustness which would normally functions of the National Government and to prevent interference therewith be taxable, the fact that In 80 doing It to extrelsing a governmental power, does through auy attempted State action. In Thomson V. Paolfin Railroad, mipro, not Itself render the activity Immune from Federal texation. In this connection, the Court pointedly referred to the authority of Congress to prevent such an the Court stated: interference through the use of the taxing power of the State." "Under the tost laid down in Holvering V. Garhardt, onle (p. 4051, however, This Indicates that the Court was of the opinion that If a State should by essential a system of public education to the extence of the State, the cou- n tax, even though nondiscriminatory, which would make It difficult or Impor- duct of exhibition for admissions paid by the public to not sueb a function of sible for the Federal Government to obtain the service it needed, the Federal State government an to be free from the burden of e condiscriminatory fax Government etill had II remedy. This remedy from the Court's reference to the case of Thomson Y. Pacific Hailroad Company appears to be by menns of legis- charged." laid on all admissions to public exhibitions for which an admission fee to lation preventing the State tax from applying. But the States would have no Mr. Justice Black concurred In the opinion "except Insolur as It approves the corresponding remedy to prevent 1 nondiscriminatory Federal tax from bur- reasoning of the Court on the question of State Immunity from Interforence by dening rheir functions to obtain services or borrow money, for the Federal Federal taxation" It will be noted that the reasuning of the Court recognizes law, being the supreme law of the land, would override any State law exempting that there are certain functions of State government which are free from the such activities from the Federal tax. The sole protection of the States in a burden of a. nondlscriminatory tax, and In the Gerhardt cride pointed out that matter of this kind, is the Constitution. une of these functions was the power of the State to borrow money and that the (k) Reivering V. Mountain Producers Corporation."In the above elted cam n taxation of income received by a private Investor from State bonds (hrentened was held that the Income received from a State lease by IL lessee from the sale of Impairment of worth function. his share of oll produced W06 subject to the Federal Income tax. The Court over- ruled certain former cases in reaching this conclusion, stating: SURFANT a. POWER AM AFFECTED BY THE MISTERNYM AMENDMENT 2 These declaions in a variety of applications enforce what we deem to be the controlling view-that immunity from nondiscriminatory taxation (1) Legislative history sought by a private person for his property of gains because he In engiged to operations under a Government contract or lease cannot be supported by The sixternih amendment to the Constitution, which became effective February merely theoretical conceptions of Interference with the functions of government, 25, 1013, provides (LE follows: Regard must be had to substance and direct effects. And, where It merely "The Congress shall have power to lay and collect (nam on income, from what- appears that one operating under n. Government contract or lease Is subject ever source derived, without apportionment among the several State, and without to a tax with respect to his profits on the same basis as others who are engaged regard to any census DE ennimeration." in similar businesses, there la no sufficient ground for holding that the effect The Supreme Court has held that this language does not extend the Federal upon the Government is other than indirect and remote. We are convinced taxing power to new objects and does not give the Congress authority to tax that the rullage to Gillergie V. Oklahoma, supra, and Burnet V. Coronado Oil Income which before the ratification of the amendment was beyond He powers. & Our Company, supro, are out of harmony with correct principle und accord- It was decided that the purpose of the amendment wee to remove the necessity of apportioning such Income taxes as are direct: and further, that the amoudment ingly they should be, and they now are overruled." But. in reaching this concinsion, the Court distinguished (his alination from is not to be extended beyond the meaning clearly Indicated by the language need. Neverthelow the meaning of the phrase "from whatever source derived" has the Pollock cases, NE follows: While fL (az on the Interest payable on State and municipal bonds fornished grounds for continued controversy and debate. It must be admitted by has been beld to be Invalid as a tax bearing directly upon the exerclee of the the most persevering protagonists that there la A possible basis for two Interpre- borrowing power of the Government (Weston v. Charleston 2 Pet. 449, 4(1), rations of this language; the first, that It was Intended by thom propostog and 460, 7 L Ed. 481; Pollock T. Parmers' Loan di Trust Co., 157 U. 8. 429, SML mtifying the amendment that these words would bring within the Procrat testog 304 C. 8 (May 18. (D38), 704 D. 8 e P Wall. 679. (May 23, 1989). ALL 18 a cog a 3014 NEVERUE REVISION OF 1019 TEVENUE REVISION OF THE 3015 all incomes from every source, including interest on State mode securi- power Item, and the security that the language was intended simply to memore the appor- upon another COMO Involving the answer point. However, with regard to the por- riomment requirement with respect DO Income arising from property, II tua report tion of the declares relating to State and loent bond Interest, upon which point which was a "direct" tax under the declaion in the Pollods agre. the Court was unanimous, there was evidenced a general angulescence and a A study of the Matory of the amendment discloses numerous arguments TIP- desire to make all proposed legistation conform to that part of the decletion. holding each position-from the name the amendment was Bret руоровой eminent On June 16, President Taff in il to the Contros, submitted two pro- lawyers and bettliant Ingal minds have differed 63 to the propor interpretation of possits: The first of which recommended that the Congress website to the States the debated phrame. It la extremely dum nit to weigh even the approximate effort . constitutional amoudment "enderring the power to levy FLET income Tes Opon theme pro and con arguments bad opon the minds of thom proposing and ratifying the National Oovernment without apportionment aming the States in proportion to population." The second recommended the adoption of a enrporation exclase the amendment. The entatanding events to the legislative history of the amendment may be tax based upon net Income, If was generally conceded that this more ENT the part briefly related. By 11KX), the popularity of the Inéumé tax had grown to the union of the President and the party leaders was made In au effort to "placate the where it could no longer be denied. The attempt made in (be set of 1894 to levy insurgents" and bring about a compromise reasonably acceptable to nill of the such if les had met with general approval and the Pollock decision. rendering conflicting elements In the Congress, and, above will, to remove the hindrances to the passage of the tariff NIL (hat not ineffective. created widespread resentment. After the Pollock case there ATOMO a demand that the necessary ateps be inken to overcome the effect of This Senator Brown then offered bie second proposal for A constitutional amond- ment already referred 1. P., The Congress should here power to tay and entlect decision. which clearly meant the adoption of a constitutional amendment. In the Pollock case Income had been divided into three general classes: The direct taxes on Incomes without apportionment atrong the several States accord- Ing to population." This proposal had the aerions fault, from The point of view finit, compowed of Income from proporty the second, of interest upon bonds of of Il great number of the Members who - strongly revented the Pottock declare, State and local governments: and the third of income from all other noureer (the question of sularies of State and local officers and employees was not before of seenting to admit, by the une of the word "dievet," the full Implication of the majority's position with respect to a thx on freomie from property, the Court). Senator Brown's proposal was referred to the Committee on Finance where 10 With regard to Income of the first class, the Court found that e tax Chereop days later It emerged In the form finally adopted, namely- was A "direct" INT for the purposes of the constitutional requirement that "The Congrems shall have power to tay and collect times on Incomes, from direct taxes must be apportioned to geordance with the events of enumeration. whatever source derived, without apportionment timong the several States and Upon this point the Court was divided, the majority being Dve Justiers, while without regard to any eensus or enumeration." four dissensed. Upon the question or the power of fbe Federal Government to Thus the Brown proposal WAR amended by ellminating the despised word tax the Interest from State and local securities the Court found that this was "direct" and by adding the phrase "from whatever source derived." "n tax upon the power of the States and their Instrumentalities to borrow money. While the Brown proposal was under the consideration of the Finance Com- and consequently repugnent to the Constitution." As to this point the decision mlitee, Senator McLaurin made the suggestion 00 the Bour That Menator Brown of the Court was unanimous. could have secured the same result by simply striking out the words "And direct The date of the Pollock decision was April M, 1896. From that date to 1909 taxes" to clause 3, section 2 of the Constitution, which provides. there was an ever-tocreasing growth of public opinion (avorable to the income "Hepresentatives and direct taxes shall be apportioned among the several tax. Agitation became acute and the demands were no Instatent that when . States, etc." and the words "or other direct" in clause 4, section 9, which pro- special sension of the Congress was called to 1909 to consider the subject of vides: teriff revision it developed that the question of an effective Income tax "No capitation, or other direct tos shall be laid, unless in proportion to the and a constitutional amendment was oppermost in the legislative mind. Pro- cousua or enumeration, etc." posed amendments in several forms were presented. On April 27, 1909, Benator This suprestion, however, did not take Into account the fact that Renator Brown, of Nebraska. introduced one providing that "The Congress shall have Brown's proposal removed the apportionment requirement only with respect to power to my and collect taxes on incomes and Inheritances." He apporently Income taxes, while the elimination of these two phrases would have unlified this become com Inced that this language udded nothing to the Federal taxing requirement with regard to all other direct taxes with the exception of capitation power. AN on July 17 no introduced n arrond proposal as follows: "The Congress taxes. There was no destre to go this far. shall have power to lay and collect direct taxes on incomes without apportion- There seeme Uttle doubt but that the genesis of the debated phrase Цен com- ment smong the several States according to population." pletely in the word "direct" ne used in the Brown proposst. This conclusion seems Durine this time The tariff hill of 1000 was under consideration by the Con- particularly likely when viewed In the light of the following facts: First, there grow. Several amendments were offered To this bill to provide an Income 182 was a substantial group of Members of Congress who were greatly Incensed over Renator Daniel, of Virginia, proposed a special exclse tax OB corporations to be the portion of the Pollock declaion relating to taxes on Incomes from property. measured by their grown Income. Benator Balley, of Texas, Introduced a port- As Is demonstrated by the bills they Introduced and the speeches on the floor, they crul Income 19% which, with the exception of the State and local bond Interest were naxious to fully challenge this part of that declaion. There was another legue, fully challenged the Pollock case. The Balley proposal provided for a Bat group who favored an Income tax but were willing to conform to the decision and rate and angeled to both individuals and corporations. Sensior Commins with- wanted to pass an income-tax net that would be acceptable to the Court until an mitted Il MII providing for a. graduated income tax upon individuals, beit en amendment could be occured that would allow (If broadened tax Then, there were, inthing provisions exemptive sularies of State and local officers and employees of course, those who were not agreeable to an Income tax and did not destre an and the Interest upon B'ate and local securities. amendment. Of perflcular Interest are two bills which were submitted by Mr. Cordell These fncts throw light on the compromise Interenge eventually agreed upon, of in the Rose The first provided for a general Income tax Second, the stimult for setion 00 the Income tax came from the Insurgent group. with would apply to Inenire from property but which exempted State and local The conservative element WILS anxions for the passage of the tariff bill The hand forement. The instructed the Treasury Department and the Depart Income-tax tasse was a popular one and the ngitation and pressure for definite ment of Tustice to proceed anon the cullection of taxes under the 1894 act (except retion was acute. It cannot be doubted that elmost all Members were sensible Phone mored to Etate and toeal bond interest). regardless of the decision in to these demands. Thus, when the second proposal for a constitutional amend- ment was submitted by Senstor Brown. who certainly did not come from the most The Pollmok one. TI will he noted that there ron through these proposale a general disregard of consorvative group, the necessity for B. compromise upon some generally accept- the Polineh PHAE Insofar AS If related to Income from property. From statements able lenguage became apparent. the Members. and from the dehates on the door, It will appear that among a The membership of the Finance Committee nt this time was RS follows: Ren- constiterable element in both Houses there evisted a alrong resentment toward ntors Aldrich (ebairman), Burrown, Penrone. Date. Cullom, Lodge, McCumber, that portion of the Pottock decinion, and a belief that considering the importance Smoot, and Filnt were on the Hepublicano elde: the Democrate were Senators of the declaton and the majority of only 1 vote, that a reversal might be had Daniel, Money, Balley, Tallaferro, and Simmonk. From these names a majority 3016 REVENUE BEVISION OF 1948 BEVENUE REVISION OF 1942 3017 could be obtained made up of Benation an conservative 48 any then in affire, It ameritant and be concurred WILD the and reported the bill with the in Inconceivable that the Finance Committee BIT constituted would have phrase from whatever source derived." With regard to the declaion in Brons V. Honator Brown's proposal and extended It to nelds dearly not evotemplated to dore." Benator Nelson mid, in this letter: its language. "I have boen very vorry to BOY that the Duprome COUPE In He decision has ulterly If seema much more reasonable to assume that the word "direct" was supleken ignored the physe In taot, treated The amendment as though this phrase were all and the phrase "from whatever source derived" inseried, purely to require not a part of it." the necessity for distingbishing between "Indirect" Income (using which were com The Record discloses that Numator Nelson W/Le present to the Senate at the atitational, and much taxes UF were "direct" and this barred by the Pollock time the debates on the amiendment were toletuge place. It also discloses that to declaton. The changed Language was undoubtedly M concillatory gesture on The 1010 when Aventor Bornh made his often-quoted speech with regard to Die Inter- (art of the Finance Committee toward the Insurgent element to whom, in their protation onf the amendment, that Senstor Netson was else present. It indignation over the Pollock cose the word "direct" was as affroot, Further very strange that be should att through these debates to which the contrary avidence of the compromise nature of the committee's change to wording Is ourl- view was ao definitely and forethly stated, without orising to make We BWD position Islned in Menator Aldrich's request, upon reporting the hill to the Sounte, That clear with regard to the disputed phrase. the amendment be disposed of without debate When the amendment came before the Sinted for ratification, 0 number of Senator Brown, in April 1910, in the Editorial Beview, made the following people, including eminent legal authorittes, governors, and others in positions commend with regard to the words "from whatever source derived": of expressed grave doubts BM to the proper construction of the disposed "The sole question, therefore, presented by the amendment, and the sole on- phrase, Governor Hughes, of New York, to IL measage to bis General Assembly, sideration involved in the ratification or rejection la whether or not the United pointed out that the phrase could be construed as to Include not only Incomes from States, the foremost Nation of the world, shall be clothed with this prevegative property, but aleu Interest Prom State and local decurities. His melange was of national sovereignty-the power to tax Incomes according to their value and given wide circulation. and bis popularity coupled with a very general respect without regard to apportionment among the several States according to popula- for his clarity of mind and legni ability, undonbtedly made his views of con- elderable weight In the minds of State legislators, Renature Borah and the ntite (lon." And further- and learned Eltha Root, took Terms with Ow Governor und. in o clear and yery "Recently the question Las been raised by those who are opposed to the ratin. foreeful menner, pointed ont that there was DO substantial ground upon which cation of the amendment that with the amendment ratified the powers of the anyone could conclude that The Intended to do any more than to remove States will In some way be impaired and their strength and vitality, In way the apportionment requirement with respect to locome taxos. Senator Borab pointed ont further, that Trum the beginning the Federal tax- not specified, destroyed. "The objection Le not sound. The amendment in no way changes the existing lug power had been plenary and complete except for the express restraints Im- relation between the State and the Federal Government. Whether the amend- posed by the provisions requiring apportionment of direct taxes and the uni- ment la ratified or not, The rights of the State BE a State and those of the formlly of all taxes, and the Implied restrator, under Court declaions, against Federal Government to their relation to each other will remain the same. Each diminition of the solaries of Judges, the burdening or Infringement of State sovereignty in now wholly Independent of the other In the exercise of certain powers, the impairment of contracts, dental of due process, and The like-by use governmental functions and the proposed amendment neitber adds to nor takes of the taxing power. In other words, that except for the requirement for the away from the Independence now enjoyed by each. But It la the argument of apportionment of direct taxes and the unfformity of Disa(len that the Federal some who oppose Its adoption that the amendment will alter that relation by texing power was Just an broad and DE all Inclusive as any other express power conferring upon the Federal Government the power to tax the incomes arising granted to the Congress by the Constitution but, Just AM were all of the other from investments in State and municipal securities. I do not agree with that powers, the taxing power was subject to the general limitatime and restratore argument because the language of the amendment and the occasion for its enb- provided In the Constitution mission by Congress and the Constitution Itself do not warrant that Inter- Othere joined in the general débite and a number of very forceful opinions pretution. Under the existing Constitution. the Federal Government is without were expressed and circulated among the State legistratives. However, no upn the power to tax State or municipal securities. And the State la without the can say just what effect theme statements had to determining the choice of the State legislatore, power to tax Federal securities Each may (ex la own securities but neither is subject to the jurisdiction of the other in taxation matters. The proposed Whatever was Intended, the colce of language was infortunate. Considering amendment to not the remotest degree suggesta any change to that regard, Each the stmosphere of douht that surrounded the amendment during the time of its vacideation, there to little reason to thirt ench an Important step as the severeignty In left to the Independent and exclusive privilege of taxing Its own removing of the boo 00 9. Federal tax of State bonds would have been under- aecurities without Interforence by the other." boken or completed far words and uncertato time and In the absence While there were u number of references made by Members on the floors of both House and the Senate to the destrability of taxing the Interest from State of a general agreement as to just what the language really meant, Tble seems doubly cortain when If to considered that. had the intention been definitely and and local bonds, there la nothing to the legislative history of The sixteenth amend. ascertatoubly to include State bond Interest, the States would have been giving ment from which It could be concluded that It was the intention or the Congress to frame the amendment se as to provide for the taxability of State and local up A valuable timmunity without receiving in return any comparable compen- ention. hand Interest. The language "from whatever source derived" seems more property This point has been ably summed up by Mr. William Andersm to an article on to have been used to eliminate the use of the word "direct." tax exempt securities in the Minnesota Law Review for March 1004, as follows: Thus the Senator Introdocing the amendment and Chairman Aldrich. who WILA "Can It be assumed that Cougress, without discussion of the question, by the In charge of the bill on the floor, give no infination that the momentous step of claimay not of four words in the middle of an amendment, intend 10 introduce a. subjecting State and local hand Interest to the Federal Income tax, was con- chunge of no tremendous significance? New and fundamental powers are not templated In fact, they dented this TO be the Intention of the Congress and der unity conferred by a single phrase found In B provision baving a different pur- clared that the only purpose of the language was to remove the necessity for apprit- DOME If the broad construction would be applied to the smendment. a might be lionment with regard to such income taxes na might be direct. even construed brond enough to tax the incomes or revenues of the State or Mr. Harry Hubbard, to un article published in the Journal of the American Ber ununicipal government themselves. Furthermore, this broad construction, If taken Association, quotes from a letter written to him by Senator Knote Nelson. of Min Itternity, would authorize the Impairment of the obligations of contracts. neanta, In 1920. Senator Nelson was n member of the Committee on the Juliciary. "It in entirely Improper to take out a single providon of the Constitution and Be wrote Mr. Hubbard that "the words from whatever source derived with vountrue it without reference to other purts of the document. If la equally U.B. Inverted in an amondment In the Senate at my Instance and on my instatence" Justifiable to take the bare words and construe them with an uncompromising Later he weete Mr. Hubbard that "the record may one show II Int I introduced the ammidment and the facts are that at that time Mr. Aldrich WILL chatrman 258 U. Я. 245, of the Finance Committee and I discussed the matter with him and Instated no the NO-11 3018 BEVENUE REVISION OF 1942 REVENUE REVISION OF (34) 3019 Interality When the letter la the law, the people become victims of the mukille] draftsman and the careless copylet. The omeial or strict conformetion of the It le stated than the purpose of the aixfeenth amendment was to overcome Constitution la proferable, Brat, because it considers the Constitution an A whole; the decision of the Supreme Court In the Pollock cuse. However, It should be second, If le not misled tate disregarding the form of the amendment for Ita remembered that It was only the majority opinion of the Poliock COMP which was stance, and third, it does not open the door to such remilts as impulrment of eriticized, not the minority Both the majurity and minority optuions were obligations of contracts, ft. preserves the fundamental rule that the l'ederal unantmous to holding that the Congress WAS without power to apply a non- Government may not Iss the governmental Instrumentalition of the Btate." discriminatory Federal Income TAX to the income from State or municipal boods In this connection, the decision In the came or Pairbank V, United States in at Moreover, that case did not involve the taxution of State officers OF employees Interest. The validity of a Federal stamp tax on foreign bills of Inding TM for the reason that their salaries were specifically exempted by Congrame In the before the Court. In Using the senpe to be allotted to the provision limiting the net before the Court In the Pollock case, Mr. Instice Fuller, la referring to the taxing power, by probibiting taxes on orticles exported. the Court laid down the said: Income from State and municipal bonds in the rehearing on the Pullock culam, following general rale with regard to powers and restrictions thereon "We are not here confrosted with a question of the extent of the powers of "We have unentmously hold In this cum that, so for BA this law operates INI Congress but one of the limitations Imposed by the Constitution on its action, the receipts from municipal bonds, 16 cannot be mistained. because LE la n. tax on and It sems to TM clear that the name rule and spirit of construction and also be recognized. If powers granted are to be taken IM broadly granted and as consequently repugnant to The Constitution." the power of the States, and on their Instrumentalities to borrow tomey, and earrying with them authority to pass those acts which may be reasonably DECES- He then went on to state: essary to carry them into full execution; in other words. If the Constitution "But If, es contunded, the Interest when received has become merely money In in its grant of powers in to be no construed that Congress shall be able to carry the recipient's pocket and taxable na much without reference to the source from Into full effect the powers granted, If IN equally Imperative that where prohi- which It came, the question in Immaterial whether If could have been originally bitton or limitation is placed opon the power of Congress that probibition or taxed at all or not. This Was admitted by the Attorney General with char- limitation should be enforced in Its spirit and to its entirety. It would be a acteriatie candor; and It follows that, if the revenue derived from municipal bonds strunge rule of construction that language granting powers la to be liberally cannot be taxed because the anuree cannot he, the name rule Applies to revenue construed and that Innguage of restriction In to be narrowly and technically from any other source not subject to the tax; and the lack of power to levy any DinE an apportion tax on real and personal property equally existe as to the construed." With regard to the power of Congress to tax the interest on State and local revenue therefrom." securities, the limitation was DO less exacting, because It WAA implied rather than that: In construing this opinion, the study of the Department of Justice holds expressed ne in the above case. Looking back over the history of the amendment, the following points stand out "The majority view was that the Court other looks to for all purposes First, that with regird to the portion of the Pollock decision dealing with or must accept the Income concept for all purposes" (Department of Justice Incomes from property, the Court's majority was 5 to 4: but. na to the power of Stody, p. 118). the Federal Government to tax State and local bond interest, 11 WIMI unanimons and then continues: Second, that in order to levy an effective Income HIS. II was preventy to "The sixteenta amendment was written Into the Constitution because of the remove the constitutional requirement for apportionment or direct taxes. effect of this decision upon the power of the Congress It la believed that the Third, that Senator Brown's securit proposal sought to do just tbat. and that amendment, in giving to the Congress the power to tax Incomes "from whatever nothing more was contemplated or possibly to be inferred from the longuage und. source derived without apportionment, abolishes the governing principle In the Fourth, that It la extremely unlikely that the conservatively constituted Com- Pottock come, I, e., that AL tax on Income is equivaleur to a tax on the several mittee DEL Finance had In mind extending the scope of the Brown proposal to sources from whence such Income is derived. This makes no Incomé tax s be Include tax-exempt interest when It struck out the word "direct" and Inserted on fucomo without regard to the sources from whence derived As the Chief the phrase "from whatever source derived." Justice pointed out In the optuion on rehearing. if au Income TAX le not con- Fifth, that It Is clear from the statements of Senators Brown, Bornh, and sidered ne the legal equivalent of a tax on the source, then the Interest OD State Aldrich that there was no-Intention on the part of the Congress to include State and 113" munteipal obligations would be subject to n. general, nondiscriminatory income bond interest by the use of the disputed phrase. Sixth, that to spite of Senator Nelson's statement (made In A letter In 1020) The Chief Justice In this case was showing the result which would follow that the change of words WAS made at bis Indistence and that be understand them If the notree of the income was disregarded for all purposes. Under ench a to Include State bond Interest, It secms strange that be should alt attent through theory. the Congress would be unable to classify Income that is II would be the debates without making his position clear. nnable to tax expital gains at one rate and earned Income BE another rate or Seventh, that the origin of the phrase undopbtedly arose in the use of Die to determine a distribution was capital OF an ordinary dividend in the hands word "direct" by Renator Brown In his proposal, and 11 was need to avoid the of the sharebolder. It would also be unable to levy an Income us on wages, necessity for using this unpoputer word. which tax has recently been upheld by the Supreme Court to connection with the Eighth, that even If there were doubt inn to the propor construction of the Social Security Act. If the only Income tax authorized by the stxteenth amend- phrase and the Intention of Its framers, nn ambiguous amendment abould not ment in "a tax on income without regard to the source from whence derived." have been construed no as to infringe the powers of the State unless soch # step all of our Income-tax laws, beginning with the Revenue Act of 1913, would be was unquestionably und Incontrovertibly muthorised. unconstitutional. That this was not the view of the Supremo Court AS to the purpose of the sixteenth amendment la made evident by the first decision arising (f) Judicial interpretation under the sixfeenth amendment, construing the Revenue Act of 1912 This was the case of Brushaber v. Union Pacific Ratirnal Co.,* decided January 24, 1916. The second question to be considered is whether the Federal Government bas In the Revenue Act of 1913 Congress classified Incomes and allowed certain the power to tax the Income from State bonds by renson of the alxteenth nimend- exemptions. Proceeds from Ilfe-insurance policies or from life-Insurance endow- ment. This amendment provides that: ments or unnuity contracts were not Included In Income. The interest upon the "The Congress shall have power to lay and collect taken on Informes, from bonds of State or political mbdivisions, the compensation of the President of the whatever source derived, without apportiment among the several States, and United States, the Judges of the Supreme and Inferior enurts, and the compensa- without regard to any cenants OF enumeration." flom of officers or employees of a Blate or political mbdivision were exempt. 187 D. if. 420; 186 U. 9. 001. 181 D. 5. 288. NO U a, 1. 3020 REVENUE BEVISION OF 1042 Individuals were entitled to deduct from their Insure dividends received BEVENUE GIVISION OF 1049 3021 from corporations. To determine whether or not the amounts to the honds of the Individual were exempt or deducitide under the law, " WILE to requirement of apporttment as to one of the groat classes and of uniformity look Into the from which soch theome derived as to the other class were not BY much a limitation upon the complete and all- The first point raised to the Newshaber case was that the effect of the sixteenth embracing authority to tax. but in their CAMPDOG were storply regulations con amendment was merely to waive the requirement of apportionment arming the cerning the mode to which the plenary power was to be exerted. In the whole States to (to application to a general and uniform tax upon Incomes from what- history of the Government down to the time of the adoption of the sixteenth ever surren derived and that the Income-tax law of 1013, except insofar as The amendment, leaving saide some conjectures expresent of the possibility of a TAX tax (hereby imposed was to reality such a general and uniform tox on Incomes, lying intermediate between the EWO great classes and embraced by notcher, no it derived no support from the sixteenth amendment. It was contended to that question has been anywhere made ou to the corrections of these propositions. At the very beginning, however, there affuse differences of opinion concerning the caso that- "Diseriminations, inequalities, exemptions. and artificial rules of computation critecia to be applied to determining in which of the two great subdivisions a las are excluded from any Income-Dax law which purports to derive the authority would fall from the stxteen(b amendment, because they necessarily Involve the testog of Upon the lepsing of a constiterable perfod offer the repeal of the income-tax laws reforred to, in 1804 All not was passed laying a tax on Incomes something other than Income." If was nice contended that, under the gixteenth amendment. n tax could not from all classes of property and other sources of revenue which was not appor- be imposed on particular kinds of Income, such an the tax on Lucoma from gold tioned. and which therefore was of course assumed to come within the classifies. mines or upon rules received from feaschold estates. It WIME hirther contended (lon of exclam, duties, and which were subject to the rule of uniformity (but the tax to De imposed under the sixteenth amendment must be a general tax but not to the rule of apportionment. The constitutional validity of this law moomer from whatever monroe derived, merely because they were Invomes was challenged on the ground that It did not fall within the class of exclases, and upon not because of their sixo or their source or any other quality at Incldent duties, and importe, but was direct to the constitutional sense and was therefore vold for want of apportionment, and that question name to this court and WILM whatsoever. The Court mimmed up the contentions no to the invalidity of the soot XXXX (Diver presed upon in Pollock V. Farmers' Loan if Trust Co. (157 U, S 429; 158 U. 8. (101). The Court, fully recognizing in the passage which we have previously points AR follows: "(o) The amendment authorises only a particular character of direct the quoted the all-embracing charucter of the two great classifications, Including. without spportionment. and therefore if a tax to levied nuder its unsined on the one band, direct taxes subject to apportionment, and on the other, exclas, authority which does not partake of the chargeforistics exacted by the amond- dutles and imposts subject to uniformity, held the law to be anconstitutional mont. It is entside of the amondment and LA void ne n direct ins to the ground to substance for these reasons: Concluding that the classification of direct was adopted for the purpose of readering It Impossible to burden by taxation accume constituilunal sense because not apportioned. "(D) AM the amendment authorizes a tax only upon incomes "from whatever Intions of property, real or personal, except subject to the regulation of appor- derived." the exclusion from taxatine of rome income of designated your tienment. it was held that the duty existed to flx what was a direct tax to the mource sons and elasses in not authorized and bence the constitutionality of the law constitutional sense Bo na to necomplish this purpose contemplated by the Con- must be tested by the general provisions of the Constitution an to taxation. and stitution (107 D. S. 581). Coming to consider the validity of the tas from this point of view, while not questioning at all that In comfirm understanding It thus again the tax is vold for want of apportionment." It In eleme therefore, that the Supreme Court hnd before If to The Brushater was direct morely on Income and only Indirect en property, " was held that que the question as to whether OF not the Income tas authorized by the an- considering the substance of things It was direct on property in a constitutional tounth amendment was "A tax on Income without regard to the sonreo from sense, since to burden an Income by a tax was from the point of substance to burden the property from which the Income who derived and than accomplish whenee derived." The Court, before taking up The fost of the amendment, made a brief statement the very thing which the provision as to apportionment of direct taxes was of the legislative and Judicial history of the enbject with which the amendment adopted to prevent. As this conclusion but entureed a regulation as to the mide was concerned. The following la quoted from the opinion of the Court as TO of exercising power under particular efreumstances, It did not in any way dispute the all-embracing authority possessed by Congress, Including necessarily Iberein these matters: That the anthority conferred upon Congress by section A of article the power to Impose Income taxes If only they conformed to the constitutional regulations which were applicable to them. I to tay and collect taxes, duties, Imports, and excises' in exhaustive and embraces every concelvable power of insation has never been questioned, of, la clvar on the face of this text that it does not purport to ender power to lovy It Then the Court. after quoring the amendment, went on to etate: If It has, bas been so often authoritatively declared n.s. to render 11 necessary income leses lu a generic sense-do authority already and never only to atute the doctrine. And It has also never been questioned from the questioned-or to Unit and distinguish between one kind of income taps and foundation, without stopping presently to determine under which of the separ another, but that the whole purpose of the amendment was to relieve all Income rato headings the power was property to be classed. that there was authority taxes when Imposed from apportionment from a consideration of the source all-embracing taxing power was subject, no for an they were respectively Again, It bas never moreover been questioned that the concerled complete and given, B.M. the part WBA included in the whole. to Iny and collect income taxes, whence the Income WRS derived. Indeed, in the light of the history which we have given and of the declaion in the Pollock case, and the ground upon which the ruling In that case was based, there le no escupe from the conclusion that applicable to Hemitation resulting from the requirements of article 1. acction the amendment was drawn for the purpose of doing away for the future with 8, clause 1, that 'all duties, imposts, and exclses shall be uniform throughout the United States." and to the Umitations of arttele I. section 2. clause 3. the principle upon which the Pollock case was decided that Ln. of determining that 'direct taxes shall he apportioned among the several States,' and of whether a tax on Income WILL direct not by a consideration of the burden placed on the taxed Income upon which le directly operated, but by taking futo vlew the article I, seetion 9. clause 4. that "DO capitation, or other direct, DIX shall burden which resulted on the property from which the Income was derived, be laid. unless in proportion to the census or enumeration hereinbefore directed elnon to express terms the amendment provides that Income taxes, from what- to be taken.' In fact, the (wo great substivisions embracing the complete and ever HOUPOO the Income may be derived, shall not be eubject to the regulation of perfect delegation of the power to tax and the two correlated limitations BR to appartionment. From this in substance It indisputably arives, first, That all such power were thus aptly stated by Mr. Chief Justice Fuller to Pollock V. The contentions which we have previously noticed concerning the assumed limita- Parmers' Loan di Trust Company, supro, at page MT: 'In the matter of 1020- Hone to be Implied from the Innguage of the amendment as in the inture and tion, the Constitution recognizes the two great classion of direct and Indirect character of the Income taxes which It mithorisms fluid no support In the text (area, and lays down two rules by which their imposition must be governed. and am in Irreconcllable confilier with fire very purpose which the amendment namely The rule of apportionment BIT to direct taxes, and the nile of upl- was adopted to accomplish. formity ny to dntles, Tenports, und resultes.' If la for two observed. however. And then the Court concluded: ne long ago pointed out in Peazio Itonk V, Fenno (N Wall. MM. Part the the amendment contains nothing repudiating or challenging the Filling in the Pollock case that the word "direct" had a broader vignideance since 3022 REVENUE REVISION or 1942 REVENUE REVISION OF 1943 3023 It ambraced nine Taxes jovied directly on personal property because of Its owner- ship and therefore the amendment nt least trupliedly makes such wider sig- on State and municipal obligations, but this provision falled of passage This bill included to gross Income- a part of the Constitution-a condition which clearly demonstrates That the purpose was not to change the existing interpretallos except to the extent "the interest from obligations of States, Territories, political mislivisions necommary to accomplish the result intended that In the prevention of the TONOTE thereof, or the Disfrict of Columbia, Issued after the Date of this act, to the sources from which a taxed Income was derived in order to cause A direct unless authorized by law prior to the passage of this not OF unless Import for tax 1114 the moonio to be IL direct EAS no the source Itwelf and thereby to take an the purpose or funding or refunding Interest-bearing Indebtedness outstanding income tax out of the class of exclses. daties, and imposts and place If In the dam at the time of the passage of this are OF for the performance of a contract entered toto prior to the parange of the act. of direct taxes." The same contentions were enised to the CILMI of Stanton V. Baltie Mining The reason for taxing this Interest, which had been free of tax under the prior acts, WILL according to the committee report, that- Company." In that case, the appellant to Its brief polited out that Income "the committee WM of the opinion that. although there in doubt as to the consti- derived from the executive of essential governmental runetions of States OF initionality of Including the Interest ou these obligations, Justice requires that at their pollical autodivistous were among the exemptions granted by the 1913 act. least in time of war the holders of these securities should share the burdens This COAP also raised the point that the tax on mining companies was A les equally with the bolders of Liberty bonds." on the gross production and not on the not production of the working of the In regard to the provision subjecting the interest on new Immod of State and mine by the corporation and that. for that reason, the tax was not within 1bs. municipal bonds to invation, the Senate Finance Committee struck out the House purview of the sixteenth amendment. In enswering this question, the there provision specifically taxing them, the report stating that- wold) "Hut aside from the obvious error of the proposition intrinsteally remaldered. "Apart from the constitutional question, it seems nnwlen for Congress to attempt to impose this tax upon obligations of States and municipalities BO long GA these It manifestly diaregards the fact that by the previous ruling it was sottled States are not free to tax In a similar manner the obligations of the United that the provisions of the sixteenth amendment conferred no new power of States" togation but simply probibited the previous complete and plennry power of The conference committee agreed to the Sounto amendment and restored the Income texation possessed by Congress from the beginning from belog taken exemption. However, there was a provision Inserted In the Bevenue Act of 1918 out of the category of Indirect taxation to which It luberently belonged and which specifically laxed the sularies of the President and Judges of the United being placed in the category of direct taxation subject to apportionment by a States Supreme Court and the Infertor courts of the United States, This was the consideration of the sources from which the income was derived that 10. by situation existing until 1920. when The case of Some V. Core was decided. This Testing the tax not by what It was-a tax on Income-but by a mistaken Cheery case Involved the texation of the sulary of A Federal Jodge for the western district deduced from the origin or source of the Income taxed. Mark, of course, in of Kentucky, who was appointed by the President with the advice and consent of mying this we are not here considering a tax not within the provisions of the the Senate in 1899. The Government taxed bis sulary under the Revenue Act of amendment: that le. one in which the regulation of appertionment 1918, which speelfically Included us Income the sulary of such a Judge. There OF the rule of uniformity la wholly negligible & the TOP Le one entirely were two questions presented to the Supreme Court for declaton (1) Whether In beyond the of the tazing poscer of Congress and where consequently no subjecting the salary of n Federal indge to II and income tax immunted to a diminu- authority to impose o burden direct or subtress ealate. In other words, we are tion of his compensation under article III, section 1, of the Constitution and (2) lun'e dealing solely with the restriction Imposed by the sixteenth ameudment on If the lovying of a net Income tax does amount to a dimination of If Judge's salary, the right to resort to the source whence an income la derived to a case where does the sixteenth amendment modify this express provision of the Constitution thore is power to tax for the purpose of toking lbe Income tax out of the BU as to render such sulary subject to the income tax) The Court concluded that class of Indirect, to which It generically belongs, and putting It in the class the levying of an luvame tax would diminish the compensation of # Federal judge of direct, to which It would not otherwise belong, to order to subjeer It in the within the meaning or the Constitution, and then went on to state: regulation of apportionment" "Does the sixteenth amendment authorize and support this tax and the at- It will be noted that this case held that the eight to disregard the MONTER tendant that to to say, does it bring within the taxing powers sub- estated to a case where there was a power to tax only for the purpose of not jocts theretofore excepted? The Court below answered In the negative: and coun- applying the rule of apportionment. Of course, in the cave of Indome from State and for the Government say: or municipal bonds, there was no power to tax. "It to not, in view of recent recisions, contended Unit this amendment rendered The nest case involving the sixteenth amendment to connection with the taxable n.a. Income anything that was not NO taxable before.' Bevenue Act of 1913 WILB that of the Tyoe Really Co. V. Anderson." Rince "We might rest the matter here, but It мостоя better that our riew and the all of the contentions In this case bad already been docided by the Brushaber reasons Cherefor be stated in this opinion, even If there be somo repetition of case, the Court held that case to dispose of the Issues here involved. what recently has been sald in other cases." The conclusion from the cases construing the Revenue Act of 1918 suema After reviewing the Pollock case, the Bruthaber case, and other cames, and the Inscreapable that the Court are not accept the Interpretation that an income legislative history of the sixfeenth amendment, the Court concluded that the six- TAX. to meet the requirements of the sixteenth amendment, must be A tax ou teenth amendment did not extend the taxing power to bew or excepted mobjecte incomes without regard to the source from whence derived. It concluded that but merely removed all occasion otherwise existing for an apportionment smang the source WES to be disregarded by that amendment only where there was a. the States of taxes Iald on Income derived from one source or another. In other power Tax tax, and then only for the purpose of preventing the application of words, this question WILL reconsidered, and the view in the Ballie Minino Com- the volo of apportionment The provisions of the Revenue Act of 1913 exempt puny came and other cases was adhered to, which, In effect, meant that the ets- Ing the interest upon obligations of State or political subdivisions were Inserted teenth amendment would not authorize such a tax. according to Mr. Cordell Hull, who WILD in charge of the bill In the Elotest, In Peck d Company V. Lowe," relating tn the application of the income tax to provent the injection of any more constitutional questions or enntroversies Imposed by the Revenue Act of 1018 to exports, the argument was made that the (11) The hill- On the Senate side, It WAS stated that these exemptions were each sixteenth amendment had not enlarged the Inxing power of Congress 60 that It Inserted to foreclose the doubt which was regarded B.P. Improhable that could levy a get Income tax (in exports. Mr. Justice Van Devanter, in delivering revenues might subject to Federal taxation. or entree, at that time, the decl- the opinion of the Court, held that the s(xteenth amendment had DO real bearing sions In the Brushdber case and related cases had not been rendered. Time on the case, but stated- exemptions were continued through the Revenue Acte of 1016 and 1917. IDO "that this amendment does not extend the taking power to now and expected Revenue bill of 1018, AR Introduced in the House, attempted to tax the Interest subjects, but merely removes all occasion, which otherwise might exist. for an DAN D. 8. NA 240 11. 8. 109. 247 U. 8, 165 (1918). 240 U. 8, 116, 3024 SEVENUE REVISION OF 1042 BEVENUE REVISION OF 1842 3025 apportionnent among the States of taxes laid on income, whether " be derived $20,000, regardiess of whether relasured It in further suggested that the remain from one source or another." In the case of Elener V. McComber," the Court In determining whether or DATE 8 log motual compantes be taxed 002 the mins of their Investment Income and the stock dividend was Income within the meaning of the sixtemith amendment. said additions to their surplus which are free from claims or polleyholders. "The sixteenth amendment must be construed in connection with the contrup Such statement was made by Mr. Paul as SL part of the Treasury's cleases of the original Constitution need the effect attributable to them before the recommendations for removal of special privileges. We concur in Mr. amendment was adopted," And then restated the conclusions referred to in the former opinions that the Paul's statement that there is serious disparity in tax treatment be- amendment did not extent the taxing power to new subjects bot merely removed tween stock and mutual insurance companies other than life. Such the necessity which otherwise night extet for an apportionment smoke the States disparity can be explained in these simple terms: of taxes laid on Income, Also, in Metcalf di Bddy V. Mitchell." Mr. Justice Stone in writing the majority opinion referred to the casos holding that The sixteenth Mutuals are permitted exactly the same deductions as stock com- amendment did not extend the trxing power to any new classes of subjects. panies. In addition they enjoy the following deductions which are not The only cum directly involving the taxation of the Income from State and permitted to stock companies: 100ml bonde after One passage of the sixteenth amendment was that of the National They are permitted to deduct dividenda paid to policyholders. Life Insurance Co. rdae, already discussed In the first. part of the report, In They are permitted to deduct amounts of premiums which are re- that case the Court did not consider the sixteenth amendment directly but held that Congress was without power to impose such a tax. tained and added to surplus. Therefore, the mutuals have never paid It is reasonably clear, therefore, that the Court, both by dicta and decisions, any tax either on their investment profits or their underwriting profits. has come to the conclusion that sterms of income which were not taxable before This despite the declared intent of the Congress to impose a tax upon the ndoption of the sixteenth amendment are not tarnble after such adoption. both stock and mutual companies. The CHAIRMAN. I have here a short supplementary statement made Applying to actual figures these special deductions allowed to mu- by Mr. Williamson, who appeared here yesterday, on the tobacco situn- tunis we find a mutual company with $46,000,000 of net premium writ- tion. It is just one short page. That will be inserted here in connection ings in 1940, showing $11,000,000 underwriting and investment profits, with his statement. paying nothing into the Federal Treasury for income taxes, From (The document referred to appears on p. 2778 of these hearings.) 1940 business, this same company added $2,300,000 to its surplus. By The CHAIRMAN. The next witness on the calendar is Mr. Ray Mur- this same process 23 leading mutuals mirned $42,000,000 in 1939 and phy, assistant general manager, Association of Casualty and Surety paid nothing or nearly nothing BR Federal income taxes. Executives, 60 John Street. New York. Is Mr. Murphy here} During the continuation of these special privileges the mutuals have Mr. MUDPHY. Yes, Mr. Chairman. accumulated over the years not less than $150,000,000 in surpluses The CHAIRMAN. Come forward and identify yourself. which belong to the companies free from claims of policyholdera. We wish now to clarify one extremely important point, concerning STATEMENT OF RAY MURPHY, ASSISTANT GENERAL MANAGER, which the large commercial mutuals for many years have successfully ASSOCIATION OF CASUALTY AND SURETY EXECUTIVES, NEW confused the issues and the facts. That point is the claim repeatedly made by mutuals' spokesmen that there is DO distinction between a YORK, H. Y. small farmers' mutual and the largest commercial mutual in the United States, and that both therefore should be exempt from taxe- Mr. MURPHY. I am Ray Murphy, assistant general manager of the tion, We will summarize briefly the character of income and the Association of Casualty and Surety Executives, on behalf of which I methods of operation of these wholly different types of mutrial com- appear. This association is composed of 61 principal stock casualty panies, believing this will dispose of the claim upon which the large insurance and surety companies doing business in the United States commercial mutuals have consistently based their plea for tax ex The principles expressed herein apply to all mutual insurance com- emption. panies other than life. Classified according to character of income and methods of opera- On March 3, 1942, Mr. Randolph Paul, special tax adviser to the tion, the two principal types of mutual easualty companies are: Secretary of the Treasury, in his appearance before this committee In the first group, those operating on the assessment or premium- made the following statement: deposit basis and, in the second group, those which collect a fixed cash Mutual insurance companies other than H/e-Many of the mutual commity premium equivalent to that charged by other companies generally. Insurance companies, large as well as smill, are given an outright exemption Usually the income of companies in the first group consists almost from texation under section 101 (11), although that section was originally entirely of assessment or premium deposits collected from members designed to exempt only small and local mutual companies. Other mutual nom- panies, while nominally subject to tax, ordinarily pay no tax under the present either in advance or after occurrence of the loss. No dividends are method of computing their income. This has resulted In a perlous disparity to paid to members; amounts refunded to members, if any, represent n. tax treatment between such mutual companies and the sinck casualty companies. return of the unused portion of the assessment or premium deposit. It la suggested that the exemption in section 101 (11) be confined to these These mutuals do not, with B. few notable exceptions, maintain esten- mutual ensually compantes whose net taxable Income does not exceed $25.000 and which do not write Insurance on any property having a ralue of care than sive organizations nor employ commercial methods of conducting their operations, such ne widespread advertising and other forms of solleit- any (I. 5. 180 (1920). ing business from the general public. It is doubtful whether the entire - DPD 11. 5. 514 (1926). number of mutuals operating on this basis have any profits of conse- 277 12. B. 609, quence. In this group fall the several hundred true farmers' mutuale 3026 REVENUE REVISION DE 1942 BEVENUE REVISION OF 1982 3027 which the Congress has heretofore exempted as a. matter of iss valiey. Under the recommendations of the Treasury made to this committee of large mutuals whose roetliods of business THE have Increin described, on March a, 1942, by Mr. Paul, every small farmers' mutual would wholly commercial in nature, parallef in operation in off respects with the operations of the stock companies. continue to be exempt. In contrast are the commercial mutuals in the second group, many A principal contention made by the mutim! spokesmen in that their of which operate on A national and, in some cases, international mente, accumulations of surplus are hold in trust for their policyholders Their policies provide the same coverage as those issued by the stork This cannot be demonstrated. At this time the largest mutual casualty companies. A flat, final, fixed premium is charged as distinguished company is resisting in court the claim of a former policyholder to III from collection of an assessment or a premium deposit. Mutunis have pro rata share of the company's surplus which was accumulated dur- sought and secured authority in every State to issue nonassessable ing the long period that it was n. policyholder. Very probably all policies; the issuance of such polícies is now their common practice, holders. other commercial mutuals would resist similar claims by policy- This constitutes an abandonment of the fundamental concept of mm- With DO constancy of policyholders, with policyholders coming and caulity. The wholly commercial nature of these companies is emphasized by going and ever changing with intermingling of funds, with no records of proportionate accumulations from the premiums of individual pol- the methods and vigor with which they seek their business. icyholders, with a fixed practice of resistance to policyholders claims Like many other large commercial enterprises, they spend hundreds thereon, the commercial mutuals cannot in good faith contend that of thousands of dollars annually in advertising. Their national adver- their accumulations of surplus are in fact held in trust. They are tising is directed not to individuals alone but to industry and commerce in fact the property of the company, free from any claim of the policy- as well. Their advertisements are carried in the largest periodicals holder for participation therein. The hoary myth of trusteeship has and newspapers in the country, such as Fortune, Time, Newsweek, Sat- long been % favorite device of the commercial mutuals in their success- urday Evening Post, Nation's Buriness, Colliers, New York Times, and ful resistance to Federal income taxation. Wall Street Journal. Now a few words concerning the Federal tax bistory of stock cas- The policyholders of commercial mutuals now include many of the unity and surety companies. Since 1909, the date of the original Cor- Inrgest industries in the United States. One mutual advertises that porate Excise Tax Act, which taxed corporations on their net income, it is the leading writer of compensation insurance in America. An- they have remained subject to tax on their net income at approximately other advertises that it is the largest exclusive writer of automobile the same rate applied to corporations generally. The rates on stock insurance in the world. casualty and surety companies are now identical with those of other The commercial mutuals employ conventional methods of solicita- corporations. Under successive revenue nota since 1900 the stock com- tion-some through agents, others through branch-office employees, panies have paid millions of dollars of Federal taxes based on net and still others through both agents and branch offices. The larger income, Under the rate increases proposed for 1942 their Federal companies have offices in the principal cities throughout this country; taxes will be drastically increased. some maintain offices in foreign countries. What is the tax history of the mutual casualty companies! Ac- Many of those companies maintain large home office buildings cording to the testimony of their own spokesmen here last week, they staffed by hundreds of employees. have paid nothing, or nearly nothing, into the Federal Treasury by In 1940, the 203 mutual casualty companies doing business in the way of income taxes. They will continue to pay nothing, regardless United States had premium and investment income of more than % of rate increases, SO long as the present situation maintains. quarter of a. billion dollars; 43 of these companies, each with an an- Neither the time allotted, nor your patience, will permit a detailed nual premium income of more than a. half million dollars, wrote M verbal reply to the various points raised by the five mutual spokesmen percent of the total business. Those 48 companies, therefore, wrote in support of their plen for tax exemption. I shall, therefore, cover more than 10 times the volume of business written by the other 160 as quickly as I possibly can the principal points advanced by them, companies: 6 of these 48 wrote 59 percent of the total mutual ensualty and I nsk leave to file with the committee additional data, statistics, business; each of these 6 companies in 1940 had premium income rang- and other information touching upon these points, as well as other ing from $11,000,000 up to $16,000,000. These 6 biggest companies, as pertinent matter. I am told, are members of the American Mutual Alliance for which A The CHAIRMAN. Without objection, they may be filed. spokesman appeared before your committee last Thursday. (The statement referred to in on file with the clerk of the committee.) It should be transparently cleur that the true farmers and local Mr. Murrer. Four points were listed at the committee hearing of mutuals are not the real parties in interest represented by the spokes- April 9, by the spokesman for the American Mutual Alliance, in man appearing last Thursday before this committee. The true farm- opposition to the Treasury recommendations presented by Mr. Paul. ers and local mutuals have either no profits, or profits of no importance We shall summarize here the answers to these points, requesting that from a tax standpoint. Furthermore, undes the Treasury's proposal, the committee, if it desires, consult such additional exhibits, as we those mutuals having net income not in excess of $25,000 and not are permitted to file, for more complete information. insuring risks in excess of $50,000 would be exempt. The real parties The first point alleged was that no disparity exists in tax treat- in interest represented by the mutual spokesmen are the small number ment between stock and mutual easualty companies, and that the present difference in tax treatment between the stock companies and 3028 REVENUE UNVISION OF 1942 REVENUE REVISION OF 1042 3029 the mutual companies, two wholly different types of companies, is fair and reasonable. any published average may be wholly meaninglem, indicative of In one breath the spokesman stated that no disparity existed and nothing. in the next breath stated, in effect, that the disparity which does The important fact is that if the recommendations of the Treasury exist is justified. Department are enacted into law the stock companies will, for 1942 When one set of corporations, the stock companies, pays several and doubtless future years be subject to income and surtaxes totaling million dollars a year in Federal taxes and another set conducting 55 percent and to excess profits taxes as high BR 75 percent, and that exactly the same kind of business, the mutual companies, pays noth- unless existing law and practice are changed with respect to mutuals, ing, disparity cannot be doubted. the mutuals will continue free from any Federal taxes based on net As to the pretended justification for this disparity, we believe that income. our previous statements herein made, showing the methods and prac- It is estimated that if the proposed rate increases are onscted into tice of the commercial mutuals, constitute a wholly sufficient. answer, law the stock companies will be required to pay in Federal income Such statements are supported by the matter filed. und excess profits taxes of at least GO conts out of each dollar of tax- The second point alleged by B. mutual spokesman Was that the stock able net income. By reason of their heavy investment in Federal companies are not in a serious competitive difficulty because of the obligations, the incidence of the corporate mirtas is far heavier on tax law, na the record of their earnings will show. the stock companies than on ordinary business corporations. We are confident that this committee has no interest in any com- The third point alleged by a mutual spokesman was that the capi- petitive issue, as such, between the stock and mutual companies, We tal stock insurance companies have enjoyed and are now enjoying are equally confident that this committee will not knowingly con- special 10% privileges not available to other profit-making concerns; tinue any serious tax disparity, nor permit the Federal tax laws to and that consequently their profits are greater and taxes less, be employed AS a competitive weapon. We believe the existing dis- This statement is false in its implications. We have hereinbefore parity was never intended. Now that it has become serious by reason outlined the past and present tax status of stock casualty companies, of increased tax rates, and can become more serious as such rates under the successive revenue acts since 1909. The records of the increase, we trust that the Congress will implement by appropriate Treasury Department are the best source from which to determine legislation the proposals for elimination of such disparity. whether the stock companies have enjoyed or are now enjoying special Our view finds support in the statement of the Treasury made to tax privileges. this committee by Mr. Paul on March 8, 1942, pertaining to tax- Inasmuch as such records are not available to us, we respectfully in- exempt corporations which engage in trade or business not related vite the attention of the committee to them, that they may satisfy to their exempt activities. On this subject he commented: themselves on this point. We are completely convinced that such records will effectively refute the mutuals' point, and that they and In This way sources of considerable tax revenue are withdrawn from the other Government records will establish definitely that stock com- acope of the tax. At the same time privately owned business are forced to panies are not only given no favored treatment, but, no, heretofore compote with other businesses not subject to an Income tax herein stated, it is the commercial mutuals that are given favored We submit that the exemption of the commercial mutuals from treatment. Federal taxation withdraws a considerable revenue from the scope of Important facts are that the stock casualty and surety companies the Federal income tax. At the same time the stock companies are are required to compute their net income on is basis comparable to that forced to compete with companies conducting the same type of busi- of other corporations generally; the rules of normal tax and surtax IMISS but not subject to income taxes. are the saine BE imposed on corporations generally; they are subject In attempting to minimize the importance of Federal income taxes BS a competitive factor, a mutual spokesman quoted to the committes generally. to the same provisions of the excess profits tax as are other corporations a newspaper statement purporting to deal with the differential in The fourth point alleged by n. mutual spokesman is That the Govern- expense ratios of stock and mutual companies. The illustration is ir- ment does not lose revenue because of the nonprofit nature of the relevant and grossly misleading. mutual companies. First, Federal taxes are not a permissible factor in arriving at BX- The point is fallacious. On the one hand their spokesman extolled pense ratios. Second, the spokesmini artfully selected for his example the mutuals as the benefactors of the farmers. On the other hand a line of insurance, workmen's compensation, on which few companies the mutuals' spokesman frankly claimed, for the purposes of one of are fortunate enough to make IN profit. Obviously, any ratio of taxes their points, that from 75 to 100 percent of the mutuals' dividends are paid on extremely low-profit business, in relation to expense ration, or paid to policyholders engaged in corporate business. any other element of the premium dollar, will not accurately reflect It must be assumed that the dividend recipients to which the mutual the general and the true over-all situation. Incidentally, there ie no spokesmen referred are not only corporations, but are sizable corpora- compulsory or uniform accounting method prescribed as respects the tions, since the 24 percent rate was used by such spokesman, and such treatment of Federal income taxes in various published statistical ex- rate applied, I believe, only to those corporations having taxable net hibits. This is immaterial since there is no allowance in insurance income in excess of $38,000. We believe the mutual spokesmen in rates established by rate-making authorities, for such taxes. Hence, this regard are guilty of n. violent assumption indeed, but if not, and their statement is true, then their claim of service to the farmer and the little man is quite exploded. 3080 REVENUE REVISION OF 1982 BEVENUE REVISION OF 1048 3031 Moreover, the Report of the Commissioner of Internal Revenue for In response to questions from & member of this committee this wit- the fiscal year ended June 30, 1941, page 18, reveals that in 1940 540,035 ness frankly stated corporations filed Federal income-tax returns, of which 340,220, or 64 percent of all corporations, paid no tax. In 1941 535,525 corpors. I believe all Itfe-Insurance companies expect to pay wore Incrue tax. The question, as I stated, la to determine whet the fair Amount would be and to tions filed returns, of which 328,342, or about 65 percent, paid no tas. determine a basie for equitably distributing the tax among the difforent life- It is fair to assume that an unknown, but possibly substantial, Insurance companies. number of corporate policyholders to whom the commercial mutual Parenthetically it may be stated that the tax basis for stock life companies returned dividends were included in the great majority of insurance companies and mutual life insurance companies under pres- non-tax-paying corporations. If so, the mutual spokesman's estimate ent law is identical No reason exista why the same parity should not of Federal income taxes paid by recipients upon dividends from the exist between stock and mutual companies other than life. No reason commercial mutuals becomes even more fantastic. exists why life insurance companies, stock and mutual, should be In laboring their point the mutual spokesmen have chosen to dis- (axed while the commercial mutuals go tax free, regard the fact that Federal income taxes, undoubtedly substantial in We, too, expect to pay additional taxes. The Nation has never the aggregate, are paid by the many thousands of stock company com- needed them 80 much as now. And all we ask are only parity and missioned producers. equality and justice. We believe it to be the desire of the Treasury Department and of the The CHAIRMAN. Mr. Murphy, if I understand your position, it is Congress that loopholes be closed so that all unwarranted tax exemp- that under existing law there is an unfair competitive condition be- tions shall be eliminated. We trust that whatever legislation is en- tween the mutual companies and what might be called the standard or acted, it will effectively close the loopholes concerning which I am profit-earning companies, and also that there is under the present law making this statement. a loophole through which certain insurance companies are escaping However, great anxiety was expressed by the spokesmen for the or avoiding making their proper contribution to the support of the mutuals over the possibility that the Treasury's recommendations Government. Do I get your point! would result in B. tax upon mutuals substantially higher than the tax Mr. MURFITY. That is correct, air. paid by stock companies-"two and one-half to four times more than a similar profit-making stock company"-to quote the spokesman ver- definitely? The CHAIRMAN. Are there any other points that you brought out batim. Please note the spokesman's perhaps inadvertent use of the Mr. MURPHY. Those are the only points. word "similar," for at the outset of his statement to this committee to The CHAIRMAN. Those are the two principal points that I under- alleged that the stock and mutual companies are "two wholly different stood you to emphasize. types of companies." Mr. MURPHY. The exhibits that I filed will amplify, of course, what We are sure that no one will take seriously this pretense of anxiety. I have attempted to state, In the light of past and present tax history, the spokesman's tears are Mr. DINGELL You do make H. clear distinction between the small reminiscent of the crocodile. noncommercial mutual company and the big profit-making mutual We do not feel that we are presumptuous in saying we are certain or commercial company, do you not? that the Treasury will not advocate, nor the Congress permit, the Mr. MURPHY. Yes, sir. I do make a distinction. mutuals to be taxed at a greater rate than the rate applied to stock Mr. DINGELL. You make that in your discussion before the com- companies. Certainly we have not asked it. We ask equality only. mittee? We are frankly astounded at the attitude of the mutual spokesmen Mr. MURPHY. Yes. appearing before this committee. One has attempted to prove that Mr. DINGELL. And you think that they should be treated differently the taxes paid by the stock companies are not n. competitive handicap. than they have been heretofore? If this were true, it would necessarily follow that similar taxes upon Mr. MURPHY. Yes. the commercial mutuals would not be a competitive handicap. Mr. DINGELL. Are you concerned about applying this recommen- One mutual spokesman, out of step for the moment, told you that dation State! of the Treasury to any company that is operated within il given the statement submitted by the Treasury does not "appear to be urged BE a means of raising any substantial revenue." Why, then, are the Mr. MUDPHY, I do not think that there are any of the types of com- mutual spokesmen opposing the Treasury's proposal so vigorously! panies that I have referred to as the so-called commercial mutuals In refreshing and encouraging contrast, may I say in conclusion, which are operating within one State with, I think, one exception. is the attitude of a witness who appeared before this committee Inst I do not know that you can determine the distinction by geograph- Thursday on behalf of Acacia Motual Life Insurance Co. He saids leal lines, although I think that that is one very important considera- tion. In other words, the small local mutuals, which Congress has Our company appreciates the nature of the situation confronting our Govern ment and fully recognizes the necessity for greatly Increased revenues We always desired to exempt, are certainly not the large national and appreciate the fact that life-Insurance companies, along with all other corpora international mutuals which do a business exactly comparable to the Union and citizens, must pay additional taxes. We have na fixed Ideas AA to what stock company business. MX formula should be adopted by Congress this year to apply to the life-insurance Mr. DINGELL. I have n. certain company in mind that I am quite Industry. confident is really IL mutual company in the strictest MOTIRO. Tt has 3032 REVENUE REVISION OF 1948 REVENUE BEVISION OF 1943 3033 grown up in our midst and hás carried out overything that you would expect of a mutual concern. By its own charter and power it. in con- Mr. DINGELL That in right. And that is what makes the distinction fined absolutely to people within the State of Michigan, and would between a mutual company and a commercial company. There are 4 not seek anybody across the river, as some of the companies that WII bunch of farmers who got together and decide how much to pay in have referred to will do. They may even go into Canada or Mexico, and how much to pay out, But you do not have that with the big com. But this company confines its activities, the insurability of risks, en- panies. The stookholder or policyholder pays his premium. He does tirely to the State of Michigan. not have anything to say in the so-called mutual company on B. large It has grown to be quite A considerable concern. But it le not your scale any more than be has in the U. F. & G. or any other insurance object to class those companies in the category of those that you would company, that is, liability insurance company. care to try to tax as commercial mutual insurance companies. Am T My contention is that a lot of that sort of thing here is the bank: that if they are in it for business, if they are in it for profit, I think right about that? Mr. MUMPHY. In a sense that is correct, I think, or a correct state- they ought to be made to pay the tax. And I do not. care whether that applies to Michigan corporations or not. If they are in it for business ment of my point of view. Of course, the innumerable ramifications and different classifica- or for profit, we need the money and we are going to get it 50 far BE I am concerned. tions of mutual companies which have grown up have made it difficult to draw an exact line of demareation. The commercial mutuals have Mr. MURPHY. I think that that is the real distinction-whether they make protits or whether they do not. adopted all of the money-making saving devices for & time of the Mr. DINGELL. What about that? Have you any idea about some of email mutual companies, but they have also adopted all the other the salaries that are being paid in these magnánimous mutual concerns, devices adopted by what might be called the free-enterprise companies, Mr, Murphy Can you give us any information for the committee on Mr. DINGELL, Of course, to be perfectly candid about it, I think that point? If you do not have it available now, you might put it in that with most of these mutual companies in 11. large sense the mu- the record. I think it would be interesting to the committee. tuality can be treated AS just IL lot of bunk. I refer particularly to Mr. MURPHY. I do not have it available. So far as I know, it ie some of the life-insurance companies. not # matter of public record except in the individual tax returns, Out of the million or more policyholders, when it comes time for which, of course, at times in the past have been subject to public the stockholders, so-called, the policyholders referred to na stock- scrutiny, but which I understand are not now. holders to meet-out of the million stockholders there will be, if Mr. DINGELL. You are quite right there. there is & real fight on, probably about a thousand or fourteen hundred Mr. MURPHY. So for as I know, the State insurance departments do at the very most of those living in New York, and New Jersey, and not require that information. But I have run across one or two very Delaware. Is that about right? interesting things. Mr. Monray, I do not want to get the life-insurance companies on Mr. DINGELL If it is worth while and you are permitted to tell us, my neck. I have plenty of trouble now. you might do so, Mr. DINGELL. I will not expect you to answer that question. Mr. MURPHY. It would be worth while to me. Mr. MURPHY. But I will say that that applies to the commercial Mr. DINGELL. Go ahead. mutuals. Mr. MURPHY. One spokesman who appeared before your committee Mr. DINOELL. If that applies to the commercial mutuals, it applies last Thursday, according to this statement, which purports to be from then to all of these people that are doing business in the casualty an official insurance record, stated as follows: field, and there is no difference one from the other. It is profits that At a board of directors meeting held October 21. 1031, a contract WAR entered they are looking for. into between the company and Ekern & Meyers, of Chicago, DL, If Tiew partnership. Mr. MURPHY. That is right. This contract provides for payment to Eltern & Meyers. for the relention of their Mr. DINGELL They are in business the same as you are to connection with general legal eminsel and advice, a compensation based na three-fourths of 2. percent of all gross income received by the company Mr. MURPHY. I agree with that. from all sources during the period from June 1, 1031, to Jame an. 1907, provided Mr. DINGELLA The so-called stockholders and mutual policyholders that moneye advanced to the company on surplus notes, Interest Income, anivage do not have & thing to say about the policy established by the company recovered, and premium deposits returned to members on account of cancelations or about anything else, or about the rates of pay to be paid those who during such period are to be deducted from and not considered 0.6 a part of the grown income, are on the inside. Is that right? They do not have anything to say about it, do they According to the statement which I read, it says that- Mr. MURPHY, I would say that the pretense that the policyholders Assuming that the above contract who carried out, and tosofar AM we know own the company is just purely a. legal fiction. It WAA, the amount collected there under by the firm of Ehern & Myers from 1981 through June 1937, estimated no the basis of the premiums written by that Mr. DINGELL. That is right. company would amount to roughly $375,000, Mr. MURPHY. And that they have no active participation in the Mr. DINGELL For 1 year! company. Mr. MURPHY. For 6 years. I believe that if that contract is still Mr. DINGELL. That is right. Mr. Mumphy. Except in R small local neighborhood company, where effective, the compensation last year would have been about $125,000. 60068-42-pt. 30-12 they have sort of a town meeting. 3034 REVENUE REVIRION OF 1069 REVENUE REVISION OF 1942 3035 As a matter of fact, many of the people connected with the large commercial mutuals have management contracts with the company, other 160 companies, In the main those 43 companies were the large commercial mutuals, were they not! and that is where they make the real money, and it is through that Mr. MURPHY. In the main: yes. method that they build up real financial and insurance empires, which Mr. DISNEY. And the 180 were chiefly farmers' mutuals and smaller threaten to be very, very much larger in the very near future. ones! Mr. DINGELL But can you give the committee any information Pe- Mr. MURPHY. Those other companies which write less than $500,000 garding some of the individual large salaries paid, for example, to the of premiums in any year. president and two or three or five of the vice presidents and the treas- Mr. COOPER. Mr. Robertson of Virginia will inquire. urer and secretary and the managers, and 80 forth and so on! Doubt- Mr. ROBERTSON. I received 11. communication from a small Virginia less IL mutual, so-called, that is writing from $10,000,000 to $44,000,000- mutual fire-insurance company, not in my section, but it does operate I believe that that was one of the figures cited-in premiums annually, in three or four Virginia counties. It does not reinsure, and I under- certainly must be paying some pretty substantial salaries; and I think stand that the operating expenses are possibly more then this $15,000 it would be interesting for the committee to know something about limit. Is that the limit? how generous these mutual concerns really are with the premiums of Mr. Mureux. $25,000. That was the net, I believe. That is the the so-called mutual stockholders, because, obviously, if the money net income. is going into salaries, it is not going back to the stockholders. Mr. ROHERTSON. $25,000 net income? Mr. MURPHY. Mr. Dingell, I am afraid that we could not provide Mr. MUDTHY, Yes, That would be the net income after the pay. that information. I assume that the Treasury Department or the ment of all expenses and losses, Internal Revenue Bureau could. Mr. ROBERTSON. What was the amount of insurance that they could Mr. DINGELL. We may be able to get some of that as we begin to write on any one property? delve into this. Mr. MURPHY. $50,000 in one risk, Mr. MURPHY. We could, of course, provide you with names, which Mr. ROBERTSON. Is that a necessary test, do you think, of a. local would assist you, perhaps. But we cannot give you actual amounts, company-that does not reinsure and does not go beyond two or three because, 80 far BS I know, they are not of public record. counties! Mr. DINGELL. If you give us a few of those names, I will see if I Mr. MURPHY. I do not know, Mr. Bobertson, whether I could sky can find out something about them. that it is. I know this: that in appearing before the Senate Finance Mr. MURPHY. I will be very glad to do that. Committee upon this same point we suggested an exemption of Mr. DINGELL Because when anybody comes before the committee, $100,000 net income. That would certainly take care of some pretty I like to know whether he is imbued with this spirit of mutuality and good-sized companies. helpfulness toward his fellow human beings to the extent that be ia Mr. ROBERTSON. And if they do not reinsure, there would not be not in it for profit purposes. any point in limiting them to $50,000, would there? I mean the local I am not opposed to the profit motives, but I do not want to be mutuals. mistaken about it. I want him to come over here and tell us that Mr. MURPHY. I think the point was that it would be . limitation if this is 0 business and not a charitable institution. I want to treat they did reinsure. them all alike, with no pro bono publico work, as my lawyer friend Mr. ROBERTSON. But I mean, if the company does not coinsure, tells me, whatever that is, there would not be any point in holding them down to a $50,000 Mr. COOPED (presiding). Mr. Boland will inquire, policy ? Mr. BOLAND. Mr. Murphy, in my community there is a small farm- Mr. MURPHY. I do not think that that is particularly vital. ers' company with maybe nine or ten hundred stockholders in it, Mr. ROBERTSON. As far as you are concerned, you would not bother 991/3 percent of the people in it are farmers. They have a paid secre- them if they have a net income of less than $100,000 tary. They might do some of these things that Mr. Dingell was talk- Mr. MURPHY. I would not say that, quite. I would say that I ing about, but they could not afford to pay very large salaries. Do would be willing to compromise on that basia if it were within my you agree with that! power. Mr. MURPHY. I agree with that, sir. And not only that, but ne I Mr. COOPER. We thank you, Mr. Murphy, for your appearance and have attempted to point out in my statement, the proposals made by the information that you have given the committee, the Treasury Department would exempt all of those small groups. The CHAIRMAN. The next witness is Mr. T. E. Swigart, Houston, Mr. BOLAND. I see. That is what I wanted to get. I did not know Tex., representing petroleum pipe lines. Is Mr. Swigart here? enough about it, and that is why I asked the question. Mr. SWIGART. Yes, sir. Mr. MURPHY. If we can be of any help to you in providing informa- The CHAIRMAN. Come forward and identify yourself for the record. tion at any time, we will be glad to give it to you ns practically (EP STATEMENT OF T. E. SWIGART, HOUSTON, TEX., REPRESENTING possible. Mr. DISNEY. In your statement. you referred to the fact that 43 com- PETROLEUM PIPE LINES CO. panies wrote more than 10 times the volume of business written by the Mr. SWIGART. I am Mr. T. E. Swigart, of Houston, Tex.; I represent the Petroleum Pipe Lines Co. 3036 REVENUE REVISION OF 1042 REVENUE ERVISION OF 1043 3087 Please allow me to express my appreciation for the privilege of appearing here today as spokesman for a typical cross-section of the Under normal circumstances 0 large part of the supply of oll des- tined for the Atlantic seabourd, flows through a great network of country's operators of petroleum pipe lines. pipo lines from oil fields of the Southwest to Gulf ports. There some We fully appreciate the great responsibility with which you are COI)- oil in refined for East Coast consumption and the remainder is fronted, and we can appreciate to some small extent at least, the per- shipped no crude to eastern refineries. Normally, both of these move- plexity of your problem of devising ways and means of financing the ments are by tankers. This traffic amounted to about 1,600,000 barrole war affort. Our problem, on the other hand, in to operate our pipa per day before our entry into the war, but the sinking of tankers and lines with the greatest possible economy and efficiency HD AB to speed the need for tankers in other parts of the world has directed atten- the flow of petroleum and its products to war industries at home and tion forcefully to overland transportation which is beyond reach of to the far-flung battle fronts abroad. the enemy. Operators of pipe lines are ready and willing to bear their propor- The phenomenal increase in railrond tank car shipments from the tionate share of the cost of the war but they feel that certain aspects Southwest and Middle West to the East, from n. negligible amount of the special levy upon transportation by pipe line merit your con- to almost 600,000 barrels per day is most noteworthy. It is conceiv- sideration at this time. able that these shipments still may be increased by another 100,000 As you know, the present net imposing this tax became effective in barrels per day. Even so, the remainder of the petroleum required on 1982, at which time a rate of 4 percent of gross transportation revenue the Atlantic seaboard for the Army, Navy, Air Force, and essential was set. In 1940 it was increased to 4½ percent, and now the Treasury industrial and civilian uses, is estimated at an additional 600,000 bar- is proposing that it be further increased to 10 percent, which is the rela per day, and it now appears that this petroleum must be moved reason for my appearance here today. chiefly by pipe line. First, I should like to sketch briefly the background of pipe lines Existing pipe line facilities are 50 located and constructed that it in this country. From n. historical standpoint pipe lines trace back is impossible for them to supply wartimo needa on the Eastern Hea- to the earliest days of the discovery of oil. At first, oil was hanled board without the assistance of tankers. Therefore, as a result of in barrels on wagons and Batboats. To facilitate speedier and more the tanker shortage, it becomes necessary to lay new pipe lines in economical movement, producers in the oil fields of Pennsylvania, order to cope with the present difficulty. with typical American ingenuity, developed an altogether new and It now appears that a partial solution of this problem is for pipe- novel means of transportation, namely, the pipe line. The first line companies to dig up certain lines and relay them in more stra- lines Were crudely built of cast iron pipe, and by modern comparison tegio directions. This will be a very expensive procedure in all casm were operated at very low pressure. Out of such origins developed and in many instances will practically double the carrier's investment the high-pressure steel lines of today. without increasing the mileage of the line involved From n. most modest beginning the pipe line has developed to the The pipe lines are fully aware of the importance of complete mobie point that it is the chief method in use in this country for transport- lization of our natural resources, and steps already have been taken ing crude petroleum, and has how become nn important method for to bridge the gup in transportation. The 100,000-mile network of transporting refined products as well. In recent years approximately existing pipe lines is now supplying refining and consuming centers three-fourths of all the crude oil which has been produced in the of foremost military and naval importance. United States has arrived at refineries by pipe lines, and an appre- Even before our involvement in the war pipe-line operators had eiable part of the remaining 25 percent also moved some of the dis- numerous projects under way which have increased their ability to tance by pipe line. Gasoline pipe lines now serve areas containing move oil from the grent reserves of the Southwest to Northern and no percent of the country's population. Eastern States. These new pipe-line projects have released numbers In short, the pipe line is the dominant method of overland trans- of tankers for use across the Atlantic and in the Far East. A com- portation of petróleum. Its economy in only exceeded by the oil mittee of pipe-line executives is now considering plans devised by tankers, but they can only operate along the Atlantic and Pacific engineers for digging up and relaying existing pipe lines 80 as bont consts and on the Great Lakes, and thus cannot connect the oil finkls to fit them into a strategic plan for uninterrupted movement of petro- with the large consuming centers in the interior. Moreover, most of leum. Such plans are being formulated without serious consideration the oil carried by tankers actually reaches them by pipe line and a of the dislocations which the changes will bring to the owners of the large amount of the finished products refined from the crude origi- relocated lines. Every thought is being given to over-all way effort nally transported by tanker is transshipped inland by pipeline. It is regardless of individual hardship, capital costs, and the probability clear, therefore, that the pipe line does and always has played a lead- that the relayed lines will not be economically useful after the war. ing role in the transportation of petroleum and its products. In summary, transportation is generally recognized AS being the At the moment, however, we are witnessing serious disturbances and number one problem confronting the petroleun industry today. Con- difficulties in the transportation of petroleum and its products, sidering the possibilities of further need for diverting tankers which brought about by attacks on our shipping and by the transfer of are now engaged in constwise runs to was service in the Atlantic and tankers to supply the rapidly increasing needs of our own armed Pacific, the practical limits of tank-car shipments, and the relatively forces and those of our allies throughout the world. limited capacity of barge and towboat aquipment available on inland waterways in comparison with the tremendous quantities of oil to be 3038 REVENUE REVISION OF 1942 REVENUE REVISION OF 3842 3039 moved, it is fair to state that the pipe lines occupy the any position that form must give way to substance, than they now pay as not in petroleum transportation today. It ie the pipe lines' plea that the bardships, the surious dislocations, income taxes. Surely no such result was contemplated by the Con- and the expenses caused by the need of digging up existing Itnes and gross when it passed the sixteenth amendment in 1918, authorizing the taxing of net income only. relaying them, as well 66 the required expenditures for new line which, insidentally, will be very, very high and which will run into To show the effect of increasing this transportation tax upon the pipe-line industry, the following table has been compiled from the many millione of dollars, not be aggravated by higher taxution of most recent record of the Bureau of Statistics, Interstate Commerce their gross revenues. Commission, to compare the amount of transportation taxes at 10 This transportation is not levied on the transportation of oil or percent, of four representative pipe-line companies with their Fed- petroleum products by railroad tank cars. It is not levied on the eral income taxes. transportation of oil or petroleum products by the boats that traverse our rivers and Great Lakes. It is not levied on the transportation All to the 1948) of oil or its products by the ships and tankers that sail our constal waters. This tax is levied on pipe lines alone. open- Tremporte- Non tax at Federal las HOT difficult to understand why one industry should be compelled affor reve- nus (tustuder 10 persons nome and nontasable - Titable to pay a Federal tax on exactly the same business that is being trans- exporta) alripments taxe bally pass acted by other industries without taxation. We are sure that no one non- tasable) in public life would suggest a tax on transportation by tanker at this particular time. Nor would such taxation of rail tank cars be enter- Ce Co tained seriously. But the pipe lines which feed both tankers and 11,786,174 7% 1,200,60 1,30,200 If Ce 14,784,565 1,455,650 1,271,000 tank cars are taxed, and now the Treasury is proposing that they be Co 1,501,412 of, 06,075 in taxed more heavily, namely 122 percent more. That is from 41/2 to 10 percent. These four companies are truly representative. There are SOIDO big Such discriminatory taxation certainly cannot be justified on the ones and some small ones. grounds that pipe lines have benefited from public mibsidies or simi- It is quite apparent from the foregoing table that if the transporta- lar aids from the Treasury. Over a period of years Joseph B. East- tion tax in 1940 had been 10 percent, as now proposed by the Treasury man, the present director in the Office of Defense Transportation who Department, the transportation taxes of these companies would have long has been a member of the Interstate Commerce Commission and exceeded the Federal income and execss-profits taxes which they ac- other public agencies identified with defense transportation, has been tually paid, by a substantial amount. The comparison would be even makingr extensive studies of this subject. To quote Mr. Eastman more striking if the net income and excess-profits taxes quoted above directly: were adjusted for the reduction in net income by the increased trans- Public aide to pipe Harm have been altogether negligible pipe-line portation tax. transportation of potroleum, petroleum products, and natural gus appeared to Or, again, if we look at the pipe-line industry as a whole we find be the one branch of transportation which has not received public uld. that it had gross operating revenue subject to transportation tax of In other words, the pipe-line industry, alone of all our means of approximately $172,000,000 in 1940, upon which the transportation public transportation, has never been and is not now a burden upon tax computed at 10 percent would have been $17,200,000. This figure the Public Treasury. The taxpayers of the Nation have never bean closely approximates, if it does not exceed, the total income taxes paid called upon to bear any part of the cost of construction or opera- by the industry to the Federal Government in the year 1940. The tion of the network of pipe lines that serve every section of our exact figure is not published in the report of the Bureau of Statistics, country. The pipe-line industry is not one of those public utilities but since the total income taxes paid to both Federal and State Gov- that has to be supported at the people's expense, merely because it eruments by the pipe-line industry for 1940 was $20,000,000, the above happens to perform nn indispensable public service. I want to speak comparison appears to be reasonable. for a fow minutes upon the effects of this tax. The proposed drastic increases in Federal taxes would impose a very While this tax is ostensibly levied upon the transportation of crude serious burden on many members of the pipe-line industry. To more petroleum and liquid products by pipe line, in all practical effect it than double the amount of transportation taxes now being imposed is not an excise tax in any true sense of the term but is n. second would, in the case of certain pipe-line companies, change their opers- or duplicate tax on the income of the pipe-line companies. Moreover, tions deficit. from a profit to 11. deficit or substantially increase their present the tax is especially burdensome because it is based upon the tax- payer's gross income, instead of upon his net income, ne is the case of Whether or not any deficit results, of course, depends upon each other income taxpayers. particular company, the volume of oil transported, the operating cost Now, being imposed upon the gross income of the taspayer, the of the particular carrier, the amount of transportation taxes levied at effect of the tax, if it is increased to 10 percent, undoubtedly will be 10 percent of gross receipts, and finally the amount of Federal income to require pipe-line companies to pay larger gross income taxes, in taxes assessible on net earnings. the form of transportation taxes, and it is today the rule of taxation 3040 REVENUE REVISION OF 1942 REVENUE REVISION OF 1842 3041 1. C. C. reports show that more than 89 percent of all pipe-line mile- age in the United States in located in Texas, so a study of Texas con- Sun Pipe Line Co. also operates almost exclusively in Texas. During ditions is illuminating in determining the effect of this proposed tax 1941 that company delivered 15,971,495 barrels of crude ail, It esti- increase. Practically all of these Texas lines terminate on the Gulf mates that for 1942 deliveries will not exceed 10,762,819 barrele, a coust, and they are built to carry erude from inland points to the Gulf decrease of about 33 percent, The estimated net income of Sun Pipe const. where the crude in either received hy tankers and transported to Line Co. for 1042, based on the present transportation tax rate of the eastern seaboard, or refined into products, most of which am trans- 4½ percent, will result in a deficit of $8,120. If the proposed 10-per- ported by tankers to the eastern seaboard. It is obvious that the pros- cent transportation tax is imposed by Congress, Sun Pipe Line Co. will ent tanker shortage must necessarily result in drastic curtailment of experience a net loss of $85,172. pipe-line transportation in Texas. While the exnet number of tankers As already pointed out, the tanker shortage has caused a tremendous sunk or transferred from this service is IL military secret, the fact that decrease in pipe-line tonnage in the Southwest. A further reduction tanker loadings on the Gulf const have already dropped more than 50 looms because of the closing of refineries in that area The Texas Co. percent is well-known. Of course, pipe-line transportation to the Gulf has recently suspended operations at a refinery which has a capacity const is suffering B. proportionate loss end, as all of these lines depend of 25,000 barrels daily, and it now, appears that several other large refineries soon will have to shot down. largely upon tankers for an outlet, there is no relief in prospect for them. It should be observed that the recently increased mil shipments In view of the dependence of our military and nával forces upon our present method of transporting and distributing petroleum and its of crude do not benefit pipe lines serving the Gulf-coast area because products by pipe line to every section of our country, it seems obvious such shipments originate largely in producing finkle and not at Gulf- that the Congress should carefully consider the adverse effects of im- const pipe-line termini. posing this additional tax burden upon the pipe-line industry. It has To illustrate the probable adverse effect of the proposed increase already been pointed out that the effect of this transportation tax in this tax. based on accurate forecasts for the year 1942, the following would be to increase an already discriminatory tax by 122 percent. It analysis of three companies is submitted. has also been shown that this tax increase would throw a number of Humble Pipe Line Co. is A good example, since it serves all of the the pipe-line companies into serious operating deficits. The question principal producing areas in Texas, and for several years has trans- and the problem before this honorable committee is whether or not ported approximately 20 percent of all of the oil produced in that it is wise thus unduly to burden an industry which is performing such State. During 1941, this company delivered 139,798,030 barrels of an essential function in our war effort, simply to obtain additional crude. During 1942, this company estimates that its total deliveries transportation taxes estimated by the Treasury Department at $18,700,- will be 110,507,584. Humble's actual net earnings during 1941 were 000 and which sum is but one-quarter of 1 percent of the total revenue $6,002,940. Due to the decrease in volume, and certain reductions in sought to be raised. fates, this company's estimated net earnings for 1942 are $2.211,253, Mr. DISNEY. Do you make a deduction of your excise tax against which is less than one-third of the earnings for the previous year. your excess-profits calculation or your income) This future is based on the present transportation tax If the tax Mr. SWIGART. This is after the transportation tax That is de- is raised to 10 percent, this company will earn only $1,578,616 during ducted before calculating the income. It goes in the statement as an 1942, or less than one-fourth of the 1941 earnings. The 1. C. has ap- expense item. praised the value of this company's properties ns of December 31, 1039, Mr. DINGELL. This proposal, of course, would give a great benefit at approximately $60,000,000. and this value should be enhanced con- to a competitive transportation line and is competitive fuel, would it siderably today. Thus, on its L.C. C. valuation, Humble Pipe Line Co. not, at the expense of oil! will only earn 2½ percent for 1942, if this tax be increased to 10 per- Mr. SWIGART. We feel that it. is of benefit to one competitive means cent, and this is a dangerously low rate of return in this hazardous of transportation, Mr. Dingell. business. Mr. DINGELL. As it is? Atlantic Pipe Line Co. is similarly situated. Its lines run from Mr. SWIGART. As it is now, And of course, this only exaggerates New Mexico and interior Texas to the Gulf const. In 1941 this com- the benefit to those people. pany delivered 36,755,000 barrels of crude. Under present conditions Mr. DINGELL. It will widen the differential between them? the company estimates that it will not deliver more than 23,523,000 Mr. SWIGART. That is true. barrels, R decrease of approximately 30 percent, Not income, after Mr. DISNEY. Has there ever been any discussion with the 1. C, Federal income taxés for 1941, was $2 068,766. Even if the tax is about this tax when the transportation of tankers and cars is not taxed not increased, net income for 1942 will be only $75,128, a decrease of similarly? Has there been any discussion of that more than 96 percent. If this tax is increased to 10 percent, Atlantio Mr. SWIGART. I cannot answer that. I do not know. will show a loss of $40,240 for 1942. Furthermore, Atlantic Refining The CHAIRMAN. We thank you for your statement. Co. has advised that it is faced with the necessity of shutting down Mr. SWIGANT. I wish to submit four exhibits in connection with my its Atreço refinery in Texas. If this is done, Atlantic Pipe Line Co. statement. estimates that it will operate in 1942 at a net loss of $503,689. If this tax is raised to 10 percent, this net loss will be increased to $612,428. 3042 REVENUE REVISION OF 1942 REVENUE REVISION OF 1941 3043 (The exhibits are AS follows:) The CHAIRMAN. The next witness is Mr. Henry B. Fernald, chair- APPENDIX A man, tax committee, American Mining Congress. Come forward and identify yourself. Tenk-ear shipments Harrets STATEMENT OF HENRY B. FERNALD, CHAIRMAN, TAX COMMIT- 1941: Average daily tank-car shipments 40,000 TEE, AMERICAN MINING CONGRESS 1942: Jan. 1 to 15 daily tank-car shipments 68,062 Mr. FERNALD. I am Mr. Henry B. Fernald, chairman of the tax com- Jan. 15 to 31 daily tank-car shipments 137,ONT Feb. 1 to 14 daily tank-car shipments 289, Sho mittee of the American Mining Congress. Feb. 15 to 28 dally tunk-car ablpments 325,206 I am not an oilman. I do not know the oil situation. But for mines Mar. 1 to 15 daily tank-car shipments 437,140 we find nothing in Mr. Paul's statement which answers the showing as Mar. 15 to 22 daily tank-car shipments 440,000 to the occasion and justification of the present percentage depletion. Mar. 22 to 28 daily tank-car 506,00m Mar. 28 to Apr. 4. daily tank-ear shipments 525,000 On the new question that he raises as to mine development: As he points out at one place, mines do not have so-called intangible develop- APPENDIX B ment costs with an option regarding them; but different rules are pre- scribed for mines, and mines have no option under those rules. This New major pipe Tines distinction at other points in his statement seems not clearly made. Portland-Montreni Hne-Portland, Maine, to Montreal, Canada, capacity 30,000 He feels that mine-development expenditures are easily segregated burrels per day. from operating costa. But I any to you, out of the fullness of long Soutbenstern Pipe Line Co.-products line-from Port St. Joe to Chattanoogs, accounting experience, that it is wholly impracticable to do this, which capacity 30,000 borrels per day. is a basic reason for the present regulations. Plantation Pipe Line Co. from Baton Rouge, Ia., to Greensboro, N. C., capacity 60,000 barrels per day. In appearing before you BE B representative of the mining industry I first wish to state briefly the fundamental principles in accordance APPENDIX C with which our recommendations are made, I believe our thought as to these principles is entirely in accord with that of your committee. Amount of Not Income First: The first and foremost objective of industry and of Govern- Operating the increase Net income site Increase Company in transpor- ment today is and must be to furnish production for war needs. This INTERNES tation tax tn 1980 for transpor- lation tas is the paramount problem and duty. It involves not merely the pro- 10 percent duction for this month or this year but for future months and future $152,627 $8,345 $10 88,527 years, because much as we may hope to win this was quickly, we must B 1,088,434 07,114 38, prepare for a war of years rather than of months. Immediacy of pro- o 51,266 2,029 15,718 15,681 D 1,080 100 8,707 8,418 duction is of tremendous importance, but we cannot overlook the need E 1,236,582 51,166 30, 432 MO,586 P 1,242,169 70,870 1.00 of the continuous, vast production for several years. We must plan 0 7,424 406 166 of and work with this in mind. B 1,581,413 37.088 21.145 10,400 $,124,758 115,865 7,889,762 Second: We must have an effective, solvent, industrial system left after the war is over. This we shall then need for the great work of Italle figures defiels. restoration and reconstruction which will be required. This will be needed to yield the revenues which our Government will then require APPENDIX D for its current needs and to pay for the war costs not met. by the taxes Percentage of crude-oil production transported to refinertes by different of war years. Industry must be able not merely to continue but to means expand, to give employment and livelihood to those who return from the war and to those who look for normal occupations when their Calendar Pips Tanker Ball Tank Colentar Pipe Ball Tank lines tank est lines Tanker war-production jobs are over. This second objective does not conflict per truck yest task our truell with the first, because efficient, solvent industry at the conclusion of the war will be the efficient industry to serve effectively for a long war. Percent Percent Pricent Private Permit Percent Percent Perceal 1934 71,2 20 2.9 07 198 78.2 24.5 25 A There is necessary emergency diversion of industry from peace to war 1985 71,2 28,2 2.6 a 1939 72.9 25.8 11 2 1989 71.3 24.6 21 .1 1960 723 DL7 21 .4 production, but this should be done without crippling the ability of 1937 71.1 25.6 1.1 .9 1911 N.2 22.2 120 1.6 industry to serve for a long war or to serve in peace after the war. Third: The problem of currently raising taxes to meet the Govern- 1. Partially estimated. ment's need for revenues during the war period is important, but Sources of beste material: Cride Petroleum Regarts by Table a, Total Demeitio Delivering and Total Receipta of Crigin 00, by Method of Transportation. monthly, U. B. Burent of Mine: and subordinate to the primary objectives. We need vast revenues not Freight Community Statistics of Class L Steam Ballways in the U. 8., Interstate Commente Commission merely for this year, but for the post-war period. We must not annual and quarterly. recklessly and unwisely let desire for immediate revenues obstruct. 3044 REVENUE REVISION OF 1243 SEVENUE REVISION OF 1943 3045 OF interfere with the production of war needs or wreck our industrial depletion so for ne concerns the capital element. That capital allow. system no it cannot serve through a long war or meet the post-war ance we rightly recognize in not to be considered as income and not to needo, be subjected to tax as income. Only after appropriate deplation ni- In planning for several years of war production, we are necessarily Inwance is there income to be subjected to income tax or to excess- planning for years of war taxation. We must strive earnestly to keep profits tax. This, I believe, We are already agreed upon. industry strong, active, and efficient to yield production IN well as The excess-profits tax, however, raison a further point. The excess- to yield revenues. If we can do that for several years of war, We profits tax naturally should apply only to net income, and then only to should come from the war with industry in shape for its post-war 60 much of the net income as is in excess of normal earnings. work. Our present law recognizes " credit for normal earnings determined We should make clear in our tax laws that we adhere to these prin. from a standard of base-period earnings or from a standard of B. per- ciples. We should not include in new laws, we should eliminate from centage of return on invested capital, with limited provision for Kpe- old laws features which would block, discourage, or impede full war cial determination in meritorious cases where neither the base-period production. We should not penalize those working for production of earnings nor the percentage on invested capital fairly measure the essential war needs by placing them in n. worse position than those normal earnings for which the excess-profits credit should be given. who are not so engaged. We can rightly impose heavy taxation on The present provisions for such credit of " fixed annual amount, those who are making excessive profits, whether directly or indirectly, gardless of volume of production, do not work out fairly in many CHSM from our war activities or from civilian activities. We can hardly 05 an allowance for the normal profits of mines. hope for the fullest possible participation in the war effort if we dis- For example, using the profit per fon na the fair measure of profit criminate against those who produce goods for or furnish goods to the por unit, but recognizing that in some profit per pound OF per Government. Throughout our tax plans we must strive to have them ounce of roetal production would be the appropriate unit to nso, if the apply fairly and equitably. The higher the tax rates, the more mine during the base period had produced no average of 100,000 tom careful we must be to seo that the bases to which or upon which those of ore a year at $1 per ton average profit, $100,000 net income per year, mtes apply are fair and equitable. Points which were of minor im this amount of $100,000 would be the busis for its excess-profits credit portance at low rates may become grievous injustices when rates AT# determined on base-period earnings. If in the excess-profits year the higher. mine does not increase its production. it will have its allowance for $1 In this spirit we urge on your attention some of the technical fea- per ton of normal profit. If it produces only 100,000 tons and makes tures of our tax laws which we feel interfere with these fundamental not more than S1 per ton of profit, it will not be subject to excess- objectives both from the production and from the long-term revenus profits tax; or if it makes $1.40 a ton on 100,000 tons, it will pay excess- standpoint, profits tax on the excess 40 cents a ton, or $40,000 of profits. There are two special features particularly applicable to mines 80 far this seems a fair and appropriate rule. In such a case as this, which I would mention-depletion and unit-of-production credit in where production is not increased, the mine will have on excess-profits credit equal to the normal profit on production. computing exces-profits taxes. The reasone for continuing the present percentage depletion provi- If, however, the mine should increase its production-as it must de sion have already been SO fully submitted to your committee that I if it possibly can to meet the demand for maximum production for simply record here our position that percentage depletion for the war needs-then it finds that not only the excess profit but also the mining industry should not be denied, abridged, or further limited. normal profit from the increased production will be subjected to the excess-profits tax, Excess-profits credit based on profit per unit-of-mine production: If in our example the mine produced 150,000 tons of ore and made As recognized in depletion, mines realize profits only through dispos- only the normal profit of 81 is ton, its credit under present law would ing of their capital assets, For the ton of ore in the mine, as for be limited to the normal profit on its normal production of 100,000 any other capital asset, the profit can be realized but once. Any part tons, but the $50,000 of normal profit on the additional tonnage would of the capital assets realized upon in 1 year cannot be realized upon be Created as all excess profits and subject to the excess-profits tax. in another. Whatever tonnage of ore is realized upon during the If on the 150,000 tons production it made $1.40 per ton, under present emergency curtails the profits which can be obtained in future years law the excess-profits tax would be applied not merely to the addi- In this, mines differ from the ordinary manufacturing or trading tional 40 cente per ton profit, but also to the normal profit of $1 per business. The raw materials is manufacturer purchases this year and ton on the 50,000 tons increased production. the profits he makes upon them are not expected in any way to limit or This is the situation intended to be remedied by the amendment curtail the materials available to him for purchase and manufacture which Senator Johnson of Colorado proposed last year when the in subsequent years nor to limit his future profits. The trading con- 1941 bill was before the Sennte. No action was then taken, on the cern which purchases and sells goods does not expect that its purchase assurance that this subject would receive particular consideration in and sale in this year will limit its purchase and sale of goods in future the next revenue measure, The proposal of the Johnson amendment years. was simply to make available to mines an excess-profits credit equal Oro in the mine is not this replaceable, and what is removed this to the normal profit per unit. your limits what is available in future years. This is recognized by 3046 REVENUE REVISION OF 1042 REVENUE REVISION OF 1949 3047 Under such a provision, in the example olted, the mins with its basic credit of $1 per ton might receive this eredit on its total tonnage of We urge that the principle of this amendment be incorporated in the law and that it be given retroactive effect. production, 80 that if it did produce 150,000 tonx at S1 per ton profit, it would have its fall excess-profits credit of $150,000 and would not be The mines which have heretofore gone aboad with increased pro- subject to excess-profits tax. If on its 150,000 tons production it made duction to meet the demands of the defense and the war situation, as $1.40 per ton, a total of $210,000 profit for the year, it would apply its many of them have in 1940 and 1941, are no less entitled for those $150,000 credit, nl. $1 per ton on 150,000 tons, and its excess profits of years to the correction of an injustice which the law quite uninton- tionally did them. $60,000, at 40 cents per ton on 150,000 tone, would be subject to the The entire net income of mines would in any event be subject to excess-profits tax. We are confident that the present law's application in such A case normal and surtax. Actual profits would be subject to excess-profits WILS entirely unintentional and is contrary to Congressional policy. (ax, but such an amendment as this, in addition to present provisions, in needed to insure that the excess-profits tax shall in no event be The Government is asking, and rightly asking, that mines do their utmost to produce in this year the ore and the metals or minerals which production. imposed upon what are merely the normal mining profits per unit of normally would not be produced until in some future year, This the mines are trying to do, They ask not to be penalized for taking from This is not a question of subsidy, but of removing a penalty which otherwise might be unintentionally imposed upon those who bert do their mines in this year the ore which, on a normal scale of produc- what the Government wants them to do in increasing production for tion, would be mined in a future year, and if thus normally mined war needs. would not be subject to excess-profits tax, except to the extent that the As to matters of general application which also affect mines, We profit per unit were in excess of normal. commend the Treasury recommendations with respect to the follow. Some mines may not need this credit. Mines which cannot increase ing points: production over that of the base period; mines which have ample As stated for the Treasury by Mr. Paul, "wartime rates make is base-period earnings credit; others which have ample invested capital imperative to eliminate as far as possible existing inequities which credit, may not be subject to this injustice. But many, particularly of distort the his burden of certain taxpayers." We commend the spirit the snialler mines, do not have either B. credit on base-period earnings of this statement and the following recommendations which the Treas- or is. credit on invested capital which will be adequate to give a fair ury made: allowance for normal profit on increased production. 1. The capital-stock tax and the related declared value excess- There is also the problem of new mines or mines which were shut profits tax should be repealed. down or operating at a greatly reduced capacity on a noncommercial 2. Consolidated returns should be permitted for income An well as basis in the base period. The Government is making every endeavor excess-profits tax. But we urge there should be no differential in tas to get new mines opened or old mines into maximum production. rate applied. For mines which do not have an already established normal profit 3. Recoveries of bad debts and taxes should only be considered As per unit, it will be necessary for the tax authorities to make a fair income if and to the extent that their deduction in a prior year pro- determination of what would be the reasonable normal unit profit duced a tax benefit. AE a bazis for such an allowance. 4. Statute of limitations on bad debts and worthless stock losses There are also mines which during the base period were not being should be extended to allow for refunds where there is question of the operated on a profit basis as separate entities; for which also there proper year for the deduction; and the present charge-off requirement should be the determination of a fair normal profit per unit as inde- as to bad debts should be eliminated. pendent mines. 5. Use of the "last-in, first-out" inventory method should not be Such profit determinations will naturally involve the engineering contingent upon the particular form of interim or other reports is- judgment which mining engineers are quite capable of making and sued by the taxpayer. do regularly make. This will be far simpler than some of the present 6. Further relief should be afforded where the earninga of the base adjustment provisions in the law; much simpler than many of the period were abnormally depressed. legal and factual determinations which the law may otherwise require. Supplementing these particular recommendations, which the Treas- In any event, these are determinations which the Commissioner would ury has stated "do not exhaust all the changes which we believe should make and which, if made by him on anything like a fair and reason- be presented to the committee," we urge the following as also falling able basis, would undoubtedly be conclusive upon the taxpayer. The under the classification of hardships and inequities which should be taxpayer would be largely at the mercy of the Commissioner 03 to the remedied under these high tax rates: amount of any such constructive allowances, but the Commissioner As to invested capital, the taxpayer should not be denied the cost should be given authority to make such appropriate allowances where basis for property as invested capital merely because the property was necessary in applying the unit-of-production credit. acquired in some particular form of exchange or reorganization when I submit for the record R copy of the Johnson amendment and po- there WAS no thought or consideration of a possible future invested spectfully refer you to Senator Johnson's discussion of it which Ap- capital determination. pears on pages 7488-4 of the Congressional Record of September 4. 1941. 3048 REVENUE REVISION OF 1942 REVENUE REVISION OF 1042 3049 The basis for computing gain, rather than the basis for computing loss, should be used (LE the basis for property under section TIN and porations should be considered taxable and which should not be onl)- section 720. sidered taxable to stockholdars was to remedy the chaotic situation Depreciation or depletion adjustments should be those appropriate with regard to this question which existed before them provisions were to the unadjusted basis which is used. written into the law. To repeal them now would introduce far greater The deduction under section 718 (b) (1) should be for the distribu- complexities in the situation than now exist. tions which are not out of "earnings and profits" instead of thom not We again urge, as we have heretofore urged, that there should be out of "accumulated earnings and profits" to clarify the law and avoid the ulinost economy in all Government expenditures which are not absolutely essential for the war. possible question. Daily computations should not be required, or the Commissioner We commend what the chairman and members of your committee should be given broad authority to waive the requirement. have done toward this end and urge that those efforts be continued. Borrowed capital should be fully included in invested capital. When pressed to raise revenues for the necessary war expenditures Special relief: Special relief should be granted as to invested capital and to make our immense borrowings for those purposes, we are not as well as to income: to corporations formed after as well as before justified in either taxing or borrowing for nonessentials. Further- or during the base period; without penalty tax where special relief more, it is hard to ask our people to deny themselves to pay taxes and is granted; with limitations of tax initially payable where special to buy bonds if they see Government funds being expended sarily and without regard to the war needs. relief is bonn fide claimed. Revision of supplements A and B: Among the points for revision In conclusion, it seems necessary to mention proposals for profit in these supplements, we urge that the definition of "acquiring cor- limitations which, although not pending before this committee, will vitally affect the problems you are considering. poration" should be brondened; differences in fiscal years of corpora- tions should be fairly adjusted; the entire net income or constructive Through you we urge that Congress consider these proposals BA they bear on our fundamental principles: Will they help and hasten net income for the taxpayer and its components for the entire base period should be included; the transferee provisions of supplement R war production or will they hurt and delay it? Inevitably, placing ou those who take Government contracts special limitations or penal- should be revised. Section 784 regarding inconsistencies should be repealed, sinoo it ties not applying to those who do not (ry to meet the special war need, is unfair, unjust, and oppressive as it now stands; and in no event objective. will tend to hurt war production. This is contrary to our first does it have an appropriate place in determining the excess profits Furthermore, limiting profits to IL percentage of cost of production which should be subject to excess-profits tax. means that the higher the cost the greater the profits. This places Il The exemption from excess-profits tax for strategic minerals should penalty on economy and efficiency in production, encourages osroless- be restored. ness, extravagance, and delay, and generally introduces the vines of The amortization provision of section 124 should provide for allow- the old type of cost-plus contracts which have been so strongly con- ance for necessary facilities which may not have been completed at demmed. The administrative problems of accounting and auditing the termination of the emergency need for them. Also, it should and settlement of disputes will be interminable. Neither the producer specify, as seems clearly its intent, that mine-development expendi- nor the Government will know what should be considered the contract tures may be subject to amortization. cost until standards are set up adequately to cover every possible The income tax should be allowed as B. deduction in determining situation and until andita have been completed, with determinations excess profits as was done under the 1940 net. The amount which not merely of direct cost but of overhead allocations for each contract. the taxpayer will be required to pay BE income tax to the Govern- This will be bad enough in cases where the entire production goes on ment should not be included in the amount on which it must pay An Government contracts; far worse where part of the production will be excess-profits tax. subject to and part not subject to Government contracts. Even the The rate schedule should be stated by brackets based on percentages limitation of profits on Government contracts to A percentage of selling of the excess-profits credit and not merely according to the dollar price is subject to many, if not all, of these objections. amounts of the present law, Of course, procurement officials should endeavor earnestly to make The net operating loss carry-over should be extended to at least & prudent, reasonable contracts for production or supplies, but prompt years. and effective procurement and speedy and efficient production should Interest 00 deficiencies should be at a rate not to exceed 8 percent. have precedence over debates regarding cost details and allocations. As to distributions out of March 1, 1913, surplus and increase in We take this opportunity to add our festimony to that of the war value, we join with others who oppose the Treasury recommendation authorities, the Price Administration, and the Treasury, that propos- to abolish the present provisions under which such distributions are als to fis by law arbitrary percentages to be allowable on Government not deemed taxable income to the stockholder. contracts will hurt rather than help the war effort: will, as the old The long-established principle of recognizing pre-1918 earnings cost-plus contracts did, promote eather than curb inflation: and will or values ns not. constituting taxable income should be retained. present n problem impossible of matiofactory administration if We are We further note that one of the reasons for writing into the law to have the war effort which in essential. the present provisions for determining which distributions by cor- 10-13 3050 REVENUE REVISION OF 1042 ABVENUE REVISION OF 7842 3051 If profits are excessive, the excess-profits tax should recapture them and the excess-profits tax should be framed 80 it will do this effer- I wish to make en offer of a fair bargain to the committee. I am tively but fairly, whether profits come from Government contracts or speaking in connection with section 3405 of the excise-tax legislation, otherwise, which applies to our industry. This concluding thought in entirely in accord with the rest. 1 have This fair bargain, if adopted, would result in the Government saving said will to the bases for a tax at high rates which shall equitably and substantial money and the diversion of time of Government personnel, effectively reach or discourage any real excess profits whatever their and would result in the saving to our industry of - great many head- source. rehes. (The Johnson amendment referred to is as follows) The problem, briefly, is that section 3405 formerly taxed only the self-contained types of refrigerating equipment, However, the 1941 (From the Compressional Record. September 4, 1941. D. 74821 amendment brought in self-contained air conditioners, us well as many AMENDMENT PROPOSED BY SETATOR JOHNSON or COLORADO TO SECTION 713 or Tile components of industrial and commercial refrigeration and air-condi- INTERNAL REVENUE Code tioning equipment. The phrassology referring to industrial and commercial components (h) Corporations engaged in mining- is ambiguous. On many questions, the Bureou of Internal Revenue (1) A corporation engaged in the mining of natural deposits shall be entitled has been unable to give us clear rulings. under this section (with respect to its mining operations) to an excess-profits credit equal to the normal profit per unit of production for Its entire production It would be difficult, and in some cases impossible, adequately to during the taxable year. in addition to such other excess-prod(s) credit (LE may to define what are taxable componenta. allowable under this subchapter which is properly allocable to Its operations other We are faced with endless questions from customers and from the than mining. Bureau of Internal Revenue, with litigation, and with years of hold- (A) In the event that the taxpayer was actually to existence at the beginning ing questionable amounts in abeyance. of Its base period and WAR, during all or a part of such base period, engaged, on a commercially profitable basis, in mining operations similar, except as to The sale of the industrial and commercial equipment is now almost the volume of production, to those earried on during the taxable year, then the solely for war effort, generally for use by the Army, the Navy, the taxpayer's normal profit per unit of production during the base period (excluding Maritime Commission, and other Government agencies. the year or years In which there was a deficit in excess profits net Income) shall There will be, therefore, little tax return during the war. The tax constitute the taxpayer's normal profit per unit of production for the purposes of this subsection. In computing such normal profit per unit, the adjustments return from industrial and commercial equipment has averaged only provided by section 711 (b), HO for as applicable, shall be made. $220,840 per month 80 far, even though civilian Uses have been sub- (B) If the texpayer was not In existence at the beginning of Its base period, stantial until recently. OF If " was not, during all or a part of such base period, engaged, on D commer- From now on, the tax return cannopt conceivably equal the cost to claily profitable basin, in mining operations similar, except as to volume of pre duction. to those carried op during the taxable year. then the normal profit X the Government represented by the vast amount of paper work no- unit of production shall constat of the base period profit per unit of production quired for exemption certificate procedure, and so forth, which must which the taxpayer would have realized If 0 bad been 60 engaged during such be carried out by the many Government purchasing offices throughout base period. Such normal profit por unit whall be computed by assuming this the country. This waste brings no profit to anyone, the taxpayer had sold in ench year of the base period the number of units which We propose the following amendment of section 3405 (the words It could have produced and sold, with due regard to the average prices and coeta of operation prevailing In each base period year, except that the number of unlie in the present statute which are to be deleted are stricken through in assumed in such computation for any base period year shall not exceed the - brackets, words which are to be added are stated in capitala) ber of units sold in the taxable year. Sec. 8406, Tax ON REFEBERATORS, REFRIGERATING APPARATUS, AND Am Com- (2) The term "base period" means, for the purposes of this subrection, the base TIONESS. puriod as elsewhere defined in this subchapter, but If the base period of a tos- payer La not elsewhere 80 defined. in such case the term "base period" means the There shall be Imposed on the following articles (Including in each IN parte eglendar years 1030 to 1030, inclusive, up accemories therefor sold on or In connection with the sale thereof) eold by the (3) This subsection shall not apply If the excess-profity credit computed under manufacturer, producer, or Importer a tax equivalent to 10 percent of the price for which NO sold, section 712 without the application of this section, OF under section 714, exceet the amount of the credit computed under this subsection. (a) Refrigeratora, etc.-Refrigeratora, beverage coolers, ice cream cabinete, The CHAIRMAN, The next witness is Mr. James A. Bentley, view water coolers, food and beverage display casso, food and Deverage storage cabineta, leo making mmebines CABINETS, and milk conler cabineta, each president of the Carrier Corporation, Syrucuse, N. Y., representing such artíclo having or BEING OF THE SELF-CONTAINED TYPE the tax committee of the Air Conditioning and Refrigerating Ma- being primarily designed fee use with è mechanies] refrigerating units oper- chinery Association. Come forward, Mr. Bentley, and identify your- ated by electricity, gne, kerusone, or gasoline. (b) [Re/rigarating condonsero, ein- self for the record. potion unite, and controls, for of suisable for use no part of OF with # refrigerating plants refrigerating system refrigerating equipment or STATEMENT OF JAMES A. BENTLEY, VICE PRESIDENT, CARRIER unity or any of the enumerated in oubsention (a)- (c) Air-Conditioners-Self-containod air-conditioning units. CORPORATION, SYRACUSE, N. Y. (d) [Gomponente]. Cabineto condensore, blowers, heat- ing solle, moling miler filtore, humidities, not controle, for or multable for Mr. BENTLEY. I am James A. Bentley, vice president of the Carrier - IMS part of OF with, any of Hen articles ensimerated in (#)= Corporation. Syracuse, N. Y., appearing on behalf of the Air Comil tioning and Refrigerating Machinery Association. 3052 REVENUE REVISION OF 1942 REVENUE REVISION or 1942 3053 The above amendment would confine the tax to the sulf-contained type of equipment. This would eliminate the industrial equipment BM "that part of a system in which refrigement is expended or vapor- which is the portion involving the ambiguities, some of which are ind to produce refrigeration." A pips coil, when used in cold impossible to clarify, but would not eliminate any revenue profitable storage for direct expension, may be RD evaporator: but the identical to the Government. coil might be used on a brine or cold-water job, The identical pipe As the statute stands at present, the tax is impossible accurately coil, at the moment it is sold by the manufacturer, might be that to determine, expensive to collect, and uneconomie in its net yield for heating purposes in nonrefrigerating work. Are We going to to the Government. say that all pipe coil, no matter what its intended use may be, in Our proposals arise primarily as B. result of our actual everyday to be taxed merely because it could be used as an evaporator! In a experience with the difficulties and expense of interpreting, applying, manufacturer to be denied the right to show that neither he nor any- and accounting for that part of the present tax which applies to one else intended his pipe coil to be used for an evaporator or any commercial and industrial refrigerating und air conditioning other refrigeration purpose and that his pipe never was so used Is be to be taxed for something which has nothing to do with re- equipment. We have no means of determining the cost to the Bureau of In- frigerating or air conditioning On the other hand, if one manu- ternal Revenue of administering this tax on commercial and indus facturer is permitted to make such a demonstration on one article, trial refrigerating and air conditioning equipment, but we know that on what just ground can the same right be refused to all manufac- the cost will be high. Already it has been necessary for the Bureau turers on all articles? If such a. right is conceded, who can measure the size of the administrative task? to exchange with this association 69 letters respecting rulings on the application of the tax to different circumstances. At least 28 oral The same types of questions which arise with respect to evapora- conferences with the Bureau have been required 0.5 a part. of such tors may be raised respecting other components mentioned in sub- sections (b) and (d) of section 3405, inquiries. Some of these conferences have consumed an entire day. Take also, for example, the phrase "ice-making machine" used in These figures make no accounting for the many inquiries and con- tacts with the Bureau which have been required of the individual subsection (a) of section 3405. What is an ice-making machine! Is members of this association or of the industry. it a compressor? Is it. an ice-making cabinet! la it something self- contained, or is it. every item which may be used in B. plant in which The resulting amounts of time and study required of the Bureau's artificial ice is produced? If an "ice-making machine" does not policy-making and administrative officers have been very grent. The cover the entire plant, just what part does it cover! How are these difficulties and disputes which may be expected to nrise from an audit questions to be decided without dispute, argument, and, where the of the returns are calculated to be even more frequent and more con- amount involved warrants, litigation! The situation could not be sunning of time and thought. better illustrated than by the following sentence (from a letter to The most serious cost in administration arises from the exemption our association's counsel sent November 28, 1941, by the Deputy certificate which is required when the equipment sold is for the use Commissioner of Internal Revenue) reading: of a governmental agency. These certificates are made out by 9. number of persons who have little or no knowledge of the require- The (orm "Ice-making machines" la not susceptible of general definition, How- ever, rulings will be Issued with respect to the texability of any fee-making ments for the issuing of such certificates. Because such persons are machine upon receipt of a description of the article. inexperienced in this type of paper work, protracted delays result The Bureau is unable to escape the necessity of innumerable in- before the certificates are issued and the equipment can be delivered. dividual rulings. The difficulties, complications, and delays are particularly acute Another difficulty is ascertaining what in taxable or how much the where, as is most usually the case, the sale is not made directly to tax should be when taxing an assembly of parts, as distinguished from the governmental agency but is made through an intermediate con- taxing a recognized unit or "package." In many cases only one item tractor or series of subcontractors. The time lost by suppliers, in- in a large assembly of parts may be taxable. Insemuch as the stallers, and Government employees who should be devoting them- entire assembly, however, is sold for B lump sum, it is necessary, selves to productive effort is substantial. if the percentage tax is to be computed for the one item, to assign It should hardly be necessary to add that the time, effort, and at- to that item an arbitrary proportion of the sales price of the entire tention required do not aid the war effort, nor produce revenue for assembly. In this process, differences of opinion may end do arise. the Treasury. The endless detail and discussion are an economic Disputes are to be expected and, where the amounts involved are waste to the producer, the consumer, and the Government. substantial, the disputes will be prolonged. As examples of difficulties inherent in determining whether 9 1st 80 long as this tax remains in its present form there is no escape attaches to IL given sale, we might mention the following: from the administrative problems which the examples I have men- Subsection (b) of section 3405 provides for a tax upon "evaport- tioned illustrate. tors" "for, or suitable for use as part of, or with, a refrigerating Against the expense already demonstrated and the greater expense plant, refrigerating system, refrigerating equipment or unit, or any to be expected in the future, for both Government and taxpayer, the of the articles enumerated in subsection (a). The word "evapors. receipts from the tax (for the first 4 months) should be considered. tor" is defined by the American Society of Refrigerating Engineers The receipts appear to be approximately ILH follows: 3054 REVENUE REVISION OF 1049 BEVENUE REVISION OF 1943 3056 November 941.$1,400,589; December 1941, $1,606,145= Jamary 1042, $1,503,134; and February 1042, $1,004,144. This makes an average quently between the Government and the party to the nates transsction per month of $1,543,498. Only a small portion of this would be affected which is believed to be responsible for payment of the tax. Funds by the proposed amendment. may have to be held in escrow for years. The economy, both public It will be observed that the receipts from this tax, even under the and private, suffera. conditions obtaining in the first 4 months of its application, were In the past, attempts have been made to narrow the field of dispute running at the rate of only approximately $18,000,000 per year. respecting "use" by putting the test on the design of the article in- In the future, revenue to the Government from these sources can volved; that is, by taxing only that article which is primarily de- be expected to become less and less each month, and almost stop, as signed for B. given use. Then the test as to the tax liability of an sales for non-war-effort uses are increasingly restricted. It is esti- article is whether it is designed for the single taxable use or whether mated that, nt the present time, of the industry's output of commercial it also has B commonly accepted use in fielde other than that upon and industrial refrigerating and air-conditioning equipment, more which the tax is levied. Heretofore the difficulty with such B standard than 95 percent, by dollar volume, is sold on a high-priority basis has been that, in many instances, the administratore have been loath Much of this sales volume is represented by direct purchasing by the to admit that the article in question had a variety of commercial Army. Navy, and Marine Corps, and by sales for the use of the Mari. uses beyond use in the field to which the tax applied. The consequence time Commission, Defense Plant Corporation. Lend-Lease Adminis has been litigation as to what the fact might be. Wherever the tax tration, and other Government agencies having primarily to do with rests ultimately upon the use for which un article is suitable, designed, the prosecution of the war. The present tax revenues to the Govern- adapted, or intended, administrative difficulties and "headaches" may ment from the operation of section 8405 of the Internal Revenue Code be expected. not only are diminishing but probably will virtually disappear. The proposed amendment would cure the above-mentioned diffl- culties. However, the expense and diversion of personnel, by Government and industry, in making returns, keeping records, and deciding upon It remains merely to be added that the elimination of excise tax on commercial and industrial equipment involves, in the case of section the taxability of given items will continue, If the system of selective excise taxes is to be continued, then sub- 3405, only a relatively small amount of tax. Our survey indicates that stantial changes should be made in the principles upon which the the tax receipta for the first 4 months may be divided 18 follows: present statute rests. In the first place, the system should be based upon taxable units which are simple to ascertain and which permit of If III ready agreement between administrator and taxpayer as to their Lax- ability. A self-contained unit, readily discernible and commonly ne- From sales From asics of come cepted AS a unit, is the requisite element in any tax on the sale of arti- Mumit From nales of cial and Industrial cles. We have pointed out how difficult it is, even where it is agreed of household talued units refrigerators other than refrigerating that an article is taxable, to allocate a part of the Rules price to that housebold and air- condicioning article when the article is part of an assembly and not a "packaged" equipment unit in itself. November 1941 In the second place, the article to be taxed should be defined in $1,315,387 -- Documber 1941 226.781 414,943 terms which avoid, 80 far as possible, a reference to the lise which is January THE T,109,638 10,148 253,643 648 February 1042. 1,116,185 66,619 127,190 to be made of the article. As soon as the question of üse enters into the determination, if the article taxed has a variety of commercial Avenue per month 1,200,698 121,760 uses outside the field upon which the excise is to apply, administrative Nors.-The proposed amendment would eliminate only column u. difficulties and disputes are inevitable. As we have indicated, the use of the phrase "for, or suitable for, A survey of the commercial and industrial refrigerating and air- use BS part of, or with," appearing in subsection (b) of section 3405, conditioning machinery industry indicates that in the 4 months' frequently causes dispute with respect to a given article and results period specified above the cost to the manufacturers, in keeping ac- in taxing an article which isn't intended for use and isn't ased in the counts and records and in making the required refurns, has totaled field of industry to which the tax applies. If, for instance, Congress approximately 10 percent of the receipts from sales of commercial and intended to tax pipe coil when used in the refrigerating and air-con- industrial refrigerating and air-conditioning equipment. This makes ditioning industry, it seems grossly unfair to tax pipe coil which was 110 allowance for costs to the manufacturers which may be expected intended for and was actually used in n. heating plant unrelated to when the Bureau of Internal Revenue makes its audita. We don't air conditioning or refrigeration. Disputes as to "suitable for we" know what the cost to the taxpayer is in keeping his records and in are unavoidable. Quarrels arise among buyers and sellers 86 to which making his returns of other kinds of taxes, but it seems to us that a artícles are taxable and ns to which sales require a tax to be collected. ratio of 10 percent is very high. If the cost to the Bureau of In- deducted, or withheld. If the amounts involved warrant the content. ternal Revenue of inspection, audit, and discussion and the cost to litigation follows: sometimes between sellers and buyers, but more fro- the Government agencies of furnishing exemption certificates are added, the administrative load seems disproportionate to receipts. 3056 BEVENUE REFISION OF 1942 REVENUE REVISION DE 1843 3057 Industrial equipment of other types is not usually subject to excles (ax. Therefore, discrimination is also involved, although we Are not collected if this war is to be won, But we are concerned that there Le making a point of this Inct. the greatest economic value from whatever the we do pay. Because of the principles just explained, there should be eliminated The Internal Revenue Bureau has attempted faithfully to give us from subsection (n) all reference to the use for which the articles rulings that would enable us to apply the tax, but unfortunately, with taxed are designed. Also, if "ice-making machine" were changed to little success. It is not the fault of the Internal Revenue Bureau. It has been beyond their control. "ice-making cabinet," the term would refer to "packaged" entity, iden- tifiable us such, and not to a mere machinery assembly or plant. We, We have exchanged 69 letters with the Bureau, We have had many therefore, propose that subsection (a) be amended to read (the words long conferences, some consuming an entire day. Despite that, we still do not know what is taxable and what is not taxable. in the present statute which are to be deleted are stricken through in Mr. DISNEY. We taxed little boxes and units around the houses and brackets; words which are to be added are stated in capitals) last year we attempted to tax industrial units, and that created the diffi- (a) Refrigerators, Etc.-Refrigeratore, beverage coolers, fee cream eabloeta, culty. Isn't that right? water coolers, food and beverage display cases, food and beyerage storage cab- Mr. BENTLEY. That is right. Inets, los making CABINETS, and milk cooler enbluets, each such article Charing of BEING OF THE SELF-CONTAINED TYPE [being pri- Mr. DISNEY. Those used in processing in canneries and in meat marily designed for use with, 6 mechnnical refrigerating unit] operated by packing, the big boxes good in the various big industries, and that is electricity, gas, kerosene, or gusollne. what caused the difficulty. Is that a correct statement? Because virtually all of the equipment subjected to tax under sub- Mr. BENTLEY. Yes, And at the present time the tax applies to sections (b) and (d) of section 8405 has commonly accepted uses in components of every type of industrial system, such as used in the other mechanical fields, it would be exceedingly difficult to levy any synthetic rubber factory or the chemical factory. excise tax upon such equipment without resting that tax on a defini- Mr. DISNEY. And what do you proposel tion which involved the use to be made of the equipment, It is for Mr. BENTLEY. We propose, briefly, that if the excise taxation is this reason that we have been unable to develop any satisfactory amend- continued on our industry, an amendment of section 3405 in phrase. ment to these parts of section 8405 which will permit of the taxation ology which we have suggested, that would restrict the taxation to the of such equipment without encountering the administrative diffi- self-contained type of air-conditioning and refrigeration equipment, culties existent under the present statute. We, therefore, propose that the type of equipment that is easy to define, where there can be no these two sections of this statute be eliminated. ambiguities involved, and which would bring in the maximum of The articles taxed under subsection (b) of section 3405 are items revenue. of refrigerating apparatus used largely in the processing and storage An important point is that as a result of the first 4 months of of food, or for essential industrial uses such as the production of syn- experience the rate of revenue to the Treasury has been about $18,- thetic rubber, parachute cloth, vital chemicals, and 80 forth, 18 dis- 000,000 per year. However, of that total only about $2,700,000 has tinguished from luxury items. The nonnecessities are principally those been represented by the commercial and industrial equipment. The fuz taxed in subsections (a) and (c), to which, if n selective tax is to revenue would continue on the self-contained type of equipment, which remain, we have no general objection, if amended as proposed. is the majority of the tax anyway. We have no objection to subsection (c) of section 3405. The articles Another point is that, now that we are in the war-and our industry, described in that subsection are self-contained and there is no difficulty by the way, is devoting almost its entire attention to the war effort- the industrial and commercial equipment is confined almost entirely to in determining what is meant. This amendment would result in no net loss of revenue to the Gov- war effort use, most of it being purchased directly by Government ernment, because the small reduction in taxes would be more than agencies, so that no tax is payable on that anyway. Therefore, even this $2,700,000 revenue per year that has been experienced to date offset by the over-all reduction in cost of administration throughout would be diminished and would be almost negligible very soon. the various departments, including Government purchasing depart- Despito the fact that the tax revenue is becoming negligible on that ments. type of equipment, the cost of administration to the Government and So far IMM the refrigerating and air-conditioning machinery industry ourselves is continuing. is concerned, it can be said with the assurance of conviction that a gen- For example, take the exemption certificate procedure. One would eral tax on sales, gross OF net, is clearly more economic and more efficient than any excise tax which rests upon statutory definition of think that this is a simple means of eliminating the tax on Govern- articles to be taxed and administrative interpretation of such defini- ment purchases. But, believe me, from my own experience, gentle- men, it is not simple. tion. The existing excise tax is fundamentally uneconomie and waster The requirement for the preparation of this form represents any- ful. In the interest both of the public revenues and of the welfare where from 5 to 10 steps on the part of the various Government pur- of the taxpayers, this tax should be repealed and 1. general sales tax chasing agencies and others, depending on the type of case. Where a mubsit ituted. However, the aforementioned amendment is offered IMB all contractor or a subcontractor is involved, in the instance of one of alternative to complete repeal. these large plants, such as Mr. Disney mentioned, say a synthetic rub- Our industry does not senk to reduce the amount of taxes it pays her plant or a black-out plant for bomber production, this must be We are not seeking to avoid our fair share of the tax which must be REVENUE REVISION OF 1943 REVENUE REVISION OF 1942 3058 3059 made up by the Government purchasing agencies, who are not too Mr. BENTLEY. We prefer that section 3405 be repealed, and that familier with the procedure, due to rarely having to use it, since it ap- some form of taxation more easily applicable be applied, such as, for plice largely to industrial equipment. We have even had instances example, B general sales tax. where the Government agency refuses to give the certificate until after We have no objection to paying taxes. On the contrury, we feel delivery of the equipment. that there should be more taxes than are now being paid, because, after all, we have a war on our hands. The poor manufacturer cannot deliver the equipment in advance of the exemption certificate without being vulnerable to the tax; and yet All that we are objecting to is an nneconomic method of attempting the Government refuses to let us have it in advance. There have been to collect revenue. I say "attempting" advisedly, because it. is not even resulting in revenue ne the attempt is being made today. actual delays of delivery on that account. And finally there is no tax accruing to the Treasury. So it is all Of course, we do have a selfish motive of eliminating headaches for ourselves. But if the constructive results can be obtained, We think wasted effort. that we might also be entitled to avoid some headaches. Mr. DISNEY. And in the meantime it might spoil the deal unless the The CHAIRMAN. We will take an adjournment now until tomorrow purchaser knows what he has to do? morning at 10 o'clock. Mr. BENTLEY, That is correct. And for that reason we maintain (Whereupon, at 4:55 p. m., an adjournment was taken until that even the small revenue that might accrue to the Treasury from tomorrow, Friday, April 17, 1942, at 10 a. m.) industrial and commercial equipment is more than offset by the cost to the Government. Mr. DISNEY. What is this $2,700,000 that you mentioned? What year is that fori Mr. BENTLEY. That is for the 4 months' period since October 1, when the tax went into effect. It would be nt the rate of $2,700,000 if that had continued. However, it is now on a diminishing scale due to Gov- arnment usage. You see, for the first 4 months we were still doing some civilian business in industrial and commercial equipment, while now it is almost 100 percent Government usage or direct war effort and Defense Plant Corporation, for example. Mr. DISNEY. What usage! Mr. BENTLEY. Air conditioning, for example, for use in the produe- tion of many vital chemicals, pharmaceuticals and drugs, all necessary for the direct war effort. These black-out plants which have no windows must be air condi- tioned. Plants working on close tolerances for the production of air- plane engines, for example, must be air conditioned in order to permit that close tolerance work. Mr. DISNEY. You mean to control the temperature! Mr. BENTLEY. The temperature and the humidity. When I say "air conditioned," I mean complete control of the temperature, which in- volves heating in the winter or cooling in the summer, and the correct moisture content of the air, which means adding moisture in the winter or removing moisture in the humid summer days; the purification of the air, and a proper circulation of the air. Contrary to public conception, air conditioning was founded on industrial applications rather than so-called comfort applications. Ordinarily we think of air conditioning as 8 room cooler or the conditioning for a building of this type, for example, while the great majority of usages are for vital industrial purposes. Mr. DISNEY. It is used in synthetic rubber plants, is it? Mr. BENTLEY. Yes. Mr. DISNEY. What about oil refineries? Do they use it! Mr. BENTLEY. Yes. We pioneered in the production of synthetic rubber in this country. The first synthetic rubber was a part of the pioneering effort. of our application of refrigeration. Mr. DISNEY. What is it that you propose to tax? April 16, 1942 12:45 p.m. Ocerator: Mr. Paul. HMJr: Right. Operator: Go shead. HMJr: Rendolph. Bandaloh Paul: Yes. UMJr: John 16 sitting here with me, and I've been handed a nice one by the President. Before I get to that, it went off pretty good this morning, didn't it? P: I 60t very good reports of it. I thought it vos a swell job, and I had a little difficulty hearing a lot of it myself, but I got the reporters' - several of the reporters talked to me and said it was a swell Job. HMJr: Well, Treadway's with us, and Doughton end Walter George, 50 I guess it's in the bes. P: Yeah. HMJr: NOW, this 1° a note from the President to me. Congressman McCormack phoned in that in the Deficiency Appropriation Bill the House put in the six per cent limitation, and the Senate out in 8 more liberal limitation." P: Yeah. HMJr: "He seys that the Speaker and the House conferees themselves all feel this is not 9 desirable way to legislate, to out any limitation of profits in an appropriation bill. It should be done through excess profits and the Ways and Means Committee, or through the Naval Affairs Committee, after full con- sideration of all factors involved. McCormack eaye thet he, the Speaker, and the House con- ferees think that all provisions in the deficiency bill now in Congress should be stricken out. Regraded Unclassified 8 - 2 - The conferees are meeting this afternoon. Senator Barkley 18 out of town, and so far could not be reached. If the President agrees, McCormack hopes he will take action and see what can be done with Senate confereee to have them recede and strike out any and all provisions." The President said for me to handle it. P: That's e nice assignment. HMJr: What? P: That's a nice assignment. HMJr: Yeah. He said that he wanted me to do it, and he wanted to forget about it. P: What? MJr: He wants me to handle it. F: Yeah. Well, we'll have to do it then. HMJr: Well, now, what are we going to do? It's this afternoon. I've got R call in for John McCormack. I haven't been able to reach him. P: Well, do we have to do - - do you have to popear this afternoon? HMJr: I suppose EO. I don't know, but you're A?- bearing at one-thirty, aren't you? P: Yes, and I'll probably be through about two or two-fifteen. 4MJr: Well R: We've etated the reason for our opposition in my statement before the Nevel Affairs Committee. HMJr: Well, I tell you what I think I'm going to do. AF soon AS I get John McCormack, I'll see what he's got. Then I think I'll call up Bob Pat- terson and say that the President asked me to Regraded Unclassified 9 - 3 - handle it and I'm going to handle it my way. See? P: Yeah. HMJr: And take full responsibility. P: Yeah. Well, that's all we've got. We have - we're working on a plan now, which germinates in part from a suggestion George made. Senator - rather somebody made to Senator George, which he sent to me; but we're not satisfied - suffi- ciently satisfied with it to make it public. HMJr: Well, It's a lovely time to hand this to me. Well, how can I get you later on if I get P: You can get me through Mr. Grier's office, the clerk of the Ways and Means Committee. HMJr; But you're not clear in your own mind? P: Not clear in my own mind about what? PMJr: How ve should kill this. P: No, I don't 588 - I haven't got any white rebbit except the one that you suggested. HMJr: Yeah. That's all right. P: The only thing I want to - I'd like to put the emphasis on that somewhat in this light, that we think - as I testified before the Navel Affairs Committee - that excess profite tax 1e the proper method, and we're perfectly open-minded: and if that isn't stiff enough, then we - if that doesn't accomolish the result - then we're for stiffening the tax. H.Jr: Yeah. Well, that's what I gaid. P: Yeah. HMJr: Well, you've got nothing new, P: No, just this, except that I don't think we Regraded Unclassified 10 - 4 - have anything new we can spring this after- noon. HMJr: Well, I'll see. Okay. P: of course, you ought to - they're just meeting for the first time this afternoon. If you want me, you can get me. Do you want me to come over to that committee when I get through? HMJr: Well, I've got - they haven't located John McCormack. Until I've talked to him, I can't tell. See? P: Yeah. Okay. Well, you can get me through the clerk's office, and you might get A copy of my statement just in case it comes un there. HMJr: All right. P: If they ask you about it. HMJr; Okay. P: That's the one before the Naval Affairs Committee. HMJri Right. P: Okay. Regraded Unclassified 11 April 16, 1942 12:40 p.m. HMJr: Hello. Operator: Congress McCormack's secretary will try to reach him and have him call, and I told him it was urgent. HMJri Yeah. Thank you. April 16, 1942 1:10 2.m. HMJr: Hello. Operator: Congressman McCormack. HMJr: Thank you. Hello. Cong. McCormack's Secretary: Mr. Secretary? HMJr: Yes. S: Mr. McCormack. HMJr: Thank you. Cong. McCormack: Hello, Mr. Secretary. HMJr: John? Me: Yes. 4MJr: God, what of pel you are! Me: What's the matter? HMJr: God, you cell un the Pregident on this thing and then he gives me this baby. Mc: What's that? HMJr: Six per cent limitation - to kick it out. 12 - 2 - Mc: Yeah. HMJr: And so like all these thinge, I said, "Sure, I'll take it, Mr. President, if you want it kicked out. Now, what do you went me to do? Mo: Well, the thought W98 that that should be taken up in the more - in the regular way and where it could be legislated upon from 8 sound engle HMJr: Yesh. Me: instead of in this hit and run way. HMJr: Well, I'm with you a hundred per cent. Now, John, what's the timing on this? Mo: Well, here's the story. I want to give you the latest information, end I'm glad I didn't call you - I tried to get you before, but I HMJr: Well, I was un on the Hill testifying. Me: I know, but I mean Clarence Cannon just came in and told me thet yesterday they had a meeting, the House conferees, and they unanimously agreed to strike it out. HMJr: Yeah. Mc: But he said that apparently afterwards the Republicans had a meeting with their leader- ship, and they came in this morning and changed their minds, see. HMJr: Yeah. Me: So the situation has changed to that extent, and confidentially I think that Clif might go along with them, see. HMJrt Who? Mo: Woodrum, HMJr: Yeah. Unclassified 13 - 3 - Mo: Now, the - Cannon - of course, under those circumstances, nobody can tell what's going to happen, except that Cannon thinks he might still have the votes in the House conferees: but it may have to come back on a separate vote, but the only way it can be adjusted 18 that the Senate conferees recede it. HMJr: well, now, are you meeting with the Senate groun? Me: No, you see I don't meet with them. The House - the House conferees and the Senate conferees on the bill meet. HMJr: When are they going to meet? Me: Well, they meet this afternoon and tomorrow. HMJr: Are you going to meet with the Senate group this afternoon? Me: They're going to meet - probably meet with us after - they were meeting this morning. Whether they met with the Senate group or not, I don't know: but they're going to - they're probably going to meet with the Senate group this after- noon and tomorrow. UMJr: Are you a member of it? Ne: No. HMJr: Well, how can I get in on it 80 I can telk to the Democratic leadere? Me: Well, the only way you could do anything 1F if you call uo some of those Democratic membere of the - some of the Senate Democratic members of the conference committee. HMJr; Well, that's McKellar, isn't it? Me: Barkley 1s away. I tried to get Barkley yester- day. HMJr: It's McKeller, isn't it? Me: Yes. Of course, the - SQ far as you telking Regraded Unclassified 14 - 4 - with the individual members are concerned, it seems to me that the only - the best way to do would be to talk with the - whoever 1° the acting Senate leader. HMJr: Well, could I make a SUR estion? Me: Surely. HMJr: Is Sem Rayburn in town? Me: Yes. HMJr: Well, now, look. Sam outranks All these other fellows. Couldn't Sam call a little meeting somewhere this afternoon that I could come up, and where I'd be spokesman for the President? Mo: Well, he couldn't very well with the - he couldn't very well with the Senators, I don't think. HMJr: Yes, he can. Me: Well, T'd rather you'd telk with Sam yourself on thet, Mr. Secretary. HMJr: You would. Mc: Yes. HMJr: All right. Me: I'd rather you'd talk with. HMJr: All right, I'll call him. Me: Because it would look better if you were to take that proposition 42 with him, don't you see. HMJr: Well, CRD T say where - that the initiative came from you fellows? Mo: Yes, oh, yes. You can tell him that - you cen tell him how 1 felt - I sent a message to the President, and it was sent over to you and then how - you can tell him that you Regraded Unclassified 15 5 # I talked with me and that I - and he thinks that they're unanimous, but you tell him the latest information I got was about the Republicans. You can leave Clif out, see? HMJr: All right. Me: So you can tell him that. HMJr: All right. Mc: All right. HMJr: Thank you. Me: Good-bye. Regraded Unclassified 16 April 16, 1942 1:15 p.m. HMJr: Hello. Operator: The Speaker is presiding. I have Mr. Wright. HMJr: All right. Hello. Operator: Go shead. HMJr: Hello. Mr. Wright: Hello, Mr. Secretary. HMJr: Mr. Wright? W: Yes, sir. HMJr: Look, Mr. Wright, the President has asked me to handle for him this six per cent limitation on profits that's on this nineteen billion dollar War Appropriations Bill. W: Yes, sir. HMJr: Now, I'd like to, at the Spesker's convenience, talk to him Just 8.9 soon 28 I can. Hello. W: All right. I'll tell you, Mr. Secretary. I'll get in - go on the Floor and ask him when he can see you. HMJr: Well, I'd like to talk to him on the phone first. W: Well, he's in the chair now. If he can get out HMJr: No, but I mean whenever - would you simply say to him when he can get out of the chair, will he cell me? W: I surely will. Are you at the office? HMJr: I'm at the Treasury. W: All right. 17 - 2 - HMJr: And 88 soon as - at the Speaker's convenience, I'd like to talk to him on the phone. W: All right, Mr. Secretary. I'll put him on there. HMJr: Will you get that message to him? W: I surely will. HMJr: Thank you. W: Good-bye. CONFIDENTIAL cc - Mr. Sullivan Mr. Paul 18 April 16, 1942 2:00 p.m. HMJr: Hello. Operator: Go ahead. HMJr: Hello. Speaker Rayburn: Yes, Henry. HMJr: How are you, Sam? R: I'm all right, except I've got the damndest cold I ever had. I went down home last Friday, a week ago, and got it there and had it all the time I was there, and brought it back with me. HMJr: Well, I'm sorry. R: Yeah. HMJr: Right from the heartof Texas, huh? R: Sure. (Laughs) HMJr: What? R: (Laughe) Right from the heart of Texas. HMJr: I see. Sam, John McCormack called up the President about this six per cent limitation in this nineteen billion dollar War Depart- ment appropriation, you know. R: Yeah. HMJr: And the President had Pa Watson call me up and said he wanted me to handle it for him, to get it out. R: Yeah. HMJr: Now R: It's coming out. HMJr: Is it? Regraded Unclassified 19 - 2 - R: Yeah, I told Cannon the other day that - to go and drop the whole thing out, the Senate amendment and the House amendment, too. I don't think that's the way to handle a thing like that, do you? I thought HMJr: No, no. R: I thought, hell, if it's going to be handled by a committee like Waye and Means, the com- mittee that works with him ought to handle it. HMJr: Well, that's the way the President and I feel. R: Well, we're going to drop the whole thing out. I told Cannon to drop the whole - both amend- mente out, and he said they'd do it. HMJr: Well, now R: It eeems that the conferees are pretty well that way on both sides. HMJr: Well R: I know the House confereee are all that way. HMJr: Well, John seeme worried, because he said within the last half hour, the Republicans, he thinks, are going to vote to keep it in. R: Well, I hadn't heard a word about that. HMJr: He said Cannon told him that. R: Well, I'll be damned! Well, Cannon told me that they had a meeting, and the committee was unanimous - the sub-committee. HMJr: Well, they evidently have changed. R: Well, they probably HMJr: Well, could I leave it between you and me and the President like this, that if you need - if you think you need any help from this end of 20 - 3 - the avenue, give me a ring and I'll come up. R: Sure, I'll do that, Henry. HMJr: Now, I haven't talked to McKellar, see. R: Uh huh. HMJr: I only talked to McCormack, and he said he'd rather that I'd deal with you direct. R: Yeah. HMJy: So will you do a little checking? R: Yes, I will, Henry. HMJr: And - because the President pinned this on me, and I don't want to fall down. R: No, no. Well, we're - I'm for throwing the whole damn thing out. HMJr: Well, that's what he wante. Now unless - if it's in the bag - I mean that the thing, the whole thing goes out, I won't hear from you. R: That's right. HMJr: But according to R: I'll tell Cannon thet if he needs any help, that you're ready to come un and out in what- ever osr you can. HMJr: Yes. And - hello. R: Yes. HMJr: And just 90 that you know, I'm leaving town at two-thirty on Friday. R: Yeah. HMJr: Over the week-end. R: I'm leaving - I'll find out before noon tomorrow. Regraded Unclassified 21 - 4 - HMJr: Right. R: Whether Cannon thinks he needs you. HMJr: Yeah. R: All right, Henry. HMJr: Thanks a lot. CC - Mr. Gamble 22 April 16, 1942 3:43 p.m. Richard Jenkins: There's a big mase meeting here in Tucson on Sunday evening, the night before it opens. HMJr: Yeah. J: I wonder if you could get me a good speaker here that night, could you? HMJr: Gosh, I don't know, Dick, but we can find out. J: Well, now, I tell you. My 1dea was this, that possibly we could get somebody from Loe Angeles. HMJr: What's the date? J: It's Sunday night. You see, our campaign starts on the twentieth, and we're having a big mass meeting on Sunday night, the nineteenth. HMJr: Yesh. J: And if we could get maybe somebody like Edward G. Robinson to come over on that afternoon plane, or maybe Edward Arnold would do it for UB, HMJr: Well, Ted Gamble 1e here in charge - Harold Graves 19 sick J: Yeeh. HMJr; and I'll ask him right away. J: Well, Henry, it would be fine if you could, because I think it would mean a lot to us. We're outting in a lot of work on this thing, and I think that would be an opening gun that would really help US tremendously. HMJr: Well, I'll do the best I can, Dick. J: And what I'd like, if you could, whoever tends to it, if they'd wire me in. town, I'm staying at the Pioneer Hotel. HMJr: I've heard of it. They've got a bar, haven't they? Regraded Unclassified 23 - 2 - J: They've got R bar, yeah. HMJr: Yeah. Will you be under it, or back of 1t, or on too of it? J: What? HMJr: Where - what part of the bar will you be? J: Well, I'm going to - I have a room there, and I'm not going in the bars during this campaign. HMJr: I see. Well, they'll simply say, "Dick Jenkins, The Bar, Pioneer Hotel." J: Yeah. That would get me all right. (Laughs) HMJr: (Laughs) J: But, Henry, if they would do that, end wire me here, and I'll tell you what we'll do HMJr: Yeah. J: to stand any expenses there is to a trip over here. HMJr: Yeah. J: Or from anywhere. HMJr: Well, I'll get the word to him right away. J: And we haven't much time. We'd like to break it tomorrow in the papers; if he could work on it right away, it would really help us. HMJr: Well, you don't give 118 much time. J: That isn't much time, 18 it? HMJr: No. J: We just thought of the brilliant idea today. It was brought up here, and it will be sponsored by all the laboring men here in Tucson - the meeting will be. Regraded Unclassified 24 - 3 - HMJr: Okay, Dick. J: It'll be a big thing. We're going to have it at the auditorium at the University, and it would help a lot if we would get a good speaker here. HMJr: Well, I'll tell Ted Gamble right away. J: That'll be fine. And, Henry, any communication for me, have them sent just "Dick Jenkins, Chairman of the Defense Savings Committee, Pioneer Hotel." HMJr: The bar. J: All right, the bar. (Laughs) HMJr: Okay. J: How're you feeling? HMJr: Okay. J: Are you really? HMJr: Yeah. J: Well, I'll see you around the first of May. I'll be right into your office. HMJr: All right. Good for you. J: If you'd work on this, I certainly would appreciate it. HMJr: All right, Dick. J: Good-bye. HMJr: Good-bye. Regraded Unclassified 00 - Mr. Sullivan Mr. Paul 25 April 16, 1942 4:20 p.m. HMJr: Hello. Operator: Mr. Patterson. HMJr: Hello. Robert Patterson: Hello, Henry. HMJr: Bob? P. Did you call me? HMJr: I did. P: Right. HMJr: I got a memo from the President around noon today, asking me to see that that six per cent thing 1s kicked out of the bill and putting it entirely on me, see. B. Yeah. Well, that's good. HMJr: That's good says you. P: Yeah. HMJr: You're a fine one. P: I went and harangued them yesterday after I got through with your meeting, and the House committee - the majority of them - were cer- teinly for kicking it out. This is what they said. HMJr: Yeah. P: They said it several times. HMJr: Yeah. P: They said, "Do you need the money at once?" And I said, "Yes." HMJr: Yeah. Regraded Unclassified 26 - 2 - P: "How soon?" I said, "As soon 88 we can get it. We counted on it before this." HMJr: Yeah. é: And they said, "Well, will this profit limitation which will engender debate, will that - if that delays progress on the appropriations - will that hurt?" HMJr: Yeah. di And I said, "Yes, "1t will. We need the money urgently, and a controversial measure like this is bound to be damaging to US to get the money." HMJr: Yeah. P: They said, "Shouldn't it be handled in separate legislation, if handled at all?" HMJr: Yeah. P: And I said, "Yes, I think so." Now, that was the temper of the House conference, the House side of the conference. HMJr: Well, I got that report from John McCormack, and then something happened at noon. The Republicans evidently decided that they'd make an issue of it. P: Did they? HMJr: But here's the point. I got hold of the Speaker, and the Speaker promised me personally that he could handle it and if he couldn't, he'd let me know between now and noon tomorrow. P: I think the tougher place, Henry, 18 in the Senate. HMJr: I know, but P. McKellar still wants to have something in there. HMJr: But Barkley's not in town, and I didn't want 27 - 3 - to E° to McKellar. P: Yeah. HMJr: And the Speaker ranke all of them, you see. P: Yes. HMJr: So I wanted to let you know; and if I have to move, I'll let you know what I'm going to do, and I'll most likely ask you to go uo there with me, see. P: Yeah. They told me today that they're in conference, and I was told to stand by ready to go up to the Capitol before the full con- ference. We were only before the House end of the conference. HMJr: Well, in view of the President's directive, would you mind keeping me posted? P: I'll keep you posted, you bet. HMJr: Now, I didn't call the other people in the room because : - who were here yesterday - because I thought that you were being the most active in 1t, and it being your appropri- ation. P: Yeah. HMJr: But P: That's all right. I'll keep you poeted. HMJr: And I'll do the same by you. P: You bet. HMJr; I thank you. P: Thank you, Henry. 28 April 16, 1942 4:45 p.m. FINANCING Present: Mr. Hadley Mr. Baker Mr. Murphy Mr. Buffington Mr. Haas Mr. Bell Mrs. Klotz H.M.JR: That looks better, that chart, doesn't it? MR. HAAS: Yes. H.M.JR: You are keeping these sheets that you make? MR. HAAS: Yes, we will keep a file of them. H.M.JR: In case I want to get the movements, you see. MR. HAAS: That table shows the exact differences in prices, you see. H.M.JR: All right, Bell. MR. BELL: Well, this is the way we feel about it. H.M.JR: You have got them all prepared, have you? MR. BELL: Yes. If they don't agree with it, they 29 - 2 - will have to speak up. (Mrs. Klotz entered the conference.) H.M.JR: Imagine, they come in here and say, "This is the way we feel about it." MRS. KLOTZ: That sounds like Dan Bell. MR. BELL: Mrs. Klotz, I am surprised at you. We feel that the eight hundred seventy-five million dollar Home Owners' Loan bonds should be called on April 29 or there- abouts, and that the early part of May, around the week of May 4, we should raise two billion dollars in cash. At that time we should consider a short bond and 8. long bond, probably in the two-and-a-half-percent area. Immediately following that we should consider the matter of putting out fifty million dollars additional bills each week but not put out any bills until we do the cash financing. H.M.JR: Why? MR. BELL: Well, we think it will raise the rates in the short end in May because of price increases in the long bonds like the certificate. We think we ought to hit that long market before we put out any short securities. Now, you fellows can speak up if I am not expressing your views. Later in the month of May, say the week of the eighteenth or twentieth, we would refund the eight hundred seventy-five million called bonds, the RFC, and the Sep- tember notes, and get them out of the way, because it seems to us that we have got to go to the market more than once a month some place along the line in order to do this re- funding job, either in September or in July for the RFC and the notes, and we might as well go do it all at once and get them out of the way, and then nothing will bother us until October when we have another RFC note issue. H.M.JR: We will look-- 30 - 3 - MR. BELL: That takes us down to the immediate financing problem. H.M.JR: Who wants to give the sales talk why we should call the Home Owners' Loan? MR. BELL: I am perfectly willing to let anybody talk. MR. MURPHY: Can I do it myself? H.M.JR: Sure, if you don't use more than half-dollar words. MR. MURPHY: I think I can stand that much. In the first place, it seems to me that it would be giving the market a sign of weakness if we did not call them. The bonds have only a two-year call period, which means that they are two-year securities, and they have a two-and-a- quarter coupon. We can do better than two and a quarter for two years, and if we don't take advantage of it, it will look to the market as if we don't think the market is as good as they think it is. In the second place, there is the purely fiscal reason that we can save money by call- ing it. We can borrow at a cheaper rate for that period and we will save money for ourselves and for HOLC. There- fore, I think that HOLC would be very glad to have us do the deal. In the next place, We will accelerate the run-off of tax-exempt bonds. We will be replacing eight hundred million dollars of tax-exempt bonds with eight hundred million of taxable bonds, and we will be bringing more banks and more institutions to the point, from a tax- exempt to a taxable status, and will be increasing our revenue and we will be increasing the strength of our position relative to state and local governments on the tax-exempt question. In the final place, I think we will make the market happier than if we don't do it, because the bonds are selling on the rights basis and the people would like to get & bit of gravy which we can give them with a benefit rather than a cost to ourselves. It seems to me that when we say rather emphatically that the cer- tificates would not have exchange provisions, that we had some negative indication that the other securities with 31 - 4 - respect to which we have not made the negative statement would, and it seems to me that it would promote a general good feeling to cut them in on a little bit of gravy. (Laughter) H.M.JR: I am surprised. The best argument is to get rid of the tax-exempts. When did you think that one up? MR. MURPHY: I have been working on this for two days. MR. HAAS: Put the rights at the end this time. MR. BELL: A dealer asked me today if you weren't committed to call them in view of your statement before the Ways and Means Committee last year about getting the tax-exempts out of the way - that you would get all tax-exempts out of the way as soon as the call periods came around, and I said no, I didn't think you were com- mitted, but he asked the question. You said we would get rid of tax-exempt securities as the call periods came along, but I don't think that was any commitment. H.M.JR: Well, is anybody together on this thing? MR. BELL: I think we are. H.M.JR: Well, I will let it sink in and we will hit it again tomorrow morning. MR. BELL: You don't have to make the decision today. We have got two or three more weeks. H.M.JR: What is Mills' first name? MR. BELL: Abbott. H.M.JR: Class is excused except for Mr. Bell. MR. BELL: Well, we are not through with this. H.M.JR: Well, what else is there? 32 - 5 - MR. BELL: You wanted to discuss tap issues. H.M.JR: Oh, not tonight. MR. BELL: O.K. MRS. KLOTZ: That is too funny for words. (Laughter) MR. BELL: You have got to have a clear head for that. H.M.JR: Ten o'clock, Mrs. Klotz. Does that inter- fere with anything? MR. BELL: I don't know what I have got. It doesn't make any difference. MRS. KLOTZ: We can shift it. H.M.JR: I have got an eleven o'clock appointment that I have got to keep. MR. BELL: It is all right. I will fix it. I don't know what I have got. O.K., we will do this other tomorrow then. This other won't take so long. H.M.JR: You just said - you didn't say anything about tap issues. Tap dance but no tap issues. MR. BELL: You asked me to explain this morning the first thing about tap issues. H.M.JR: That was this morning. MR. BELL: You said when we came in. This is a postponement of this morning. (Laughter) H.M.JR: No, I will be fresh at ten tomorrow. MR. BELL: And at the same time F and G, increase the limitation. H.M.JR: I am allowing you an hour tomorrow morning. 33 - 6 - MR. BELL: We won't need that, but we will take it. MRS. KLOTZ: You had better take it. MR. BELL: And also George Buffington's Capital Issues Committee, I would like to discuss that a minute. H.M.JR: You can do that tomorrow because I will not see Mr. Purcell. MR. BELL: I mean tomorrow morning we will do that while we are here for just a moment. H.M.JR: You can have ten to eleven. 34 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 16, 1942. TO Secretary Morgenthau FROM George Buffington GB- RE: CAPITAL ISSUES COMMITTEE As I told you yesterday morning, I talked with Ganson Purcell, Chairman of the Securities and Exchange Commission, on Saturday of last week about this subject. He told me he wanted to give the matter further study before coming to any final decision but he agreed that there probably was not sufficient reason at this time to justify setting up an extensive organization to control public offerings of securities. It was pointed out to him that the present machinery for priorities and allocations appears to offer adequate control of capital expenditures. Mr. Purcell agreed it might be well to request that corpo- rations give ninety days advance notice to the Securities and Exchange Commission about financing. Mr. Purcell's office telephoned this morning and asked if I would arrange an appointment with you for him tomorrow, Friday, April 17. I telephoned him to see if there had been any new developments since my talk last Saturday. He stated that he had some definite ideas on the subject he would like to clear with you, if possible tomorrow, and I told him I would try to make an appoint- ment. stephens The (weell san 1 the week the we per 4/22/42 35 THE NATIONAL COMMITTEE OF THE SECURITIES INDUSTRY FOR WAR FINANCING 33 SOUTH CLARK STREET CHICAGO JAMES F. BUENS. Jr. President, Association of Stock Exchange Firms Washington Office RII Filtwonth Street, N. W. H.H.DEWAR Chairman, National Association of Securities Declars, loc. Washington, D. c. JOHN $. FLEEK President, Investment Bankers Association of America EMIL SCHRAM President, New York Stock Exchange April 16, 1942 To MEMBER FIRMS OF THE SECURITIES INDUSTRY: A month ago it was evident that a National Committee of the Securities In- dustry should be established in order to co-ordinate and direct our national effort to aid the government in financing the war. On March 31 the necessity for this was clearly demonstrated when the Secretary of the Treasury called upon the undersigned to organize the industry for the specific job of soliciting 10,000 corpora- tions for the purchase of the Treasury Certificates of Indebtedness to be offered April 6th. This Committee was that day set in motion and a nationwide coverage was hastily improvised. The results have been most gratifying to the Committee and to the Treasury, the latter realizing full well the shortness of time allowed for the task. The list of corporations was thoroughly covered by direct solicitation and your immediate effective response has given impressive proof of the usefulness to the nation of the training and experience in this business. You will be interested in a brief review of the steps already taken by the industry to assist the government in its war financing. Last December the ASEF, IBA, NASD, and NYSE, as representatives of the industry, offered their services to the Treasury. In January the heads of these organizations were called to Wash- ington for a four-day conference, as a result of which committees representing the industry were formed in each state to work with their respective State Adminis- trators of the Defense Savings Staff of the Treasury Department, and to mobilize the energies of the securities firms in their states for active duty when called. In some states local committees had previously been set up and were already hard at work. All these state committees have endeavored to co-operate with their State Administrators and, in many cases, have been able to accomplish much in the sale of Defense Bonds. In February the Treasury Department appointed T. J. Bryce, a partner of Clark, Dodge & Co., New York City, as Securities Industry Liaison Officer of the Defense Savings Staff. He is serving on a full-time basis as a volunteer and is co-operating closely with the undersigned and with all our state committees in giving advice and developing plans for our contribution to the national effort. Regraded Unclassified 36 In establishing this National Committee, the undersigned are acting to pro- mote unification and co-ordination of the industry's activities and, most especially, as demonstrated during the past week, to have a nationwide organization ready at a moment's notice for specific assignments when and if called upon by the Treasury. In the interest of economy and efficiency, we have established an office at 33 South Clark Street, Chicago, from which central point all general and routine communi- cations and memoranda containing recommendations and detailed instructions will, be mailed. Several procedural plans are now in preparation and should be in the hands of the state committees later in the month. Furthermore, we shall appreciate re- ceiving from you any information or suggestions based on your own experience in your own localities. You should direct such communications either to the Chicago or Washington office of the Committee or directly to any member of the Committee. Each of the undersigned wishes to thank you for your participation in this patriotic undertaking. We bespeak your co-operation and assistance in working with this National Committee in its endeavor to co-ordinate and direct the united energies of the securities industry. Sincerely yours, THE NATIONAL COMMITTEE OF THE SECURITIES INDUSTRY FOR WAR FINANCING JAMES F. BURNS, JR. H. H. DEWAR JOHN S. FLEEK EMIL SCHRAM Regraded Unclassified 37 as UNITED STATES DEFENSE BONDS SERIES E.F.G. The Lafest Investment in the World È Regraded Unclassified Application for UNITED STATES DEFENSE SAVINGS BONDS Series 6 + The undersigned hereby applies for United States Defense Sarings thirds - /ulla Series E OF BOND Namber Manurity value Issue prior - ya. Your Current Income Bond Issued at Par Registered Not $23.00 #1A.75 $50,00 437.30 Transferable. $100.00 $75.00 - Denominations: $100, $500, $1,000, $5,000, and $10,000. $500.00 $375.00 - @7,000.00 $750.00 Dated limit of month in which remittance in received by any Federal Reserve Bank of the Treasurer of the United States. Series If Series 6 Mainers 12 years from jesue of date of bonds. Num. Maturies Insue Nom Maturity lvr value prior (maim Inno lw colue price #25.00 $10.50 $100.00 I $100.00 $100.00 874.00 INTEREST RATE $500.00 $500.00 $500.00 $370.00 $1,000.00 81,000.00 25 petrent a year. Interest in paid semiannually by Treasury check. As this rain $1,000.00 $7.40.00 $5,000.00 $5,000.00 is fised for a 12-year period, if bond is redeemed before maturity a partial refund of 85,000.00 $3,760.00 $10,000.00 $10,000.00 $10,000.00 $7,400.00 interest paid is required. (See "Redemption" below.) Total remittance. REGISTER Mr. BONDS IN THE NAME OF: (Please print all names) PRICE AND MATURITY NAME Mrs. This bood in priced at par. It in payable at par if it is held by the owner for 12 years Miss from (assum date. NAME MIDDLE NAME OR INITIAL LAST NAME ADDRESS STREET LIMITATION ON HOLDINGS OFF (hart is limited to $50,000 (cost price) of Series G bonds, or to $50,000 (cost price) STATE If you wish to name a Co-owner or Beneficiary, please give name and address of Series G and Serice F combined, insued To each calendar year. All limitations below of Co-owner or Beneficiary and check which: on derice C bonds and Series F bonds are in addition to the annual limitation of Co-owner $5,000 (maturity value) of Series E bonds. Name of Mr. Beneficiary Co-owner or Mrs. Heneficiary Miss REGISTRATION FIRST NAME MICOLE NAME OR INITIAL LAST which ADDRESS Honds can be registered in the same manner an Series F boails. (See data on Series F bonds in this folder.) STREET PAYMENT: CITY STATE RECEMPTION Attached herewith is Check Runds are payable at face value 12 years from issue date, and may not be called by Money order to the Treasurer of the United State the United States for redemption before maturity. At option of owner, bonds may Charge to my account with be redeemed in whole at in part, before maturity, ufter 6 months from issue date, at SHIPMENT: NAME OF CANCERN fixed redemption values (which are less than the face amount of the bond), on the To subscriber at first day of any month, on at least one month's notice, Table of redemption values appeare in face of bond. Table of selected redemption dates is on reverse side of STREET this folder. CITY la the interest rate of 2.5 percent is fixed for a 12-year period, if bond is redecued in STATE SHIPMENT TO BE MADE BY: wholeverse in part before maturity, an adjustment of interest, un the amount redeemed. Direct United mail by the Trensurer of the United States or Fiscal Agent of the to . lover rate for the shorter period in required, and is accomplished through States for partial refund of prior interest paid, the amount being deducted from the principal To arrount of Subscriber Inc amount redeemed. To every case, however, the total return of redemption value *And by above named concern HAME or CONCERN plus the interest previously received exceeds the invested principal. In the case of To subscriber et above address* partial redemption, no interest will be lost by the owner on the unredeemed portion SIGNATURE To be held for account of subscriber* of the bond which will be reissued with original lesue date. OF PURCHASED Stries G bonds may be redeemed before maturity, at par without adjustment of prior FIRST NAME interest paid, upon death of owner (or co-owner), or, if beld by a fidaciary, upon the DATE HIDDLE NAME OR INITIAL LAST NAME termination of the truel through death of any person. but notice of such intent Receipt is hereby nehnowledged of funds de designated above: filmal be received by a Federal Reserve Bank or by the Treasury Department within I of death. Representing theme OF REPRESENTATIVE WHERE TO BUY (OR ORDER) NAME OF CINCERN A1 Federal Reserve Banks. Through banks and other designated sales agencies. " dis be lbs - of the subscriber, ADDRESS are marely di bis nik. Direct by mail from the Treasurer of the United States, or from any Federal Reserve Bank Regraded Unclassified General Information Herking as individual, the word "coverner." In such name, the only authorized con- und in the joining of the two names registered in "w." For example, John A. RESIDENTIAL AND GEOGRAPHIC LIMITATIONS of Mrs. Mary L Jones; not John A. Jones and Mrs. Mary L. Jones, from John A. ON REGISTRY AND DELIVERY and/or Mrs. Mary L. Jones. Either co-owner may redeem the bond without Restricted to residents of the United States, its Territories and Insular plature of the other, including the survivor in case of the death of one co-owner, the Canal Zone, the Philippine Inlands. or citizens of the United States temporate may rederm their bonds jointly, in which case the redemption check will be residing abroad. No deliveries of Defense Savings Honds will be usade about bound in them jointly. A bond will not be reissued in under iss add the name of # but will be reissued un the death of one colowner in the name of the other Defense Savings Bonds purchased by citizens temporarily residing about will delivered in the United States or beld in sufckeeping " the purchaser may form with of without a beneficiary. In the case of the death of the owner of a bond which Hands are auntransferulde, her III provider (If beneficiary registered, the bood is payable to the owner's estate. FORM OF NAME(S) IN REGISTRATION TWO INDIVIDUALS (One Owner and One Heneficiary) Individuals Series E, F, and G: Only one or two persons can be registered as & You may name one individual 46 beneficiary ou your bonds by inserting his or her owners of three seriou of Defense Savings Bonds, One given name and - initial and address on the proper lines un the order form, and by checking, as indicated, any, are to be nood as well 04 the last name. The name(s) may lan proceded by any the wint "beneficiary." The beneficiary may redeem the bonds only if be or she nor- applicable title, such as Dr., Rev., pic. Married women should uso their given His vive the owner. Bonde so registered may not be reissued while both the owner and example: Mrs. Mary A. Junes am Mrs. Frank B. Jones. Bonds are not to be Landiciory are living, but may be reissued if the beneficiary predeceases the owner. in the name of a person under disability The reasons other than minority, unless à legal The named owner may, at any time, redeem the bond without the permission of the representative of his estate has been appointed. This is to be indicated on the reps. herebility. by the appropriate words, for example, "Henry Jones, an incompetent - legal guardianship." Registration in the name of natural or voluntary guardies, (In Past of any doubt, Treasury Dept. Circular No. 530, current revision, DOT authorized. should be consulted. A bond is por authorized to be issued, without consul- nation with the Treasury Department, if there in any doubt of the Ingulity of (IMPORTANT) The above forms of registration are the only oneruatheried invence IIT form of registration.) for Defense Sevings Bonds. Secies E.) Associations, Partnerships, Trusters, or Corporations Series / and G: Tables of Redemption Values at Selected Dates, for Defense Savings Bonds, (1) A private corporation. followed by the words "a corporation"; for example, Series E, F, and G "Smith Manufacturing Company, a corporation." (2) An unincorporated association, such as e lodge, church, society, (MP similar SERIES R body, followed by the words "an unincorporated association"; for example, "The Leta Club. an unincorporated association." The term "an unincorporated associabe" Approvi- mate is - to be used to describe a trust food, a partnership, or a trade name, investment yirld un (3) A partnership. residered as an entity, followed by the words "a partner Period alter insure date Redemption value as end of period purchase for example, "Smith and Brown, a partnership." price Email date (4) A fiduciary (trustee, guardian, etc.), for forms of registration consult Treasury la end of Dept. Circular No. 330, current revision. period (5) States, countins, municipal imporations and the custodians or owners of public Pervent funds. revision, For forms of registration consult Treasury Dept. Circular No. 530, currel Issue PRICE $10.75 $37.50 $75.00 unr 18.87 17.73 75.50 0.67 19.12 38,25 76.50 $ The full legal name of the rerporation. unincorporated association, INC partnership - 19.50 39.00 70.00 LAI - 20.54 41.00 82.99 1.79 .. the case may be, is to be given in the registration. No officer or member of de 22.00 44.00 BS.00 2.30 organization may be named in the registration. The form of registration used evel Name: value 110 yours from - dami 15.00 50.00 100.00 2.96 express The áctual ownership of, and interest in, the bond. BERIES F A MINOR CHILD A Defense Sevings Bond may be registered in the of minur child, and Percone Inco $10.30 $74,00 $740 purchased with funds already belonging to the minor, name a a OF beneficiary - TMI (8.55 76.30 742 0,27 - 19.00 26.00 360 .89 mill be included, bui the brind will be registered in his (or her) co-owner alone, If TRAFE 19.92 29,70 797 1,40 minor legal guardian appointed and acting, then the name should be name followed by the words" 2120 04.60 BAB 1.90 16 TERM 23,22 92.90 929 2.29 under legal guardianship." If the bond represents gift from some other Marwins value (12 years from lour dates 25.00 100.00 1,000 2.51 min, or is purchased with funds not already belonging a the a co-ower if understanding of which who has no Ingal guardian cash hie bond competency of hand beauticiary may be named with the minor child, A minor to of sufficient minor, and SERIES G ship, be (or sla) is a If the may Department (or is her) notice own of legal guardian any Personal appointment payment during minurity will be made only in the on guardian. proof of what Date Phone $100.00 $1,000 $10,000 will be required. - 97.00 970 9,780 0.30 Hair 95.10 ast 9,510 M 94,90 945 9,690 EST 96.10 961 0,010 1.96 TWO INDIVIDUALS AS CO.OWNERS to Min 97.00 IN 9.790 1.11 At the No time of purchase, you may name with IF Matority (12 - from - date:- 100.00 1,000 10,000 2.50 impring up her name and address un the une proper individual lines (m) as the FIL-OWIFT onler form. and you INVICE Application for UNITED STATES DEFENSE SAVINGS BONDS The undersigned hereby applies for United States Defense Savings Bonds as full Series E Number Maurity value frame price these $25.00 $10.75 - $30.00 837.50 . $100.00 #75.00 a $500.00 @375.00 . $1,000.00 @750.00 . Series F Series G Name Masseries live Num- Mourity Issue her verise price (mont for natue prin - 425.00 $18.50 # $100.00 $100.00 8 $100.00 $74.00 . 8500.00 8500.00 - $500.00 $370.00 , $1,000.00 $1,000.00 # $1,000.00 $740.00 - $5,000.00 $5,000.00 . $5,000.00 85,700.00 . $10,000.00 $10,000.00 - $10,000.00 $7,600.00 . Total remittance . REGISTER BONDS IN THE NAME OF: (Please print all names) Mr. NAME Mrs. Miss PRINT NAME MIDDLE NAME ON INITIAL LAST NAME ADDRESS STREET CITY STATE If you wish to name a Co-owner or Beneficiary, please give name and address below of Co-towner or Beneficiary and check which: Co-owner Beneficiary Name of Mr. Co-owner or Mrs. Beneficiary Miss FIRST NAME MIDDLE NAME or INITIAL LAST NAME ADDRESS STREET CITY STATE PAYMENT: Check Attached herewith Le to the Treasurer of the United States Money order *Charge le my account with NAME OF CINCERN SHIPMENT: To subscriber at STREET CITY STATE SHIPMENT TO BE MADE BY: Direct mail by the Treasurer of the United States or Fiscal Agent of the United States to: *For account of Subscriber To: NAME OF CONCERN *And by above named concern To subscriber at above address* (To be held for account of subscriber' SIGNATURE OF PURCHASER FAIT NAME MIDDLE NAME OR INITIAL LAST - DATE Receipt in hereby acknowledged of funds as designated above: NAME DE REPRESENTATIVE Representing NAME DP CONCERN ADDRESS Transportations du opn Made he the of the subscriber, are entirely - his risk. Regraded Unclassified TREASURY DEPARTMENT 38 INTER OFFICE COMMUNICATION DATE April 16, 1942 TO Secretary Mörgenthau FROM Mr. Hags Subject: Recent Changes in Government Bond Prices The accompanying chart and table compare the yields of Treasury bonds and notes at last night's close (April 15) with those on March 19. It will be noted that since that date the yields of all bonds but one have fallen (prices risen), while the yields of all notes have risen (prioes fallen). The rise in bond prices has extended over the entire period under consideration with only minor setbacks. Note prices reached B. high for the period on March 25, but have declined slowly ever since. The average rate at issuance of Treasury bills has increased from .20 percent on March 18 to .28 percent on April 15. This strength in long-term and weakness in short-term securities was presumptively caused by the Treasury's decision to issue certificates of indebt- edness, rather than long securities, this month. The focus of strength in the market for taxable issues has been the 2-1/2's of 1952-54, the yield of which has declined by 7 basis points during the period. of the tax- exempt securities, the 3-1/8's of 1946-49 and the 4'e of 1944-54 have shown the greatest strength, the yield of each of these issues also declining by 7 basis points. During the early part of the period under review, the Federal Open Market Account sold $5.8 millions of Treasury bonds, of which $4.8 millions were tax exempt, and $1.0 m11-> lion were taxable. On April 8, it purchased $0.8 million of 2-1/2's of 1967-72. On April 13, the Account purchased $11.8 millions of Treasury bills, of which $2.0 millions were sold on the following day. Regraded Unclassified 39 Price and Yield Changes of United States Securities March 19, 1942 to April 15, 1942 Prices : Yields Security : March 19, : : I April 15, 1942 : : March 19, : 1942 Change : : 1942 : April 15, : : 1942 Change : : (Decimale are thirty-seconds) (Percent) Bills Average rate last 1ssue - - - .20 -28 +,08 Certificates 1/2% 11/1/42 - 100,01 - - .45 - Tesable Notes 7/46 3/15/43 100.12 100.08 -.04 9/15/44 .37 1/4 .48 +.11 99.31 99.26 -.05 .76 1/4 12/15/45 .83 99.21 99.16 +,07 -.05 .84 2 3/15/46 .89 +.05 99.29 99.27 -.02 1.02 1.04 +.02 Taxable Bonds 26 3/15/48-50 101.28 102.00 +.04 1,67 1,64 6/15/49-51 -,03 101.04 101.11 +.07 1.83 1,80 -.03 3 12/15/51-55 100.12 100.22 +.10 1.96 3-1/2 3/15/52-54 1.92 -.04 103.23 104.08 +,17 2.09 2.02 8-1/4 6/15/52-55 -,07 101.06 101.20 +.14 2.12 2.07 2-1/2 3/15/56-58 -.05 103.05 103.14 +.09 2.24 2.21 2-1/2 9/15/67-72 -.03 100.27 101.08 +.13 2,46 2.43 -.03 will Tax-exempt Notes 2% 9/15/42 101.04 100.31 -.05 5/32* 5/32* 0/32* 1-3/4 12/15/42 101.11 101,06 -.05 2/32* 1/32* -1/32* 1-1/8 0/15/43 101.04 100.31 -.05 .22 .29 *-07 9/15/43 101.03 100.30 -.05 .26 -33 +.07 I-1/8 12/15/43 101,16 101.09 -.07 .26 .35 *.09 3/15/44 101.10 101.06 -.04 .34 -38 +.04 6/15/44 100.27 100.23 -,04 .37 ,42 4.05 0/15/44 101.16 101,12 -.04 .39 .43 +.04 t/4 3/13/45 101.00 100.29 -.03 .41 E +.03 Partially Tax-exempt Sonde 6/15/43-47 103,21 103,13 -.08 .41 .44 *.03 SA 10/15/43-45 104.06 104.01 -.05 .57 .54 -,03 MA 4/13/44-43 105.06 105.01 -.05 .72 .71 -.01 18/15/44-54 108.11 108,10 -.01 .91 .34 -.07 9/15/45-47 106.06 106.05 -,02 .94 ,91 -.03 143'E 12/15/45 105.28 105,26 -,02 .90 ,88 -.02 3/18/46-56 110.08 110,06 -.02 1,11 1,08 -,03 8/15/46+46 107.28 103,00 +.04 1,09 1.03 -,06 0/15/40-40 108.06 108.12 +.02 1,13 1,06 -.07 LiA 10/15/47-52 115.20 115,20 .00 1,33 1.30 -.03 12/15/47 104.23 104,32 +.06 1,25 1,09 -.06 0-1/4 3/15/48-51 107.25 107.31 +.03 1.35 1,34 -.04 2-1/2 9/15/48 107,07 107,10 +.03 1,33 1.31 -.02 E 12/15/48-50 104,21 104.25 +.07 1,94 2,24 -.04 3-1/5 12/15/49-52 110.22 110,00 +.06 1.65 1,61 -.04 2-1/2 12/15/49-53 106.15 106.20 +.04 1,60 1.54 -.02 2-1/2 4/15/50-52 100.20 100.25 +.00 1,66 1,63 -,03 2-3/4 5/18/91-54 108.14 108.24 +.00 1.72 1,71 -.03 3 9/15/51-55 110.20 110,23 +,03 1,78 1.76 -.02 2-1/2 22/18/52-53 104.29 105.06 +.09 1.77 1,67 -.03 6/25/53-55 103.10 103,22 *.12 1,st 1.64 -.04 3-1/4 5/25/54-36 104.26 105.07 +,11 1,30 1.77 -,03 2-7/8 3/15/55-60 110.00 110.24 +.14 2,00 1,90 -.04 2-3/4 9/25/56-59 109,10 109.22 +,12 2.00 1.97 -.04 2-3/4 5/15/54-63 109.12 109.26 +,14 2.07 2,03 -,04 2-3/4 12/15/60-65 110,00 110,14 +,14 2.00 2,07 -,03 Treasury Department, Sivision of Basearch and Statistics. April 15, 1942. Expess of price over 1470 71016. Regraded Unclassified EXECUTIVE ORDER 40 ESTABLISHING THE INTERDEPARTMENTAL COMMITTEE FOR THE VOLUNTARY PAY ROLL SAVINGS PLAN FOR THE PURCHASE OF WAR SAVINGS BONDS WHEREAS it daily becomes more apparent that victory will require the fullest participation of all of the people in our war effort, and that the purchase of War Savings Bonds constitutes a direct and effec- tive participation; and WHEREAS every purchaser of War Savings Bonds investe not only in the success of the Nation's com- non cause, but also in his own personal security and independence; and it is, therefore, to the manifest advantage of both the Government and every citizen that the sale of War Savings Bonds should be facili- tated; and WHEREAS employers and employees in many busi- ness and industrial enterprises, as well as some Gov- ernmental activities, have developed, and are main- taining, with notable success, programs that provide for the purchase of War Savings Bonds through regular, voluntary pay allotments; and it is proper that all civilian employees and officers in the executive branch of the Government should be afforded equal opportunity Regraded Unclassified 41 - 2 - for voluntary participation in such systematic pur- chase programs: NOW, THEREFORE, by virtue of the authority vested in me by the Constitution and the Statutes of the United States as President of the United States, it is hereby ordered as follows: 1. There is hereby established the Interde- partmental Committee for the Voluntary Pay Roll Savings Plan for the Purchase of War Savings Bonds (hereinafter referred to as the Committee). The Committee shall consist of Rear Admiral Charles Conard, Supply Corps, United States Navy, Retired, who shall serve as Chairman, and the head of each of the several departments, establishments, and agencies in the executive branch of the Government. Each member of the Committee, other than the Chair- man, may designate an alternate from among the offi- cials of his department, establishment, or agency, and such alternate may act for such member in all matters relating to the Committee. 2. The Committee shall perform the following functions and duties: Regraded Unclassified 42 - 3 - a. Formulate and present to the several de- partmants, establishments, end agencies in the exec- utive branch of the Government a uniform plan whereby all civilian officers and employees may systematically purchase War Savings Bonds through voluntary pay al- lotments. b. Assist the several departments, establish- ments, and agencies in the adoption of said voluntary pay allotment plan and in the solution of any special problems that may develop in connection therewith. 0. Act as a clearing house for the several departments, establishments, and agencies in the dis- semination of such statistics and information relative to the execution of the plan as may be deemed advan- tageous. d. Recommend to the several departments, 68- tablishments, and agencies any improvements in the program adopted pursuant to said plan. 3. Each of the departments, establishments, and agencies in the executive branch of the Government shall institute and set in operation, as soon as may be, the plan recommended by the Committee, with such Regraded Unclassified 43 - 4 - modifications as particular circumstances may render advisable. Each Committee member shall act as liaison officer between the Committee and his department, es- tablishment, or agency with regard to said plan. THE WHITE HOUSE, April/6, 1942. Regraded Unclassified 44 April 16, 1942 TO: Mr. Gamble FROM: The Secretary Mr. Tickton will furnish you with a list of 19 corporations, employing 5,000 or more people, which do not have the payroll deduction plan. dated rfiled J/N- I wish in each case you would send a telegram datest to our State Administrator and find out why each partic- ular firm has not got the payroll deduction plan and the filed Administrator should use his best efforts to get them to 4/101 put in one immediately. Please keep Mr. Tickton informed. Regraded Unclassified 45 April 16, 1942 TO: Mr. Gamble FROM: The Secretary Mr. Tickton has given me a list of 115 companies who have $2,000,000 or more in war contracts who do not have the payroll deduction plan. dated splad 4/15 I wish you would take this up with our State Administrators, by telegram, and find out why they don't - dated tes and have them take immediate steps to see that payroll freed deduction plans are put into these companies. 4/20 Please keep Mr. Tickton informed. Regraded Unclassified 46 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 20, 1942. TO FROM Mrs. Mr. MacHugh Gamble's Office w There is attached a copy of the form of telegram sent to State Administrators today, in compliance with the two memos sent to Mr. Gamble by the Secretary regarding firms not reported as having installed Payroll Savings Plans. As soon as answers from these telegrams are received, Mr. Tickton will be furnished the information. Attachment. Capy in diary- 4/20/42 47 Mr. C. E.Wilsm Pres of general motas. Eletiois I have reviewed your plan to assist employees in their purchases of war bonds. The spirit and enthusiasm of General Motors employees during the drive for victory in our survival war is most encouraging I am sure that the employees want to hold an investment in our war effort and I have confidence that your goal of 100 per cent employee participation each month throughout the war will be attained. 11mh 48 OFFICIAL MR. C. E. WILSON APRIL 16, 1942 PRESIDENT, GENERAL MOTORS DETROIT, MICHIGAN I HAVE REVIEWED YOUR PLAN TO ASSIST EMPLOYEES IN THEIR PURCHASES OF WAR BONDS. THE SPIRIT AND ENTHUSIASM OF GENERAL MOTORS EMPLOYEES DURING THE DRIVE FOR VICTORY IN OUR SURVIVAL WAR IS MOST ENCOURAGING. I AM URE THAT THE EMPLOYEES WANT TO HOLD AN INVESTMENT IN OUR WAR EFFORT AND I HAVE CONFIDENCE THAT YOUR GOAL OF 100 PERCENT EMPLOYEE PARTICIPATION EACH MONTH ThroughOut THE WAR WILL BE ATTAINED HENRY MORGENTHAU JR. Regraded Unclassified no 6400. PHONED APR 16 1942 49 TO Fetzgerald 105 II 12 TIME WAS DET 205 TY RR 9 10 8 4 2 3 HENRY MORGENTHAU JR COPY MDS 7 6 5 SECRETARY OF THE TREASURY I APPRECIATE VERY MUCH THE TELEGRAM YOU SENT ME TODAY REGARDING THE GENERAL MOTORS EMPLOYES BOND DRIVE FOR VICTORY. I READ IT TO THE EMPLOYE HERE IN THE GENERAL MOTORS BUILDING AS PART OF THE PROGRAM TODAY. EARLY REPORTS I HAVE RECEIVED FROM THE PLANTS INDICATE THAT THE DRIVE IS GOING OVER BETTER EVEN THAN WE HAD HOPED. C E WILSON GENERAL MOTORS CORP Detroit N Regraded Unclassified GENERAL MOTORS COMMUNICATIONS TRANSPORTATION BUILDING 50 17& & H STREETS,N.W. RE. 3551 WASHINGTON, D. C. CHINGTON 48-PM APR D.C.A 1942 MR HENREY MORGENTHAU JR TREASURY DEPARTMENT WASHINGTON, D. c. 51 April 16, 1942 Dan Bell Secretary Morgenthau On the meeting which you have today with Isbey from Detroit, please invite John McKee of the Federal Reserve Board to sit in 80 he can familiarize himself with our troubles and help us. I expect to ask him to go to Detroit if we cannot clean up the trouble from here. If I should decide to go to Detroit, I'd take McKee with me. I'd like to have him kept posted. finished 4/17/42 Regraded Unclassified Mr. Houghteling revised this over the 52 telephone. Mr. Kuhn has approved. Ore of goal set by U.A.W.,C.I.O. Language in last two lines is to take 53 official MR. WALTER P. REUTHER DIRECTOR OF THE GENERAL MOTORS DEPT APRIL 16,1942 INTERNATIONAL UNION, U.A.W., C.I.O. DETROIT MICHIGAN I HAVE REVIEWED THE PLAN TO ASSIST GENERAL MOTORS EMPLOYEES IN THEIR PURCHASE OF WAR BONDS. I AM CONFIDENT THAT THE MEMBERS OF YOUR UNION WHO ARE EMPLOYEES OF GENERAL MOTORS WILL COOPERATE FULLY IN THIS JOINT EFFORT OF GOVERNMENT, LABOR AND MANAGEMENT DURING THE DRIVE FOR VICTORY IN OUR SURVIVAL WAR. I AM SURE THAT YOUR MEMBERS WANT TO HOLD AN INVESTMENT IN OUR WAR EFFORT AND I HAVE CONFIDENCE THAT THE SPLENDID GOAL WHICH YOU HAVE VOLUNTARILY SET FOR YOURSELVES WILLBE ATTAINED HENRY MORGENTHAU JR 7K mr. Regraded Unclassified Mr. Houghteling revised this over the telephone. Mr. Kuhn has approved. 54 Language in last two lines is to take are of fact that this Union has not yet set a goal. 55 OFFICIAL MR. JAMES J. MATLES DIRECTOR OF ORGANIZATION APRIL 16,1942 UNITED ELECTRICAL, RADIO AND MACHINE WORKERS UNION 261 - 5th AVENUE, NEW YORK, N.Y. I HAVE REVIEWED THE PLAN TO ASSIST GENERAL MOTORS EMPLOYEES IN THEIR PURCHASE OF WAR BONDS. I AM CONFIDENT THAT THE MEMBERS OF YOUR UNION WHO ARE EMPLOYEES OF GENERAL MOTORS WILL COOPERATE FULLY IN THIS JOINT EFFORT OF GOVERNMENT, LABOR AND MANAGEMENT DURING THE DRIVE FOR VICTORY IN OUR SURVIVAL WAR. I AM SURE THAT YOUR MEMBERS WANT TO HOLD AN INVESTMENT IN OUR WAR EFFORT AND I HAVE CONFIDENCE THAT WITH YOUR COOPERATION THE GOAL OF THIS DRIVE WILL BE ATTAINED. HENRY MORGENTHAU JR. 1 1C H my Regraded Unclassified 56 TREASURY department INTER OFFICE COMMUNICATION DATE April 16, 1942 TO Secretary Morgenthau FROM Ferdinand Kuhn, Jr. I wonder if you could ask the President as soon as possible whether he would give a very brief talk of one and 8. half or two minutes for the newsreels next Tuesday, April 21st. This talk would appear on more than 8,000 screens on April 28th, the day after the President's broadcast speech. It would be a direct appeal to the movie audiences to buy bonds every pay day. We need such a separate appeal, with the widest possible coverage, because newsreels of the President's broadcast on the 27th will appear only in a few hundred leading theatres immediately. There is always 8. time lag in the distribution of ordinary newsreels, and it is this time lag which we are trying to overcome. 7.K. K. 57 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 16, 1942 TO Secretary Morgenthau FROM Mr. MR Haas 1. Attached to this memorandum are tables showing (1) the number of agents qualified to issue Defense Savings Bonds, Series E, at the close of business on April 11, classified by type of agent, by Federal Reserve Districts, and (2) the number of such agents on selected dates since May 7, 1941. 2. Agents, other than post offices, qualified to issue Series E savings bonds numbered 21,012 on April 11, an increase of 121 since April 4. 3. On April 11, there were 1,050 corporations qualified to issue Series E savings bonds on payroll allotment plans in accordance with the instructions contained in your telegram of December 27 to the Federal Reserve Banks. This represented an increase of 70 corporations over last week. Attachments Number of agents cualified to issue Series E Savings Bonds, May 7, 1941 to date : 1941 : 1942 : May : Sept. : Jan. : Jan. .. Feb. : March : April : 7 : 30 : 3 : 31 : 28 : 28 : 11 Commercial and savings banks 7,676 11,571 13,688 14,097 14,240 14,331 14,368 Building and loan associations. 739 1,481 2,064 2,434 2,560 2,632 2,645 Credit unions OR 389 1,368 2,080 2,479 2,695 2,748 Other corporations 1/ I - - 351 686 931 1,050 Investment industry - - - 37 63 66 65 All others 7 27 28 99 137 135 136 Total other than post offices. 8,430 13,468 17,148 19,098 20,165 20,790 21,012 Post offices 15,812 16,429 16,883 17,123 17,928 18,208 18,305 Grand total 24,242 29,897 34,031 36,221 38,093 38,998 39,317 Office of the Secretary of the Treasury, April 16, 1942 Division of Research and Statistics. 1/ In accordance with telegram of December 27, 1941. 58 Regraded Uncla Classification of the If ber of agents qualified to issue Series E Savings Bonds, on April 11, 1942 : :Building: : : : : : : and : Credit : Other : Invest- : All : : Banks : loan : unions :corpora- : ment : others : Total : :associa-: :tions industry : 2/ : : : tions : : : : : Corporations and associations: Federal Reserve District of Boston 837 252 230 77 1 14 1,411 New York 1,166 257 425 117 17 69 2,051 Philadelphia 855 115 124 217 I - 1,311 Cleveland 1,189 391 351 58 7 2 1,998 Richmond 1,029 196 149 46 g 1 1,429 Atlanta 1,030 165 194 29 - - 1,418 Chicago 2,373 484 284 322 17 28 3,508 St. Louis 1,402 164 81 51 7 1 1,706 Minneapolis 1,283 60 87 09, - 3 1,441 Kansas City 1,789 194 217 24 2 6 2,232 Dallas 864 124 251 64 3 9 1,315 San Francisco 551 243 355 37 3 3 1,192 Subtotal 14,368 2,645 2,748 1,050 65 136 21,012 Post offices I - - - I - 18,305 Grand total 14,368 2,645 2,748 1,050 65 136 39,317 Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942 59 1/ In accordance with telegram of December 27, 1941. 2/ Except post offices. Regraded Unclassifie CONFIDENTIAL UNITED STATES SAVINGS BONDS Comparative Statement of Sales During First Thirteen Business Days of April, March and February 1942 (April 1-15, March 1-16, February 1-16) On Basis of Issue Price (Amounts in thousands of dollars) : : Amount of Increase : Percentage of Increase : Sales : or Decrease (-) : or Decrease (-) Item : : : : April : March : April : March : April : March : February : over : over : over # over : : : : March : February : March : February Series 1- Post Offices $ 39,205 $ 47,264 $ 54,614 -$ 8,059 -$ 7,350 - 17.1% - 13.5% Series 1- Banks 115,418 138,765 207,044 - 23,347 - 68,279 - 16.8 - 33.0 Series I I - Total 154,623 186,029 261,658 - 31,406 - 75,629 - 16.9 - 28.9 Series 1- Banks 19,333 22,911 32,759 - 3,578 - 9,848 - 15.6 - 30.1 Series G - Banks 83,324 102,970 160,908 - 19,646 - 57,938 - 19,1 - 36.0 Total $257,280 $311,910 $455,324 -$ 54,630 -$143,414 - 17.5% - 31.5% Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. Regraded Unclas 61 CONFIDENT UNITED STATES SAVINGS BONDS Daily Sales - April, 1942 On Basis of Issue Price (In thousands of dollars) Post Office Bank Bond Sales All Bond Sales Date Bond Sales Series I Series I Series 7 Series G Total Series X Series 1 Series G Total April 1942 1 $ 2,476 $ 10,517 $ 2,380 $ 9,608 $ 22,504 $ 12,993 $ 2,380 $ 9,608 $ 24,980 2 2,999 8,264 2,119 7.570 17,953 11,263 2,119 7.570 20,953 3 3,222 7.572 1,185 6,235 14,992 10,794 1,185 6,235 15,214 If 2,778 9,292 1,387 5,334 16,013 12,070 1,387 5,334 18,790 6 4,961 13,035 2,329 8,027 23,391 17,996 2,329 5,027 28,352 7 2,958 5,722 834 8,983 15,539 8,680 834 8,983 18,497 8 2.309 9,610 1,142 6,562 17,314 11,919 1,142 6,562 19,623 9 2,906 9,304 955 5,715 15,974 12,210 955 5.715 15,880 10 2,730 8,052 1,573 5,261 14,885 10,782 1,573 5,261 17,615 11 2,150 5,224 668 2,720 8,613 7,374 668 2,720 10,762 13 4,619 17,572 2,432 5,604 28,609 22,192 2,432 8,604 33.228 14 2,513 6,152 1,076 3,333 10,561 8,665 1,076 3.333 13,074 15 2,584 5,102 1,251 5,374 11,728 7,686 1,251 5.374 14,312 Total $ 39,205 $115,418 $ 19,333 $ 83,324 $218,075 $154,623 $ 19,333 $ 83,324 $257,280 Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942. Source: All figures are deposite with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to neareet thousand and will not necessarily add to totals. Regraded Unclassifie 62 April 16, 1942 5:05 p.m. HMJr: What's this thing with the Post Office and Detroit, you know, and that business? Ted Gamble: Yes. Do you want the whole story on it? HMJr: Well, no, I just wanted G: Well, briefly, here is the problem. They - it's a second-class post office. It does not have the facilities to issue those bonds to General Motors. HMJr: Yeah. G: And Frank's complaint 1s - Iseby's - that they have advised General Motors that they can no longer handle this job, that they 11 have to go direct to the Federal Reserve Bank in Detroit, which 18 really the sensible thing for them to do. HMJr: I see. G: We were trying to get a little bit more in- formation on it before I reported to you on it. HMJr: Well, now, Mr. Mills is going to - if I can get him a seat on a plane - is going out tonight. G: Yes. HMJr: So he'll see you before he goes. G: Fine. HMJr: But G: But I think this 1s a matter - Mr. Graves is back this afternoon - and I had him - I checked with him on it, and he talked to Mr. Ironsides of the Post Office -Department about it, and that is the whole story on it. HMJr: All right. 63 - 2-- G: In other words, we could do this, which would not be a proper request, I don't think; we'd have to ask the Post. Office Department to depart from all of their rules and regulations and probably hire fifty or sixty people out there in that little Post Office to do it. HMJr: No. G: And I don't think we want to do that. HMJr: No. G: Because we'd have that come up all over the United States with these thirty-five thousand corporations. HMJr: That's right. G: And it can be done very efficiently by the Federal Reserve of Detroit. Mr. Sihler out in Chicago, who's in charge of that area, has done a splendid job. HMJr: Good. G: And I think that's the whole story, and I'll give it to Mr. Mills. HMJr: And you say Graves is back. G: Yes, sir. HMJr: Good. G: And he's feeling pretty good. HMJr: Good. I'll see him before I go. G: All right, sir. HMJr: Thank you. G: Good-bye. 64 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 16, 1942 TO Secretary's files FROM Ferdinand Kuhn, Jr. Mr. William S. Rainey has been instructed to handle the press in New York for Mrs. Morgenthau. Memo 4/16 65 April 16, 1942. Ferdinand Kuhn Secretary Morgenthau War Savings Bonds asked Mrs. Morgenthau to make this speech Friday. Somebody should be there to look after the Press for her. They've been call- ing her constantly. I think the easiest way would be to say that she would see any of these newspaper men or women after she is through speaking - after the luncheon. Please get in touch with New York and find out if they have any competent Press person up there who could look after Mrs. Morgenthau, and let me know before lunch-time today. Taben Car of Per Kahn- 4/16/42 Regraded Unclassified 66 Dear Mr. Kuhn: Here is my try at the talk you wanted me to do. If it does not hit the mark you can throw it out and if you want no to make another try let me know. Joseph Gaer Regraded Unclassified 67 approx 4/16/12 This breadcast celebrates the completion of twenty-five years of communal service on the part of the Jewish Welfare Board. Twenty-five years ago, during the first World War, the Jewish Welfare Board vas erganized as a service agency. It had two main objec- tives: One was to minister to the religious interests of Jewish seldiers; the other. and by far the mest important, was to help supply recreational and social needs of all non in uniferm. When the var was over, the Jewish Welfare Beard became the parent organization of the Toung Men's and Young Women's Hebrew Associa- tiens of our country. the Jewish Community Centers and various other groups fostering the growth of Jewish cultural life. New we are at war again. And again the Jewish Welfare Board has assumed its full wartine daties. It joined hands with other organ- isations through the USO and partakes to the limite of its facilities and abilities in making all servicemen - soldier and sailer, marine 1. Regraded Unclassified 68 and aviater -- feel at home wherever they are. The services of this Board, in a sense, reflect the seeen- tial unity of our nation in time of emergency. In time of peace the Beard is concerned primarily with Jewish problems and nurtures the spiritual strength of our youth. Through various activities it stim- ulates pride in our great moral heritage and encourages the achievement in our times and in our country of greater self-fulfillment. In time of war the Jewish Welfare Board at once unites with all other agencies to do the utmest for our military forces in recegnition of the fact that the sacrifices vo civilians must make in the war effort pale in- to insignificance by comparison with the sacrifices made by the non in uniform. Our enemies point to our peacetime differences in the hope that they can divide us in wartime. What they fail to realise is that the freedom enjoyed by every creed and every organisation in our nation during peacetime creates precisely that unity which we find now in the 2. Regraded Unclassified 69 var effort. Not in spite of, but because of -- bedause of the free- doms we all enjoy to develop our spiritual differences in peacetime - ve stand welded together in this emergency. The Jegish Welfare Beard takes its place among the service agencies in the same vay and in the same spirit as our soldiers and sailers are taking their poste to neet the enemy without a thought of difference, remembering only our common cause and our common faith in its justice. In this war effort there are no Jews and there are as Non- Jews, there are no whites and there are no negrees, there are no Slave and there are no Nordics. In this country and during this emergency we are all Americans only - who know our strength and realise clearly what we are defending and what we are fighting for. Thus we shall stand united unto victory. 3. Regraded Unclassified 70 APR 16 1942 My dear Mr. Robertson: This 18 in reply to your letter of April 8, 1942, relating to Treasury Form 990. Form 990 was prescribed pursuant to Treasury De- cision 5125. This Treasury Decision, in turn, was issued pursuant, primarily, to the authority contained in section 62 of the Internal Revenue Code which states that: "The Commissioner, with the approval of the Secretary, shall prescribe and publish all needful rules and regulations for the enforce- ment of this chapter." Organizations are entitled to exemption under section 101 of the Internal Revenue Code only if they meet the standards of exemption therein set forth in the various subdivisions. while the Treasury Depart- ment has conducted spot checks from time to time to ascertain whether organizations claiming exemption were properly entitled thereto, such & method has obvious disadvantages. Considerable study was therefore given to the feasibility of developing a more systematic Regraded Unclassified 71 - 2 - method of checking upon the organizations claiming ex- emption under this section. A system of annual reports under which the organi- zations would provide the information necessary to a determination of the proper applicability of the section was thought to be the most desirable method of attaining this objective. It was recognized, however, that because of the large number of organizations falling under section 101, the advantages of an annual reporting system might be lost through the accumulation of a tremendous number of returns. It was therefore decided to limit the re- quirement of annual returns at the start to those sub- divisions in which the most difficulty had been exper- ienced in the application of the section. The Bureau of Internal Revenue has found that subdivisions (6), (7), (8) and (9) present the largest number of problems under this section. Thus, it is much more difficult to ascertain whether an organization is operated exclusively for educational or charitable purposes (seetion 101(6)). is a business league (section 101(7)), is operated ex- clusively for the promotion of social welfare (section 101(8), or is operated exclusively for pleasure or Regraded Unclassified 72 - 3 - recreation (section 101(9)), than whether the organiza- tion is a fraternal beneficiary society, a labor organi- zation or a domestic building and loan association. At the same time, the number of organizations claiming ex- emption under these subdivisions is not so large as to prevent intelligent examination of the returns that would be filed. The selection of the subdivisions specified in Treasury Decision 5125 was based upon the considerations mentioned above. This Decision is not intended, however, to represent a final disposition of this problem. The experience which we obtain from the first year's returns under the Decision will enable us to determine whether the requirement of filing may not be relaxed BR to some of the subdivisions or organisations by requiring returns at less frequent intervals than 8. year, or perhaps eliminated entirely in some instances. At the same time, the results of our examination may indicate the desir- ability of extending the principle of information returns to other subdivisions or organizations. Regraded Unclassified 73 - 4 - I trust that this explanation of the principle underlying the Decision and its background will be of assistance to you. Sincerely yours, Secretary of the Treasury. Honorable A. Willis Robertson, House of Representatives, Washington, D. C. her gun ess SSS:hdr 4-14-42 Regraded Unclassified TO: Mrs Heltz 74 The letter lake OKto me I have instialed M.I. FROM: MR. GASTON 75 DEFENSE SAVINGS STAFF 709 12th St. N.W. ROUTING SLIP ( ) For Immediate Action ( ) For Files ) For Your Attention ( ) Please Return ( ) Prepare Reply Mr. Adams Mr. Johnston, Gale F. No. D. W. Bell Mr. Johnston, Lyle Mr. Chas. Bell Mrs. Jones Mr. Broughton Mr. Kilby Mr. Buckley Mr. Kuhn Mr. Callahan Mr. Mahan Miss Chauncey Mr. G. F. Milton Mr. Cole Mr. Olney Mr. Cox Mr. Powel Mr. Cunningham Mrs. Ready Mr. Duffus Mrs. Russell Mr. Edwards Mr. Schram Mrs. Evans Mr. Sloan Miss Finucane Mr. Sparks Graves Mr. Thompson Houghteling Mr. Arthur Wilson Nns. Klotz Ress. approved and intestad 76 A. WILLIS ROBERTSON COMMITTEES: SEVENTH Durnet WAYS AND Mave CHAIRMAN, SELSCT CONSERVATION COMMITTEE Congress of the United States House of Representatives Mashington, D.C. April 8, 1942 Hon. Henry Morgenthau, Jr., Secretary of the Treasurer, Washington, D. C. Dear Mr. Secretary: Kindly advise me upon what statutory authority you relied in requiring certain non-profit organizations exempt under Section 101 from the payment of income taxes to furnish to you on Treasury form No. 990 a detailed statement of receipts and disbursements, and whether it was by accident or design that this demand was made upon all associations of manufacturers but upon no labor unions. Dhines Cordially yours Dowils A. Willis Robertson. MA 77 APR 16 1942 Dear Jesse: I have your letter of April 14th with respect to the problem of substitution of silver for copper in plants engaged in war production. A few weeks ago, as you are aware, the War Production Board advised us of the serious shortage of copper and suggested that available silver stocks of the Government be used in industrial plants, both Government and privately owned, in substitution for copper. The War Production Board advised us that the silver which was to be used mainly in the form of bus bars, would not be used up or become part of the product of the plant but would be handled in such a may as to permit the silver to be returned to the Government at the termination of the war. The proposal envisaged that appropriate safe- guards would be adopted to Insure the return of the silver to the Treasury and to make good for any silver that might be lost through wear or tear or for other reasons. Regraded Unclassified 78 - 2 - The Treasury Department, after studying the matter, concluded that there was legal authority to per- mit the use of the free silver stocks of the Treasury on this basis. The Attorney General rendered an opinion concurring in this view. The proposal was then submitted to the President and he approved it. The Treasury then announced its willingness to permit the use of this sil- ver on such basis and engaged in further disoussion with representatives of the War Production Board and the De- fense Plant Corporation. If you do not think that the Defense Plant Cor- poration should enter into such an arrangement, I believe you should notify the War Production Board, promptly. The War Production Board may then wish to ascertain if there are any other channels through which the silver can be used in substitution for copper on the basis proposed. To keep the War Production Board advised, I an sending a copy of this letter and your letter to me, Regraded Unclassified 79 - 3 - to Donald Nelson. Very truly yours, de 12. Secretary of the Treasury. The Honorable, The Secretary of Commerce. EHF: kfa 4-16-42 v 4/16 45 nimic, capies to Foley to Foley Regraded Unclassified 80 APR 16 1942 Dear Donald: In connection with the proposal to use the free silver stocks of the Treasury in lientof copper for bus bars and other purposes, I an enclosing for your inform- ation copy of & letter dated April 14, 1942, which I have received from Jesse Jones, and a copy of my reply. The Treasury has been prepared to go forward promptly in working out arrangements for the use of free silver stocks in lieu of copper on the basis envisaged in discussions between our people, namely, that the Treasury would be saved harmless from any loss of silver resulting from the conversion and use in the form of bus bars. You may wish to take this matter up with Jesse Jones and let me know If any satisfactory arrangements can be worked out for the use of the silver on this basis. Very truly yours, 1. Norgonthman m Secretary of the Treasury. Hon. Donald M. Nelson, Chairman, Mar Production Board, n.m.c. è Washington, D. C. Copies toley 245L BB:EHF:v1s - 4/16/42 Regraded Unclassified 81 OF THE DEPARTMENT OF THE INTERIOR INFORMATION SERVICE OFFICE OF PETROLEUM COCRDINATOR FOR RELEASE THURSDAY, APRIL 16, 1942. The following statement was issued jointly today by Petroleum Coordinator Harold L. Ickes, Chairman Donald M. Nelson of the War Production Board, and 01- vilian Supply Director Leon Hendersons "A curtailment of one-third on filling station supplies of gasoline went into effect today in the 17 Atlantic Coast states, the District of Columbia, and the states of Oregon and Washington. This restriction is the most severe which has yet been applied to the American public's supply of motor fuel. "The curtailment probably will affect all motorists in one degree or another, In some instances, it will represent definite inconvenience. "The Federal Government has been forced, by the circumstances of war, to take this step. The continued smooth functioning of civilian life in the affected areas will be dependent upon the foresight, the cooperation, and the willingness of the American people to adapt themselves to a situation which they never before have had to face. The Government is calling upon our people to exercise that foresight, cooperation and spirit of willingness. "This step has been forced by the diversion to military service of tank ships which normally supply the affected areas with gasoline and oil; and to a minor ex- tent to sinkings by enemy action, Meanwhile, tank cars, pipelines and barges are being pressed into service to the uttermost to carry oil necessary to run our war plants and to provide as much as possible for civilian needs. The restrictions will be kept in effect until such time as the transportation situation is improved sufficiently to permit relaxation. "Full cooperation by the public 1s of the utmost importance and we expect that it will be cheerfully given particularly when it is realized that American seamen's lives are at stake every time & tank ship makes an ocean voyage. Mini- wizing of non-essential consumption will be & major contribution that the public can make. "We are sure the American people prefer to see their own bombers in the air to unnecessary use of their cars." P.N. 185119 Regraded Unclassified 82 APR 1 6 1942 Secretary Morgenthau E. H. Foley, Jr. In addition to the information on Batt in your memorandum of January 30 to the President, the American Bosch investigation has disclosed the follow- ing which may be used as 8. background in the event you decide to call in and question Monnet. A letter written by Ress, President of Amer- ican Bosch, to Batt on January 8, 1938, indicates that Batt knew of the German control of American Bosch at the time when the stock was nominally held by the Dutch in- terests. In this letter, referring to American Bosch, Hess said: "The general set-up is exactly as you described it, with control (70) in Mendelssohn & Co, Rotterdam /mic7 -- which means German Bosch and Murnane acts for them. He has apparently, as much authority as could be expected under such circumstances." Batt's reply to this letter, written two days later, did not dispute this statement and made no reference to it. You will recall that Murnane became 8. director of American Bosch Corporation in 1935 and Chairman of the Board in 1937. Shortly after Murnane had reorganised American Bosch in 1938, Batt became a member of the Board where he remained until he resigned in March 1941. In 1940, after the Mendelssohn interests in American Bosch were sold to the Stockholm Enskilda Bank which is owned by the Wallenberg family, Murnane was designated as 8. voting trustee of the Swedish interests of American Bosch (approximately 70% of the voting stock). Regraded Unclassified 83 - 2 - In early 1940 American Bosch failed in its efforts to obtain Army contracts because of its German connections. Hess turned to Batt for advice and 18- sistance and in March 1940 Batt wrote to Assistant Secretary of War Louis Johnson on behalf of American Bosch. If you decide to see Monnet, I suggest you question him about Batt along the following lines: a. The relationship between Murnane and Batt. b. What Monnet knows about German inter- ests in American Bosch, both at the time when Murnane became a director in 1935 and the present time. 0. Conversations with Murnane or Batt concerning German interests in American Bosch. (Initialed) 1. I. F., 32. MQ:EHF:v1s - 4/14/42 Regraded Unclassified 84 Personal and April 16, 1942. Confidential. The Honorable Harold L. Ickes, Secretary of the Interior, Washington, D.C. My dear Mr. Secretary: Our non have apparently reached a stalemts in the matter involving bank transactions of Captain Torkild Rieber in Now Orleans, which were the subject of your telephone con- versation with Secretary Morgenthau on March 19 and your letter of March 25, enclosing a letter dated March 22 from Kenneth Loslie, Editor of The Protestant. The Whitney National Bank of New Orleans reports that Rieber never had an account there. Our son have thoroughly examined all transactions in the bank around September 23, 1940, which was the date given by Mr. Lealie, with negative results. The F.B.I. at New Orleans denies having had the matter brought to their attention in January, 1941, and de- nies knowledge of any such photostate as are mentioned in Mr. Leslie's letter. The F.B.I. office at New Orleans, however, has recently had a tip sinilar to that given to us and is understood to be pursuing an invostigation. The etory of the payment of $20,000, involving the three individuals mentioned in Mr. Leslie's letter, was first brought to our attention by copies of reports of Military Intelligence, which were received in July and August, 1941. The first no- port stated that the transaction was supposed to have taken place in a New York bank, but a later report said that it occurred in a New Orleans bank. H. F. Baker, Chief of Police of Part Arthur, Texas, was specifically mentioned as the final recipient. The have instituted & general tax inquiry as to Rieber's affairs and his accounts disclosed to us have been examined and those of his daughter as well without revealing any trace of 4: transaction much as that described. We have, however, learned the following facts: In April, 1941, Riober invested $7,500 in an interest in the Charleston Shipbuilding and Drydock Company and in February, 1942, he becaus a director of the South- eactern Shipbuilding Corporation at Sevennah, Georgia. Both Regraded Unclassified 85 - 2 - companies are building ships under Government emergency con- tracts. From August, 1940, to April, 1941, Rieber was re- ceiving a salary of approximately $8,000 a month from the Texas Company and since the latter date has been receiving $4,000 per month. The Assistant Secretary of the Company says that the compensation currently being paid to Rieber is for his services as an advisor. Rieber, however, told our agent that he is being paid because of his long service and in consideration of his not becoming affiliated with a com- petitive company. I know you will understand that because of its source all of the above information is to be treated as entirely con- fidential. Very truly yours, (Signed) Hurbert E. Gaston Herbert E. Gaston Assistant Secretary of the Treasury. Regraded Unclassified 86 April 14, 1942. MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston This refers to the matter discussed in your telephone conversation with Secretary Ickes on March 19 and Secretary Ickes' letter to you of March 25, enclosing a letter, dated March 22, to him from Kenneth Leslie, Editor of the Protestant Digest, New York. The telephone conversation, in which Secretary Ickes cited Leslie as his source of information, told of & supposed deposit of $20,000 by Torkild Rieber, formerly Chairman of the Board of the Texas Company, in a bank account at the Whitney National Bank, New Orleans, some time in September, 1940, and the payment of an equal amount on the same day to one Baker, Cam- paign Manager for Martin Dies. The check deposited by Rieber was said to have been made out by Dr. Gerhardt A. Westrick, 8. known German agent. Leslie's letter of March 22 makes the date of the transactions definite as September 23, 1940, and asserts that photostats of the checks involved had been delivered to the New Orleans field office of the F.B.I. in January, 1941, or around that date. We have investigated thoroughly in New Orleans and have drawn B. complete blank. Rieber has never had 8. bank account with the Whitney National Bank. Trans- actions around the date mentioned have been thoroughly examined without revealing any record of an interchange of checks. The F.B.I. denies having received any such photostats as those mentioned in 1941, or at any other time. The same tip has recently been given to them and they have been - and probably still are - working on the case. Regraded Unclassified 87 - 2 - The alleged payment of $20,000 was first brought to the attention of this Department by the Military In- telligence Division of the War Department in July and August, 1941. These reports first stated that the transaction took place in a New York bank and it was subsequently stated that it W&B supposed to have occurred at 8. New Orleans bank. Instead of the name "Baker", Campaign Manager, their reports specifically named H. F. Baker, Chief of Police of Port Arthur, Texas. Port Arthur is in Congressman Dies district and New Orleans informs us that Chief of Police Baker was Campaign Manager for Dies. I first mentioned Dr. Westrick to you in & memo- randum dated August 19, 1940. (He was at that time re- ferred to in the newspaper as Adolf Hitler's special emissary to see that economic ties between the United States and Germany remained unbroken during the European war). I attached a report by a secret service agent conveying information received from an informant relative to Dr. Westrick's contacts with certain business men. Copies of the report were sent to Mr. Merle Cochran, the State Department and the Federal Bureau of Investigation. The Intelligence Unit and the Income Tax Unit have been pursuing the investigation of Rieber's tax returns. A thorough examination of Rieber's bank accounts and stock-trading accounts, recently made by a revenue agent in connection with the verification of his returns for the years 1939, 1940 and 1941, failed to disclose any trace of the funds in question or of bank transactions outside of New York City. The accounts of the taxpayer's daughter, Miss Ruth Rieber, were also examined, with negative results. An officer of the Whitney National Bank advised that there was no record of 8. summons being presented by Special Agent Larry Smith of the Federal Bureau of Investigation, as had been reported. He is not known at Regraded Unclassified 88 - 3 - the local office of that organization. However, the cashier stated that on March 28, 1942, Special Agent J. W. Core of the Federal Bureau of Investigation re- quested the production of records pertaining to the same transactions that our agent was looking for about the same time. The revenue agent learned from Mr. Rieber that in April, 1941, he and several associates purchased the Charleston Shipbuilding and Drydock Company, his inter- est being approximately nine percent, at 8. cost of $7,500. Mr. Rieber also told the agent that in February, 1942, he became a director of the Southeastern Ship- building Corporation, Savannah, Georgia. Both companies are building ships under emergency contracts. Other information concerning Mr. Rieber's current activities is contained in a letter found among papers withheld by 8. Customs officer from Dr. Luiz Felippe de Souza Sampaio upon his departure from Miami, enroute to Brazil. This letter, dated January 15, 1942, addressed to Dr. Sampaio by Mr. Benno Berger, New York, N.Y., states: "My friend, Capt. Rieber, ex-president of Texas Oil, is the president of Barber Asphalt Co. and Trinidad Asphalt Co. and he also controls these firms." Further, in a letter dated March 25, 1942, from Mr. Alexander Uhl, Foreign News Editor of P.M., to 8. correspondent in Mexico City, the writer asks if it is true that "Ben Smith, former Ambassador Joe Kennedy, Cap Rieber and Paul Shields" have bought 8 bank, a railroad and a news- paper in Mexico City. Mr. Rieber explained to the revenue agents that his resignation from The Texas Company, in August, 1940, was brought about as a result of his endeavoring to get the German Government to release several oil tankers which it had been constructing for the Company. The revenue agent further reports that from August, 1940, to April, 1941, The Texas Company paid Mr. Rieber approximately $8,000 B. month, and that since the latter date it has paid him $4,000 per month. Mr. Walter Elicker, Assistant Secretary of the Company, informed the Regraded Unclassified 89 - 4 - agent that these payments were in consideration of Mr. Rieber's acting in an advisory capacity. However, the latter told the agent that he was being paid be- cause of his long service and also in consideration of his not becoming affiliated with a competitive company. vr Regraded Unclassified 4/18 90 STRICTLY CONFIDENTIAL Bottom cargo for Russians sent from mills to Philadelphia, total April 5 to 11 and daily April 12 to 15, 1942 : Tonnage : Name of company and Total : commodity 1 April 5 : Sunday : Monday : Tuesday Wednesday : to : April 12 : April 13 April 14 April 15 : April 11 : -- : : Brass American Brass Co 513 75 39 92 Chase Brase & Copper Co 58 Revere Copper & Brass Co 176 58 36 35 Scovill Manufacturing Co 97 Wallingford Steel Go 16 Copper American Brase do 19 Anaconds Wire A Cable Co 24 Nickel Internetional Nickel Co 200 Steel Alan Wood Steel Co 152 405 365 115 Allegheny Ludlum Steel Co 440 144 94 154 17 Arnco International Co 1,762 300 213 143 Bethlehem Steel Co 2,331 125 103 103 217 Brainerd Steel Co. 50 Cold Vetal Products Do 50 86 Collyer Insulated Wire Co 15 Elliott Bros 65 Great Lakes Steel Corp 1,420 37 Inland Steel Co 547 55 Johnson Steel à Wire Oo 24 Jones & Laughlin Steel Corp 837 41 58 Keyatone Steel de Wire Co 330 109 Kndison Wire Co 81 34 McLouth Steel Co 622 135 52 76 44 National Tube Co 185 New England High Carbon Wire Co 9 Newport Rolling Mills 90 65 Otis Steel Co 772 99 102 52 P & x Co. 255 Pittsburgh Steel Co 457 Rerublic Steel Coro 3,838 1,074 254 1,258 362 Beneca Steel Co 30 Tharon Steel Co 37 Superior Steel Co 217 25 Thomas Steel do 234 60 Thompson Steel & Wire Oo 200 98 Union Drawn Steel Co 460 136 U. 8, Steel Export Co 309 269 1,122 701 Universal Cyclope Co 9 Vuloan Crucible Co 1 Wallingford Steel Co 138 52 Weirton Steel Co 231 71 74 Wheeling Steel Corp 1,365 193 132 Youngstown Sheet & Tube do 221 58 29 199 309 Miscellaneous Electro Co 130 Vanadium Corp 56 Total 18,952 1,576 2,268 4,205 2,949 Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942 Bource: Procurement Division, Treasury Department. Regraded Unclassified 91 STRICTLY CONFIDENTIAL Bottom cargo for Russians sent from mills to Baltimore, total April 5 to 11 and daily April 12 to 15, 1942 : Tonnage : Name of company and : Total : : : commodity : April 5 Sunday Monday : Tuesday : Wednesday : to April 12 : April 13 : April 14 : April 15 : April 11 : : : Brass American Brass Co 329 47 45 Chase Brase & Copper Co 42 Steel Allegheny Ludlum Steel Co 11 Armco International Co 116 Bethlehem Steel Co 334 70 141 96 Blair Strip Steel Co 19 23 33 Brainerd Steel Co 50 Colonial Steel Co 33 Colorado Fuel & Iron Co 548 Great Lakes Steel Co 731 247 45 226 Inland Steel Co 1,010 Johnson Steel & Wire Co 44 25 Jones & Laughlin Steel Corp 3,342 92 339 167 Otis Steel Co 293 P & M Co 51 Republic Steel Co 3,830 253 448 643 689 John A. Roebling & Sone 33 Seneca Steel Co 54 37 Sharon Steel Co 194 71 50 59 Thomas Steel Co 35 25 U. S, Steel Export Co 2,736 334 491 285 Weirton Steel Co 644 106 35 Youngstown Sheet & Tube Co 1,310 431 710 819 297 Miscellaneous MoKenna Metals Co 353 Total 15,478 684 2,148 2,573 2,638 Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942 Source: Procurement Division, Treasury Department. 92 STRICTLY CONFIDENTIAL Bottom cargo for Russians sent from mills to New York, total April 5 to 11 and daily April 12 to 15, 1942 : Tonnage : Name of company and : Total : : : commodity : April 5 : Sunday : Monday : Tuesday : Wednesday : to : April 12 : April 13 : April 14 : April 15 : April 11 : : : Brass Phelps Dodge Co 113 Iron Oliver Iron Co 22 Steel Armco International Co 530 356 283 252 Bethlehem Steel Co 123 65 195 Cold Metal Products Co 53 Crucible Steel Co 28 60 Great Lakes Steel Co 1,641 230 84 126 Halcomb Steel Co 66 34 Heppenstahl Co 59 46 Indiana Steel & Wire Co 135 137 55 Inland Steel Co 956 1,783 148 Jones & Laughlin Steel Corp 469 46 46 Otis Steel Co 981 90 289 375 P & M Co 51 Pittsburgh Steel Co 1,473 Republic Steel Co 391 52 97 52 Sheffield Steel Co 65 U. S. Steel Export Co 3,103 52 597 632 1,224 Washington Tin Plate Co 34 Weirton Steel Co 45 Wyckoff Drawn Steel Co 348 166 84 127 42 2,939 114 Youngstown Sheet & Tube Co 213 Miscellaneous National Standard Co 54 Total 13,679 500 3,356 1,919 2,377 Office of the Secretary of the Treasury, Division of Research and Statistics. April 16, 1942 Source: Procurement Division, Treasury Department.