The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DIARY
Book 517
April 16 and 17, 1942
-ABook Page
Airplanes
Aircraft despatched - British Air Commission report -
4/17/42.
American Bosch
517
304
See Foreign Funds Control
-BBatt, 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
-CCapital Issues Committee
See Financing, Government
Chile
See Custome, 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
-DDeferment, Military
See Secret Service
-EExcess Profits
See Inflation
Exchange Market
131,326
Resume - 4/16-17/42
-FFinancing, 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
- F - (Continued)
Financing, Government (Continued)
Book
Page
Capital Issues Committee: Purcell-Buffington conference 4/16/42
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
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,
517
34
35
page 18
Government bond prices - recent changes in: Haas
memorandum - 4/16/42
War Savings Bonds:
38
Interdepartmental Committee for Voluntary Savings Plan
established by Executive Order - 4/16/42
FDR to be asked for brief talk for newsreels to spur
interest - 4/16/42
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
Advertising: New copy discussed by staff and Weir
(Lord & Thomas) - 4/17/42
Vassar cooperation - 4/17/42
Railway Labor Executives' Association thanked for
cooperation - 4/17/42
Progress report - 4/17/42
Payroll Savings Plans - analysis of - 4/17/42
Foreign Funds Control
American Bosch: Monnet-Batt knowledge of German control
discussed in Foley memorandum - 4/16/42
40
56
57
164
192
194
196
205
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
-GGovernment Bond Market
See Financing, Government
-IBook Page
India
Financial and Economic Conditions: American Consul,
Bombay, asked for weekly report - 4/16/42.
Inflation
517
122
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.
a) HMJr-Paul conversation - 4/16/42
b) HMJr-McCormack conversation 4/16/42
c) HMJr-Rayburn conversation - 4/16/42
d) HMJr-Patterson conversation - 4/16/42
e) HMJr-McKellar conversation - 4/17/42
f) HMJr-Forrestal conversation - 4/17/42
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
5
?
11
18,144
25,155
147
156
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
The War This Week, April 9-16, 1942
Weekly Empire Guidance of British Ministry of
Information - 4/17/42
Kamarck summary - 4/17/42
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
a) Kuhn-Odegard-Graves accepted - 4/17/42
137
140
329
331
2
219,220
-0Book Page
oil
One-third curtailment in 17 Atlantic Coast States,
District of Columbia, Oregon, and Washington -
4/16/42
517
81
-PPetroleum
See 011
-RRailway 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
-SSecret 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-Grade)
Current Developments: Haas memorandum - 4/17/42
230
Biographical sketch by Buffington - 4/17/42
226
Shields, Paul
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
-TTaxation
See Revenue Revision
Turkey
New trade agreement between Switzerland and Turkey signed
at Ankara - 4/16/42
126
-UBook Page
U.S.S.R.
See also Lend-Lease
1942 National Defense Loan issued in amount of 10 billion
rubles - 4/16/42
a) Over-subscribed in 2 days - 4/20/42:
517
128
See Book 518, page 219
-VVassar College
See Financing, Government: War Savings Bonds
Vatican
See Foreign Funds Control
Voluntary Savings, Interdepartmental Committee for
See Financing, Government: War Savings Bonds
-WWar Savings Bonds
See Financing, Government
Weather Bird (Schooner Yacht)
Changed to Swiss registry - American Legation, Bern,
cable - 4/17/42
Weir, Walter J. (Lord and Thomas)
See Financing, Government: War Savings Bonds (Advertising)
310
1
TREASURY DEPARTMENT
Washington
Press Service
FOR IMMEDIATE RELEASE.
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-
Boston
New York
$ 212,414,000
District
tions Received
Cleveland
185,000
$3,062,250,000
$1,507,000,000
150,548,000
77,737,000
73,532,000
368,055,000
71,103,000
50,052,000
44,835,000
47,634,000
129,772,000
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTAL
tione Allotted
104,289,000
832,804,000
55,613,000
75,334,000
39,828,000
37,200,000
185,568,000
37,386,000
27,087,000
23,493,000
24,526,000
63,774,000
98,000
1,724,584,000
111,799,000
Philadelphia
Total Subscrip-
-000-
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 appointment 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, 1f it would be
agreeable with him
HMJr:
D:
Well
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?
4
-2D:
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'11 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 Michigan, might
be
interested in this.
D:
Well, that's fine. Well, I'll call him right now.
HMJr:
Well,
then, we'll be up there ready to put on
a show at eleven.
D:
Fine. Thank you.
HMJr:
It's very kind of you to have us up.
5
5
HE WHITE HOUSE
WISHINGTON
4-16-42
to
MEMORANDUM PRISHEST
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 01 town and so Iar 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
recede, and strike out any and all provisions. "
EnurE.N.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
69663
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1942
CONTENTS
Statement ofAnderson, H. W., vice president, General Motors Corporation
Page
2889
Bentley,
James A., vice president, Carrier Corporation, Syracuse,
N. Y
3050
Fernald, Henry B., chairman tax committee, American Mining Congress
3043
2952
George, Senator Walter F., a Senator from the State of Georgia
Jerpe,
John M., director of General Motors Bond Drive for Victory
activities
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ROBERT L. DOUGHTON, North Carolina, Chairmen
8 H. CULLEN, New York
OOPER, Tennessee
. BOEHNE, JR., Indiana
Y E. DISNEY. Oklahoma
H. BUCK. California
ID M. DUNCAN, Missouri
DINGELL Michigan
IS ROBERTSON, Virginia
KJ. BOLAND, Pennsylvania
: H. WEST, Texas
ND 8. McKEOUGH, Illinois
ALLEN T. TREADWAY. Massachusetts
FRANK CROWTHER, New York
HAROLD KNUTSON, Mispracta
DANIEL A. REED, New York
ROY O. WOODRUFF Michigan
THOMAS A. JENKINS, Ohio
DONALD H. McLEAN, New Jersey
BERTRAND W. GEARHART, California
FRANK CARLSON, Kansas
BENJAMIN JARRETT, Pennsylvania
BARRON K. GREEN, Clerk
MARION Y. McCANLESS, Assistant Clerk
2882
3024
2883
Paul, Randolph, special tax adviser to the Secretary of the Treasury 2862, 2953
Reuther, Walter, director, General Motors Division, United Automobile Workers, C.I.O.
Swigart, T. E., Houston, Tex., representing Petroleum Pipe Lines Co.
Briefs, letters, memoranda, etc.:
Arnold, Charles M., Southwick, Mass., representing the Connecticut
Valley shade -growing tobacco farmers, statement
Clark, Samuel O., Jr., Assistant Attorney General, letter
Gershel, George F., representing the Gershel-Kaffenburgh Tobacco
Co., Hartford, Conn., statement
2884
3035
2861
2972
2861
Ickes, Hon. Harold L., Petroleum Coordinator for National Defense,
letter
HILL, Washington
R D. HEALEY, Massachusetts
LANE FORD, Misalssippi
2890
Morgenthau, Hon. Henry, Jr., Secretary of the Treasury
Murphy, Ray, assistant general manager, Association of Casualty and
Surety Executives, New York, N. Y
Nixon, Russ, Washington representative, United Electrical, Radio, and
Machine Workers, C. I. O
Johnson, Senator Edwin C., a Senator from the State of Colorado,
proposed amendment to section 713 of Internal Revenue Code
Joint Committee on Internal Revenue Taxation, report by staff on
power of Congress to tax interest from State and local securities
Wilson,
C. E., president, General Motors Corporation, Detroit,
Mich
2880
3050
2999
2895
III
saas
REVENUE REVISION OF 1942
THURSDAY, APRIL 16, 1942
HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
Washington, . C.
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 inserted.
(The statements referred to are as follows:)
STATEMENT OF CHARLES M. ARNOLD, SOUTHWICK. MASS. REPRESENTING THE CONNECTICUT VALLEY SHADE GROWING TOBACCO FARMERS
I speak for the Connecticut Valley shade growing tobacco farmers. They operate in Connecticut and Massachusetts, with a present acreage 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-nicke) cigars the Industry has suffered to the
extent that 50 percent of the growers have been forced out of the business
Unless tax rates are so adjusted as 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 presentation 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. ARNOLD
STATEMENT OF GEORGE F. GERAHEL REPRESENTING THE GERSHEL-KAYFENBURGH
TOBACCO Co., HARTFORD, CONN.
The proposed revenue rates of cigars 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 Connecticut tobaccos require the greatest amount of fertilizer 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 manufacture and sell his clgars at a slight profit.
2861
2862
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
The proposed rates of $2.50 per 1,000 on the 2-for-5 cigars and under would
freeze the 2-for-5 cigar in this price class and would force all higher priced cigars
to be increased In price, with the result that the 2-for-5 cigar would immediately
outstrip all other cigars, thus placing our domestic tobacco Industry In the posttion of having to sell this tobacco for those cheap cigars, which would necessarily
mean selling our product at a loss.
We feel most strenuously that the rates proposed by the Cigar Manufacturers
of America are the proper rates In order to maintain the balance between the
cheap cigar and the most expensive cigar, so that we, as farmers, will be able to
produce and sell at a profit to our customer the elgar manufacturer, who in turn
may be permitted to sell his cigars at a profit and still pay living prices to the
farmer, his worker, and his supplier of other materials
GEORGE F. GERSHEL
The Gershel-Kaftenburgh Tobacco Co.,
801 Windsor Street,
Hartford, Conn.
The CHAIRMAN. The first witness this morning is Hon. Randolph
Paul, tax adviser to the Secretary of the Treasury.
Mr. Paul, you may proceed.
STATEMENT OF RANDOLPH PAUL, SPECIAL TAX ADVISER TO THE
SECRETARY OF THE TREASURY
Mr. PAUL. Mr. Chairman and members of the committee, in statements before your committee on March 3, 1942, the Treasury recommended the elimination of (1) percentage depletion, and (2) the privilege available to the oil and gas and mining industries of expensive
development costs. Several witnesses have appeared before your
committee in opposition to these recommendations. I should like now
to present evidence supporting the Treasury's position and to refute
the arguments made by the representatives of these industries in favor
of existing provisions of the statute.
L ELIMINATION OF PERCENTAGE DEPLETION
The Treasury believes that the favored treatment to a particular
industrial group involved in percentage depletion should not be retained in an all-out war tax program. Percentage depletion does not
appreciably stimulate exploration and discovery. It is not essential to
the maintenance of the output of stripper wells. Its elimination will
in no way endanger the supply of raw materials needed for the war
effort. The continuance of the special privilege involved in percentage
depletion would allow the oil and mineral industries to escape their
fair share of the tax burden at a time when millions of small taxpayers
are being asked to save and sacrifice for the winning of the war. The
continuance of the provision at such a time cannot but adversely affect
the morale of the American taxpayer.
It is estimated that at 1942 business levels and proposed 1942 tax
rates the elimination of percentage depletion and the substitution of
cost depletion will increase the revenue by $117,000,000. Approxitangible For oil delepment and gas wells, costs' the to regulations give the taxpayer the option of charging "In
depletion The regulations define expense or to capital account to be through
103. bailing. see supplies, 19.23 etc. Incident to "Intangible and necessary development for the costs" drilling as of "wages, wells' fuel. (regulations repairs
2863
mately 75 percent of this total is accounted for by oil and gas properties, the rest by sulfur, metal, and coal mines.
A. Percentage depletion is a special privilege.-The 1941 Revenue
Act levied a combined normal and surtax rate of 31 percent on the net
income of corporations in excess of $25,000. In addition, an excessprofits tax was imposed with rates ranging up to 60 percent. Yet many
oil companies pay extremely low income taxes, and most oil companies
pay no excess-profits taxes. Some actual examples of oil companies
that made provision for Federal income taxes of less than 31 percent of
net income are listed in exhibit 1. Each of the 4 major oil companies
listed in that exhibit set aside for Federal income and excess-profits
taxes less than 26 percent of its 1941 net income reported to stockholders. The 13 minor companies, which generally speaking were engaged more exclusively in production, set aside an even smaller part of
income, the percentage varying from 18 percent to as little as 2 percent.
The striking difference between the percentage of income absorbed
by taxes for these companies and the statutory tax rates is to some extent attributable to differences between book income and taxable income common to all corporations. In the main, however, it is attributable to the special percentage depletion. The companies ordinarily
report depletion to their stockholders on a cost basis, but receive for
tax purposes a very much larger allowance of percentage depletion.
Despite the statutory provision limiting percentage depletion to 50
percent of the net income from each property, the use of percentage
depletion instead of cost depletion enables many companies to cut their
taxable income by much more than 50 percent. Exhibit 2 gives a few
actual examples. For the first two companies cited, percentage depletion converted sizable net incomes into deficits, for the third company,
it reduced net income by more than 75 percent, for the fourth company,
it almost completely wiped out net income. The examples given in
this exhibit are not untypical.
The amount freed from taxation through percentage depletion bears
little or no relation to the actual cost of the depleted property. Per-
centage depletion continues even after 100 percent of the cost of the
property has been recovered. For example, one of the leading oil companies in the East Texas field still has in the ground more than threefourths of the original oil reserves in 10 oil properties. Yet this company has recovered through percentage depletion, and the related
option to expense intangible development expense, more than the
entire cost of the property and of intangible development. If, on the
remaining reserves, this company should obtain depletion allowances
at the rate enjoyed thus far, the aggregate deductions for depletion
would approximate five times the cost of the properties, and the aggregate deduction for both depletion and intangible development costs
would approximate three times the cost of the properties plus intangible development costs (exhibit 3).
B. The elimination of percentage depletion will not endanger the
supply of raw materials needed for the war effort.-The claim that the
elimination of percentage depletion will endanger the supply of raw
materials needed for the war effort cannot be accepted.
(m) 16). For mines, the regulations provide
in may the be charzed to expense except development costs in excess of that receipts all development while the mine costs is
curred through In depletion the (see. stage 19.23 The (m) latter 15). shall Development be charged costs to for capital mines account recoverable in-
At of the mine other than expenditures on deprecia are expenditures ble property.
existing rates the revenue increase is estimated at $87,000,000.
Reductions in taxable Income by more than 50 percent, despite the statutory limits-
tion, are possible because the law specifies that percentage depletion be computed with
respect to each property separately Consequently, after the taxable income of properties
showing net income has been reduced by a maximum of 50 percent by depletion allowances,
it can be reduced still further by the deduction of losses on other properties
REVENUE REVISION OF 1942
1. The oil industry-(a) Production and reserves.-The production
of crude oil in 1941 was the highest in our history. At the same time
the known reserves of crude oil increased to an all-time high. Total
reserves of 20,800,000,000 barrels were about 15 times the output in
1941 (exhibit 4). Even the record output of 1,400,000,000 barrels in
1941 was below the maximum achievable. The production of oil in
at least some States, including Texas, is still proceeding under proration regulations designed to reduce output to probable market demand.
While military requirements for oil products in 1942 will increase
very substantially over 1941, civilian consumption will decrease greatly
because of the transportation and rubber shortage, so that total consumption is not likely to expand and may even decline. The loss of
oil-producing areas in the Far East will throw a greater burden upon
American oil resources; but the shortage of tankers will make it
necessary to replace the supplies formerly produced in these areas by
restricting civilian consumption rather than by expanding production
in this country. Recent increases in the seriousness of the transporta-
tion shortage have already led to a reduction of production. The
Office of Petroleum Coordinator early in March ordered a widespread
reduction in output throughout the Southwest. Later, the State
authorities in Texas ordered 18 shut-down days in April. This marks
the first time in the history of proration in Texas that the oil wells
have been ordered to shut down for more days than they are permitted
to produce. It is clear that the problem of oil supply is a problem of
transportation and not of production or limited reserves.
(b) Stripper wells.-Witnesses opposing the Treasury's recommendations have claimed that their adoption would lead to the widespread
abandonment of stripper wells-the wells with relatively low output
and high cost of production. Clearly. the elimination of percentage
depletion would not have any such effect. Most stripper wells produce small amounts of oil under conditions that leave little or no book
profit. The operators of such wells get little, if any, benefit from percentage depletion because of the statutory limitation of percentage
depletion to 50 percent of net income from the property. The continued operation of these properties cannot be dependent on the continuance of percentage depletion. They are continued in operation
because current revenues exceed "out of pocket" costs, although they
may not exceed total cost, including depreciation, depletion, and over-
REVENUE REVISION OF 1942
2865
salvation of the stripper well industry lies in advances in crude-oil
prices rather than the percentage depletion provision.
In support of the claim that the elimination of percentage depletion
would lead to the abandonment of stripper wells, it has been maintained that the provision for percentage depletion introduced in the
Revenue Act of 1926 led to a substantial increase in production from
the eastern part of the United States. It is true that there was a substantial increase in the production of crude oil in Pennsylvania and
New York after 1926. However, this increase seems directly traceable to the development of water flooding methods, methods that were
first permitted by local law in 1921.ª The resulting increase in production manifested itself prior to the enactment of percentage depletion. Batween 1921 and 1926 there was a steady increase in production, the increases being minor from 1921 to 1924, but substantial
from 1924 to 1925, and again from 1925 to 1926. Naturally, the full
effect of this new technique for extracting oil was not felt at once
and continued to operate after 1926 (exhibit 5).
(c) The effect of price.-The effect of percentage depletion on production is negligible compared to the effect of price changes. In 1941
the tax relief attributable to percentage depletion amounted to about
5
2864
cents per barrel of oil. In that year the price of oil went up 8
cents a barrel. In Pennsylvania it rose by even August
1940, by 90 cents a barrel including a recent increase of 25 cents per
barrel granted by the Office of Price Administration to stimulate
output in that area.
2. The mining industry.-The conditions of supply vary widely for
different metals. Some are in abundant supply; others are limited as
to known deposits; still others, like aluminum and manganese, are
limited by the availability of power, processing plants, and materials
for exploitation, for example, explosives and mining equipment made
of steel.
These variations in supply conditions have been recognized by the
agencies dealing with the problem of war production. In the case
of some metals, premium prices have been established to stimulate
production; in other cases direct assistance in adding to equipment
for recovery has been extended. This approach clearly indicates the
diversity of situations in the mineral industry and the difficulty of
trying to accomplish specific results by any general tax relief such as
head.
percentage depletion.
In a sample study, based on the tax returns for a large number of
properties in Pennsylvania, it has been found that of the properties
producing fewer than 400 barrels a year nearly one-half showed no
net income even before any allowance for depletion. These properties get no percentage depletion under existing law. Other properties
get only a negligible amount of depletion because of the to percent
net income limitation. Only 1 out of 12 properties got percentage
Representatives of the mining industry have pointed out that the
acceleration of production for war purposes will subject the industry
to greatly increased income and excess-profits taxes at the time when
it is exhausting reserves that might be produced in later years under
lower tax rates. The Treasury is aware that producers of exhaustible
mineral resources face a special problem in increasing production
by using available reserves, and is studying methods of providing appropriate relief under the excess-profits tax. This problem, which
involves both price policy and tax policy, affects all producers in
the industry and not only the relatively few who now benefit from
percentage depletion. Any solution of this problem should be appli-
depletion equal to 271/2 percent of gross income, the maximum amount
allowed by existing law. In order to qualify for this maximum percentage depletion allowance, these properties had to have net incomes
in excess of 2 times 271/2 percent or 55 percent of gross income. Such
a large margin of profit is not characteristic of the stripper well. The
Wall Street Journal March 5. 1942.
Oil and Gas Journal, April 2. 1942, D. 16.
. Pennsylvania Statutes 1920, 16, 268a-3, Acts 1921, p. 912, 3 (amended 1929, p. 821).
2866
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
cable to the large number of producers who now get no benefit from
percentage depletion as well as to those who do.
C. Percentage depletion cannot be justified as a stimulus to explora
tion and discovery.-TI original enactment of discovery depletion
in 1918 was prompted by a fear of mineral shortages and the desire
of Congress to stimulate the discovery of mineral properties and com-
pensate for the hazard involved in prospecting. The shift to percentage depletion in 1926 was in the interest of simplicity of adminis-
tration; problems involved in determining which taxpayer was en-
titled to the benefit of the discovery, the exact date when the discovery
was made, and the value of discovery wells within 30 days of discovery
were difficult and led to extensive controversy.
We now know that the 1918 fear of oil shortages was unfounded. It
is also clear that we did not need this special discovery provision to
obtain exploitation of our natural resources, and that the provision
has been extremely costly in terms of the revenue. It is not true that
the development occurring between 1918 and the present time has
been the result of tax incentives. It has been due principally to high
prices and improvements in the technique of discovery.
1. The oil industry-(a) The importance of other factors.-The
tremendous post-war expansion of the oil industry is attributable to
the factors mentioned and not, as witnesses before your committee have
claimed, to the enactment of the discovery depletion provision by
Congress in the 1918 act. During this period the automobile industry
expanded enormously. The extended use of automotive transportation
created a strong demand for oil products which led, in turn, to a
high level of crude oil prices; it also stimulated technical advances to
raise the gasoline recovery ratio. It was these factors, and not percentage depletion, that accounted for the increase in reserves and in
output.
(i) The influence of price.-The importance of the price of oil
products in stimulating or retarding the search for oil is clearly re-
application of scientific knowledge to the search for oil has not, however, reduced the discovery of oil to a routine matter. The unusual
strike, such as that in east Texas, respects neither price nor technology.
Such exceptionally fortunate discoveries of large pools are naturally
irregular. Provisions enacted in the law cannot make them otherwise.
(iii) The influence of war priorities.-Percentage depletion should
be a particularly negligible factor in the discovery of oil during the
war period. The shortage of steel has led the War Production Board
to restrict the use of steel in drilling oil wells to such an extent that
drilling will be curtailed by about 40 percent in 1942. This restriction
is limited primarily to the drilling of development wells rather than
discovery or wildcat wells. The latter have been granted a priority
rating of A-2, the former of A-8. In addition, the Office of Petroleum
Coordinator is urging the industry to drill at least 4,000 wil cast wells
in 1942 compared with 3,100 drilled last year, even though the total
number of wells drilled will probably be reduced from 32,000 in 1941
to fewer than 19,000 in 1942. The forced restriction in the drilling of
development wells will release substantial funds for the drilling of the
wildcat wells. The saving from the drilling of fewer development
wells in 1942 will exceed the cost of all wildcast wells expected to be
drilled in 1942. The shortages necessitating curtailments in the drilling of development wells are likely to continue, and, indeed, to be
intensified during the entire war period.
(b) The ineffectiveness of percentage depletion as a stimulus to
the
prospector.-Even if percentage depletion contributed to the stimulation of exploration and discovery and we do not agree that it does
it would be an extremely wasteful and costly method. It would have
been cheaper for the Government to have paid the entire cost of drilling all the dry holes classified as wildcat wells in 1941. The estimated
cost of drilling these holes was about $50,000,000,* the estimated loss
in revenue from percentage depletion attributable to oil and gas wells
was more than $65,000,000. The reason why percentage depletion is so
vealed by exhibit 6 and chart 1 which shows for the period 1917 to 1941
the number of wells drilled and the average price of oil per barrel. In
all except 5 of the 25 years covered by the exhibit the number of
wells drilled changed in the same direction as the average price per
barrel,
rising when the price rose and declining when the price declined.
(ii) The influence of technical developments.-While price changes
have been the major stimulus to the search for new oil, the effectiveness
of this search has also depended in large part upon developments in the
technique of discovery and on pure chance. Immediately after the
First World War there was a great advance in the application of scientific knowledge to the discovery of oil. According to a study by the
National Research Project, scientific approaches have accounted for
an increasing proportion of oil discoveries, while wildcatting based on
"hunches" has become relatively less significant. According to this
study, the ultimate production from wells discovered by scientific
methods between 1922 and 1938 was estimated at about 14,000,000,000
barrels, whereas the corresponding figure for wells discovered by other
methods was only slightly over 5,000,000,000 barrels (exhibit 7). The
6.
8. Rept. No 617, 65th Cong. 3d seas., p. 6. 8. Doc. No. 280, 65th Cong., 2d sess.. p.
2867
ineffective a stimulus is that a large part of the benefit accrues not to
prospectors but to operators and royalty owners.
(i) The operator.-Twenty major integrated companies have been
reported to account for about 53 percent of the total crude petroleum
production of the United States. While data for these 20 companies
are not available, it was estimated that the major companies in 1941
accounted for only 25 percent of the wildcat wells drilled and 36 percent of the footage drilled. Their share in the direct benefits of percentage depletion is much larger than their share in the prospecting
for new oil, since they frequently purchase properties with potentialities
which have been established by the activities of independent prospectors.
(ii) The royalty owner.-Royalty owners who bear little or none of
the cost of prospecting obtain disproportionate benefits from percent-
age depletion. They have little or no investment to charge against
At the hearings on the Cole bill reported in on Weekly for March 2 1942, p. 14, It was
estimated that in 1941 3,113 wildcat wells were drilled, which 486
dry were
At anholes.
average
drilling
of $17,800
per successful for
and In
2,627
1935
cost
hole
were
(reported
Petroleum
and Natural
Gas Production
National
Research
Project, Works Progress
per outside possible cost)
Administration, p. 203 these dry holes involved an expenditure of $45,447,000 At an
average cost
the 2,027
hole
of $20,000
(andrilling
figure cost
allowing
for increases in
dry holes
in 1941
represented
total
of $52,540,000.
Hearings on the Cole bill reported in on Weekly for March 2. 1942.
REVENUE REVISION OF 1942
2868
income, which makes the percentage depletion allowance particularly
valuable to them. The benefits of percentage depletion to royalty
owners are confined largely to taxpayers having ownership prior to
the discovery of oil. Purchasers of royalty interests in developed
properties ordinarily pay a sufficiently high price to entitle them to
larger depletion allowances under cost depletion than under percentage
depletion.
(c) Other provisions favoring the prospector.-There are several
statutory provisions designed to provide relief to the prospector. The
Mineral Lands Leasing Act of 1920 provides that successful completion
of a well on the public lands entitles the prospecetor to a lease at a
royalty rate of 5 percent-less than half the customary commercial
royalty of 121/2 percent. Section 105 of the Internal Revenue Code
limits the surtax imposed by section 12 to 30 percent of the selling
price in the case of an oil or gas property, the principal value of which
has been demonstrated by discovery work done by the taxpayer.
Finally, section 721 of the Code provides for relief under the excessprofits tax in the case of abnormal income resulting from exploration,
discovery, and prospecting.
2. The mining industry.-The unimportance of percentage depletion in stimulating discovery and exploration is even clearer with
respect to the mining industry than in the case of the oil industry.
The development of mining properties in the field of the basic metals
has passed beyond the stage of prospecting risk and adventure, and has
settled down to a predictable, scientific, and commercial business enterprise involving the use of low-grade ores.
Except for the metals that have more recently become of commer-
cial importance, domestic deposits of high-grade ores were fully explored many years ago. Growing demand and technological development, further stimulated by the war emergency, have led to more
extensive exploration of low-grade ores. This cannot be termed
"discovery", since the deposits for the most part have been known to
exist. A recent proposal by the Secretary of the Interior calls for a
program of extensive exploration of additional low-grade ores-to be
carried out at Government expense. Moreover, most mineral deposits-including metals of more recent commercial importance-are not
developed by original prospectors: their development requires large
amounts of capital and is of necessity undertaken by established enterprises.
D. Percentage depletion cannot be justified by any special risks in
the oil industry.-The hazardous character of the oil industry has been
cited as a reason for retaining the specially favorable tax treatment
accorded the industry through percentage depletion. The possibility
that percentage depletion may permit the recovery of considerably
more than the actual cost of exploration and development of a productive well has been said to be justifiable on the ground that the excess
is needed to compensate for the cost incurred in connection with wells
that never become productive.
The answer is that percentage depletion is largely ineffective in
accomplishing the desired objective and that the law contains other
provisions for the offsetting of losses against gains. Further, the past
Department of the Interior press release, February 16, 1942.
REVENUE REVISION OF 1942
2869
two decades have seen changes in the organization of the oil industry
that have made it better able to bear the risks of prospecting. Larger
companies have become more important and have shouldered a larger
part of the costs of prospecting.
(a) Provisions for the setting of losses against profits.-Percentage depletion is of no help to the operator who loses his capital in
repeated unsuccessful ventures, since he gets the benefit of percentage
depletion only if he develops property that yields a net income. On
the other hand, the operator who engages in both successful and unsuccessful ventures is permitted, both under the present law and the
Treasury's proposals, to offset the cost of dry holes and unproductive
leases against current income from productive property: he may also
carry forward operating losses for 2 years. Consequently, even without percentage depletion, provision is made for the offsetting of losses
on unsuccessful ventures against gains in successful ventures. No
satisfactory reason has been offered why one operator should be permitted to recover more than his capital investment because another
has lost his capital.
(b) Changes in the structure of the industry.-During the 20 years
of discovery and percentage depletion the structure of the oil industry
has changed substantially. The industry is now in a much better position to offset losses against income from successful wells, and thus to
distribute the prospecting risk. Domestic production of crude petroleum in 1941 was about four times as great as in 1918. The estimated
investment in crude petroleum production of $5,700,000,000 in 1935,
together with investment in transportation, refining, and marketing,
makes the combined petroleum industry the fourth largest in the
country in terms of investment (exhibit 8). The gross investment in
petroleum properties, plant, and equipment more than doubled from
1921 to 1938, increasing from $6,500,000,000 to $14,800,000,000 (exhibit
9)
This increase in the size of the industry has been accompanied by
the integration of production with transportation, refining, and marketing with the result that the risks of prospecting are actually dis-
tributed over a very large aggregation of capital. Twenty major
integrated companies have been reported to account for about 53
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
of oil tankers, 76 percent of the crude-oil refining capacity, and 80
percent of the gasoline sales of the entire petroleum industry in the
United States (exhibit 10). This integration is the development of
recent years. Six important refining and marketing organizations
that owned no important producing properties in 1918 now account
for 38 percent of the crude petroleum production of the 20 major
companies and 16 percent of the national total (exhibit 11).
of
Although these large producers account for a smaller share
prospecting and exploration than of production, they now bear more
of the cost of exploration, either directly or indirectly, then they did
when discovery depletion was first enacted. The use of so-called
scientific methods for locating oil deposits, deeper well drilling, and
other factors increasing capital requirements have tended to favor
the large operator. Large producers also make what are termed
"dry-hole contributions" to independent wildcatters and purchase
leases in prospect areas from the wildcatters.
2870
REVENUE REVISION OF 1942
(c) Loans to finance drilling.-Concern has been expressed that the
elimination of percentage depletion would make it difficult to borrow
money to finance drilling for oil. The testimony presented to this
committee has indicated that bank loans are commonly made only on
the basis of productive properties. The servicing of such loans depends on the ability of the operator to recover his capital investment
and to earn a sufficient margin over his operating costs to pay interest on the loan. The Treasury proposal would in no way interfere
with the recovery of the capital investment since depreciation and
depletion allowances would be permitted equal to the amount invested.
Moreover, the interest paid on the loan is an allowable deduction
from gross income in computing taxable income. Consequently, percentage depletion does not benefit the taxpayer unless his income
exceeds the amount needed to repay capital cost and to pay interest on
outstanding loans, i. e., unless he is a good credit risk without the
benefit of percentage depletion.
E. The elimination of percentage depletion will simplify the computation of the tax.-Percentage depletion is not a simple method of
computing the depletion allowance. Under existing law percentage depletion is computed separately for each property. This involves seri-
ous difficulty, first, in determining the price of the product at the
property, and, second, in allocating expenses. The extensive litigation 11 that has resulted from the necessity of computing percentage
depletion for each property separately is sufficient evidence of its
complexity. Moreover, the provision for percentage depletion has not
obviated the necessity of computing depletion based on cost. Since
taxpayers have the option of using the one or the other basis, they generally compute cost depletion in order to protect themselves. Further,
in their reports to stockholders, corporations ordinarily use cost depletion rather than percentage depletion.
F. Percentage depletion is not justified as an offset to the heavy
burdens of other taxes.-It is claimed that special relief from the
income tax in the form of percentage depletion is justified because the
oil industry now bears a heavy tax burden in the form of gasoline
taxes, property taxes, and State production or severance taxes. This
claim cannot be accepted. Neither the property nor the production
taxes are restricted to the oil industry alone. They affect other industries as well and justify no special relief for this particular industry.
While the gasoline taxes are peculiar to the oil industry, they are
borne in large part by the consumer rather than the producer.
IL ELIMINATION OF THE INTANGIBLE DEVELOPMENT EXPENSE OPTION
The regulations now give taxpayers the option of expensing intangible development costs of oil and gas properties. They also permit
the expensing of the development costs of mines except the excess of
costs over receipts for mines that have not yet reached the state of
11 Palmer v. Bender, 287 U. 8. 551 Twin Bell ou Syndicate, 293 U 8. 312: Vinton
Petroleum certiorari denied 298 U 8. 801 Consumers Natural Gas Co.,
certiorari 296 Perkins. 302 655 Mountain Producers Corpora302 11. 681: Bankline on Co., 803 8 362 Thomas 4 O'Donnell 303 U. 8. 370
Wilshire 58 ou 308 J. Steve Anderson, 60 8 Ct. 952 Elbe ou Land Development
Co., 8 Ct. 621: Atlas Millino 29 Fed Supp 942 Rocks Mountain Oil Co., 36 B
365 Montreal Mining Co., T A. 399 Mirabel Quicksilver Co., 41 T. A. 401:
Sheridan
Wyoming
Coal U. 8. Court of Appeals for the district of Columbia 7768,
decided December
31, 1941
REVENUE REVISION OF 1942
2871
production. This excess must be charged to capital account to be recovered through depletion. It is recommended by the Treasury that the
expensing of development costs be eliminated and that all development
costs of productive properties be capitalized. Companies that elect to
expense intangible development costs for tax purposes frequently
capitalize intangible development costs in their reports to stockholders.
Intangible development costs are a proper capital asset for purposes
of reports to stockholders; they are likewise a proper capital asset for
tax purposes.
It is estimated at levels of business for the calendar year 1942 and at
the proposed tax rates that the elimination of the expensing of develop-
ment costs alone, without the elimination of percentage depletion,
would increase the revenue by $84,000,000.11 The combined effect of
eliminating percentage depletion and the expensing of development
costs would be to increase the revenue by $206,000,000.
Under the existing law, a taxpayer who uses percentage depletion
and who is not subject to the net income limitation gets the same depletion allowance, whether he capitalizes his development expenses or
deducts them currently as expense. Expensing his development costs
gives him an additional deduction: capitalizing them does not. The
expensing of development cost is, therefore, equivalent to allowing a
double deduction, once when the costs are incurred, and once through
percentage depletion. (For illustration of excessive allowances, see
exhibit 3.)
If percentage depletion were eliminated and cost depletion substituted, the option of expensing development costs would not involve a
double deduction. In that case, if development costs were capitalized,
they would be included in the base to be depleted and would be recovered through depletion allowances; if the costs were expensed, the
base to be depleted would be smaller and hence the depletion allowance
less,
Expensing of development costs should be eliminated, however, regardless of the action taken with respect to percentage depletion. This
privilege is not permitted to other groups for comparable capital outlays. The drilling cost of a productive well, for example, is a capital
investment in the same way as the cost of a building or of equipment
to a small retailer or manufacturer. There seems no more justification
for allowing the capital investment in the well to be deducted from
current gross income than for allowing the retailer or manufacturer
to deduct his capital investment from his gross income at the time
when the investment is made.
The original option for oil and gas wells dates back to 1917. The
regulations contemplated development work done directly by an oper-
ator: they are written in terms of expenditures by an operator on
wages, fuel, and other items. The trend in the industry since the
adoption of the regulations has been toward drilling by independent
contractors. The decisions of the Board of Tax Appeals 13 suggest
that under the regulations operators may no longer be entitled to expense development costs where the operator does not drill the well
himself, but pays a fixed price under a contract. The Treasury is
18 At existing rates the estimates are $63,000,000 and $155,000,000 respectively,
C.Retual
5). Drilling Co., 42 B. T. A. 1057. and W. D. Ambrose, 42 B. T A. 1405 (pending
2872
REVENUE REVISION OF 1942
reluctant to continue the option in force in view of these administrative and legal problems.
It may be suggested that the expensing of development costs could
be disallowed merely by changing the regulations. It might be
claimed, however, that the interpretation given by the regulations
has become imbedded in the statute, since it is of long standing and
has been retained unchanged in the regulations concomitant with
several reenactments of the basic legislation. To avoid controversy,
it would be best to eliminate the expensing of development costs by
statute rather than by amending the regulations.
The elimination of the option to expense intangible development
costs has been objected to on the grounds that taxpayers would have
difficulty in segregating such expenses from others. The experience
of the Bureau of Internal Revenue does not support this claim. Statements have been made by the Independent Drillers Association that
more than 80 percent of all oil wells are drilled by members of their
association. Most of these are drilled at a fixed price under a contract
that differentiates intangible costs from others.
III. POSSIBLE ALTERNATIVES TO THE ELIMINATION OF PERCENTAGE DEPLETION
The Treasury is firmly convinced that percentage depletion should
be completely eliminated. However, in case your committee prefers
partial retention and modification of percentage depletion to its elimination, I should like to make some suggestions along that line.
A. Continuance of percentage depletion for stripper wells and marginal mines only.- your committee desires to continue percentage
depletion for stripper wells and marginal mines, this might be accomplished by the following:
(a) Oil and gas properties.-Permit percentage depletion at the
rate of 25 percent of net income from the property for taxpayers
who operate oil or gas wells on which the unrestricted production is
not more than 11/4 barrels per well per day and on which the net
income from the property-computed without allowance for depletion-is not more than 10 percent of the gross income from the property. This allowance shall be restricted to taxpayers who bear the
actual burden of the cost of operating the property.
(b) Mines.-Permit percentage depletion at the rate of 25 percent
of net income from the property, for taxpayers who operate mines on
which the net income from the property-computed without allowance for depletion-is not more than 10 percent of the gross income
from such property. This allowance shall be restricted to taxpayers
who bear the actual burden of the cost of operating the property.
B. Treatment of new discoveries-1. Proposal.-If your committee
should desire to continue percentage depletion not only for stripper
wells and marginal mines but also for new discoveries, this might be
accomplished by the following provisions for properties becoming
productive after December 31, 1941,
(a) Oil and gas properties.-0 future discoveries of new pools,
allow depletion not to exceed 271/2 percent-or a lesser percentage-o
gross income to taxpayers contributing the equivalent of 25 cents or
24 Griswold A Summary of the Regulations Problem, 54 Harvard Law Review 398, 1941.
REVENUE REVISION OF 1942
2873
more per foot of hole drilled for wells less than 6,000 feet in depth and
50 cents per foot of hole drilled for wells in excess of such depth.
(b) Metal mines.-On metal mines hereafter discovered, allow 10
percent of gross income for taxpayers who bear the burden of the cost
of exploration, development, and operation of the property.
(c) Nonmetal and coal mines.- nonmetal mines, including coal
mines, hereafter discovered, allow 5 percent of gross income for taxpayers who bear the burden of cost of exploration, development, and
operation of the property.
If these allowances were made, the present limitation of percentage
depletion to 50 percent of the net income of the property-computed
before deduction of depletion-should be retained.
2. Reasons for the proposal.-Tax incentives for stimulating desirable industrial developments can be justified only if they are effective in
terms of their cost to the public. Accordingly, if it is desired to continue tax incentives to encourage discoveries in mining properties,
such incentives should be denied properties that will be developed in
the ordinary course of extending the recovery of known commercially
profitable mineral deposits.
It is suggested that for oil and gas wells this can be done by defining
a discovery as a pool outside of the limits of a previously discovered
end proven oil or gas pool. It is suggested further that the benefits of
discovery allowances be limited to those contributing substantially
toward the cost of the exploration of a new pool. Persons who, through
fortuitous circumstances, find themselves the beneficiaries of mineral
deposits discovered by others, have made no economic contribution.
For this reason it is proposed that a minimum financial contribution
be required varying with the depth of the well.
It is suggested that for mines the definition of discovery used in the
present regulations be adopted. The benefits might be limited to
taxpayers who bear the cost of exploration, development, and operation
of the property.
C. Special treatment of existing properties-1. Proposal.-If, further, your committee desires to accord special treatment to all taxpayers who developed properties prior to January 1, 1942, this could
be accomplished by the following proposal:
(a) Oil and gas properties.-Permit percentage depletion at the
rate of 15 percent of gross income for taxpayers who elected to charge
intangible drilling and development costs to capital account in prior
years, and at the rate of 5 percent of gross income for taxpayers who
elected to charge such costs to expense.
(b) Metal mines.-Permit percentage depletion at the rate of 10
percent of gross income for metal mines of taxpayers who capitalized
intangible development costs in prior years, and at the rate of 5 percent
for taxpayers who charged such costs to expense.
(c) Nonmetal mines, including coal nines.-Permit percentage depletion at the rate of 5 percent of gross income for nonmetal mines of
taxpayers who capitalized intangible development costs in prior years,
and at the rate of 21/2 percent for taxpayers who charged such costs to
expense.
If these allowances were made, the present limitation of percentage
depletion to 50 percent of the net income of the property (computed
before deduction of depletion) should be reduced to 25 percent.
" Regulations 103, sec. 19.23 (m) 3.
69663 pt 30-2
2874
REVENUE REVISION OF 1942
Moreover, if percentage depletion were continued for mines, it should
not be required that taxpayers make a binding election in order to
secure the percentage depletion allowance.
2. Reasons for proposal-(a) The reduced rates.-The available
evidence suggests that the present rates applicable to gross income in
computing percentage depletion are much more generous than is justi-
fied in view of the costs of acquiring properties and of developing
them. As shown in exhibit 12 for 1934 the United States Department
of the Interior reported that cost depletion amounted to about 71/2 percent of the average selling price, and intangible development costs,
on a capitalized basis, amounted to about 6 percent.
The increase in tax rates since these percentage provisions were
enacted make them far more generous now than they were when enacted. For example, the 1936 normal tax on corporations reached a
maximum rate of 15 percent. Under this rate there was a tax saving
of 4.1 cents attributable to the 271/2-cent depletion allowance permitted
from each dollar of gross income. If the taxpayer's net income was
75 percent of his gross income, the tax saving amounted to 51/2 per-
REVENUE REVISION OF 1942
2875
consideration to the objections repeatedly advanced against the elim.
ination of these special-allowances. These objections have been re-
examined in the light of the special needs for the war program. It
is found that the elimination of percentage depletion and the expensing
of development costs will not interfere. with the war effort, will yield
about $206,000,000 of much needed revenue, and will remove from the
statute a long-standing and inequitable privilege. Thus, it will con-
tribute substantially to the war effort in terms of national morale.
(The chart and exhibits submitted by Mr. Paul are as follows:)
30
o
#
2
If
cent of net income. Under the proposed tax rates and with only a
5-percent depletion allowance, the corresponding tax saving would
93
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
27
allowances.
12
(b) The differential rates.-The proposed lower percentage allowance for taxpayers who expensed development costs is intended to
compensate for the advantage they gained by exercising the option
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.
The size of the suggested differential is based on preliminary data
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
average about 10 percent of gross income.
(c) Reduction in the net income limitation.-At present, percentage
depletion allowances are limited to 50 percent of net income. If percentage depletion were to be continued on existing properties and the
rates suggested above were to be substituted for the present provision,
22
this limitation should be reduced to 25 percent. Unless this is done,
a considerable part of the effect of reducing the gross income percentages would be lost, since for many taxpayers the net income percentage
N2
rather than the gross income percentage is the effective limit to the
amount of depletion they can deduct.
no
IV. CONCLUSION
The Treasury has made many studies of percentage depletion and
14 Since there was an undistributed tax in 1936, this estimate assumes that all
Income was paid out.
=
or
20
23
10
related allowances in the past several years. It has given careful
8
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
EXHIBIT 4.-United States petroleum production, consumption, imports, exports,
EXHIBIT -Net income and provisions for Federal income taxes of selected oil
companies for 1941. with provision for Federal income taxes less than 31 percent of net income, as reported in Moody's Industrials Supplement
Provision for
Net Income
before Federal
Company
Millions of harrels)
Taxes
Year
net income
Income taxes
taxes
and estimated reserves, 1986-41
percent of
Federal
$6,078,558
$23,515,535
Phillips Petroleam Co
Skelly Oil Co
Texas Corporation
Union Oil Co. of California
Domestic consumption
Production
of crude oil
Imports
25.8
7,679,825
1,705,000
23.0
67.704.681
7,700,732
15,830,000
1,461,500
23.4
19.0
Exports of
crude off
Gasoline
All oils
Percent
Major companies
2877
crude all
Fuel oil
1926
771
780
267
340
1927
901
803
305
239
1928
901
NET
230
384
1929
1,007
Estimated
reserves
crude oil
60
15
58
16
in
80
383
415
977
308
369
-
960
1931
851
903
408
335
1932
785
835
378
308
1990
19
26
79
24
47
26
27
56,562
Rishop on Co
Devonian Oil Co
1.400
2.3
13,574
2.3
24,303
Houston on Co. of Texas
Cirby Petroleum Co
North American Oil Consolidated
Plymouth Oil Co
186,030
1,794,500
1,734,500
745,759
Republic Natural Gas Co.
122,695
164,503
340,994
Republic Petroleum
Superior Oil Co
Texas Gulf Producing Cc
Universal Consolidated on Co
Wellington Oil Co
Willing on and Gas Co
2.0
18,609
37,000
10.0
17.9
63,856
3.7
88,600
15,619
18,000
11.5
906
868
380
324
908
920
410
340
1935
997
084
435
367
482
411
82
m
37
12,177
82
1936
LIE
1937
L 120
1,214
1.255
1,137
1940
1,352
323
1941
1,392
1038
in
is
1939
1,231
519
442
521
409
556
458
AND
500
660
4 483
(1)
32
13 052
15-507
17,848
18,488
19,025
52
(4)
20,300
(v)
12.7
10.9
24,201
7.1
41,250
11.8
15,945
7.6
9,500
27
349,254
1933
1934
43
Misor companies
(1)
2876
For Phillips Petroleum Co., includes $309.10 for access-profits taxes; no other company in this table
End of year figures, estimated by American Petroleum Institute Includes only reserves in known
and proved fields, and recoverable by production methods then known.
No comparable estimate available,
Estimated by Oil and Gas Journal, Jan 29, 1942
. Data not made public,
Source: Petroleum Facts and Figures.
EXHIBIT 5.-Production of crude oil in Pennsylvania and New York and average
reported separately reserves for excess-profits taxes
May include State Income taxes.
price, 1911-89
. Fiscal year ending June 30, 1941.
. Reserve established for Federal taxes, shown In reported balance sheet.
Production
Source: Moody's Industrials Supplement through Mar. 28, 1942
Year
(in thou
sands of
barrels)
EXHIBIT 2 -Net income of selected oil companies reported for income far pur-
Average
Production
price
Pennsyl-
Year
vanis crude
(per barrell
posca compared with net income on the basis of cost depletion
(In thousands of dollars)
Year
Net Income
Taxable net
Cost
based cost
Income reported
depletion
depletion ,
1937
9,800
600
1937
10,100
2,900
-5,000
-5,000
1937
3,600
400
800
1938
5,300
1,900
4,200
9,201
$1.32
1912
8,713
1.64
1918
8,865
2.49
1914
9,109
1.91
1915
8,726
1.59
1916
8,467
2.52
1917
8,613
3.25
1918
8,217
4.00
1919
8,999
4.15
1920
8,344
5.97
sands of
barrels)
Average
price
Pennsyl-
vanis crade
(per barrel)
$3.33
1921
8,406
1932
8,425
3.21
1933
8,859
3.33
1924
8,926
3.61
1925
9,792
3.62
1926
10,917
3.56
1927
11,768
3.06
1928
12,559
3.27
15,197
3.79
1929
1,300
4,000
a
Company
Depletion
claimed for
income tax
purposes
1911
(in thou.
3,400
Source: Bureau of Mines, Minerals Yearbook, 1911-29.
EXHIBIT 6.-Total number of wells drilled for oil and gas and United States
D
average price of crude petroleum at the wells. 1917-41
I Under percentare depletion privileres
Year
Total wells
drilled
oil company for 10 oil properties in the East Teags field
$3,001,318
1. Cost of properties (including additions to cost)
2. Depletion sustained on cost
4 Ratio of depletion allowed to cost of properties
$701.6
$3. 635,544
percent
5 Intangib'e development costs expensed
6. Total deductions for depletion and intangible development costs
7. Cost of properties plus Intangible development costs
8. Ratio of total deductions to cost of properties plus Intangible
development costs
percent
Source : Schedules filed with Income-tax returns, 1931-37.
$3,063,271
$6,718,815
$6,084,589
110. 4
$64,408,000
9. Original oil reserves (barrels)
10. Remaining oil reserves (barrels)
11. Percent of original reserves remaining
121.1
$48, 704. 533
percent
75.
average price
of crude petroleum per
Year
Total wells
drilled
average price
of crude per
troleum per
barrel
barrel
EXHIBIT 3.-Percentage depletion and intangible development costs of a leading
3. Depletion allowed under existing law
United States
United States
1 After deduction of 85 percent of dividends received
Source: Form 1120, corporation income tax return
1917
23,407
$1.56
1930
21,240
$1.19
1918
25,687
1.98
1931
12,432
.65
1919
29,173
2.10
1932
15,040
.87
1920
33,911
3.08
1933
12,312
.67
1921
21,937
24,689
24,438
1.78
1934
18,197
1.61
1935
21,420
.97
1.34
1936
25,800
1.09
1.18
1.13
1922
1923
1.00
1924
21,888
1.43
1937
33,075
1925
25,623
.68
1938
27,493
1926
29,319
.88
1939
27,717
1.02
1927
24,143
1.30
1940
30,040
1.02
1941
32,140
1.10
1938
22,331
1.17
1929
26,356
1.27
Preliminary
Source: For 1917-39, Petroleum Facts and Figures (1941). pp. 79 and 82: (1937) pp. TO and 92 For 1940
and 1941. date on number of wells from Oil and Gas Journal, Jan. 29, 1942, data on average price from the
Bureau of Mines,
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
2878
EXHIBIT -Number of oil fields discovered with more than 1,000,000 barrels of
ultimate production, and ultimate production by method of discovery, 1922-38
EXHIBIT 10.-Relative importance of 20 major oil companies in the petroleum
industry of the United States
Ultimate production (millions of barrels)
Number of all fields
Ratio
Year date
Total
Year
Geolog
Random
Geo-
physical
loal
2879
drilling
geolog-
Geo-
Geolog-
Total
leal physical
leal and
geo-
Random
Twenty
major oil
major
companies
companies
to all
comoanies
All com
panies
Total
drilling
physical
Percent
Domestic production of crude petroleum (in
22
1922
343
343
501
583
ART
148
thousands of barrels)
1997
550
550
844
680
Trunk line
Gathering line
556
549
544
22
Mileage of crude all pipe lines:
567
17
549
1925
19
1,954
243
1,711
1,703
1926
June 30,1986
208
852
00
2,458
22
874
Total
2,465
Oil tankers
23
2,358
34
37
10
847
83
1,013
Number
13,430
3,640
Deadweight tonnage
747
1,165
930
83
210
166
44
1930
23
18
418
363
55
20
1931
164
152
1932
199
34
barrels crude oil Input)
13
262
267
385
620
1,008
1,009
635
ARC
1,315
424
872
331
754
45
1035
92
1936
111
1937
281
524
805
3. 8,854
13,992
234
512
July
1939
pp.
19,288
72.0
4,168,450
3,634,650
4,351.1
509,665
84.1
87.1
3,291.5
75.6
1407,689
80.0
EXHIBIT 11.-Gross production in 1938 of major oil companies having no im.
portant producing properties in 1918
1938 pro-
duction
(barrels)
Atlantic Refining Co
15,417,000
Continental on C
Gross
Gross
Investment
(In millions
Percent of
Division
total
investment
(in millions
Percent of
total
42.7
Natural casoline
Transportation
2,127
16.0
Refining
3,400
25.6
270
Marketing
1,814
13.7
13,276
100.0
doction
(barrels)
Total for 20 major companies
528,437,000
total major companies
37.8
United States total
Standard on Co. (N.J.
361,000
Total for companies
5,665
1938 pro-
Name company
Total for companies as percent of
Bocony Vacuum Oil Co.
Standard Oil Co. (Ind.)
Standard on Co. (Ohio)
of dollars)
of dollars)
Producing
333
336-
of the industry. 1935
11,214,355
Total for companies as percent of
total for United States
16.1
199,617,000
20
Total
I Information as to crude production of companies in 1918 from description of company's operations in
Moody's 1019
Standard Oil of New York A component of Socony Vacuum on Co., acquired important producing
properties 1918.
Petroleum Facts and Figures, 1941, p. 64.
Source: Temporary National Economic Committee bearings, pt. 14A, p. 7701.
Source: Production data from Temporary National Economic Committee Hearings, pt. 14-A. p. 7779.
EXHIBIT 9.-Gross investment in properties, plant. and equipment of the American petroleum industry. 1921-38
1929
79,655
396
7720, 7730, 7731, 7817.
EXHIBIT 8.-Gross investment in the American petroleum industry, by divisions
1997
110,580
812
5,297
Name of company
Division
Jan. 1,1988
1938
NOTE-Due to rounding, the sum of the individual items will not add to totals in all cases
1928
57.4
Source: Temporary National Economic Committee Hearings, Petroleum Industry. pt. 14-A, pp. 7710
796
M
Source: Petroleam and Natural Gas Production, National Research project, Works Progress Admin-
1925
85.4
30,284
. Total United States gasoline consumption.
, Includes only 18 companies
804
1,096
11
. Includes East Texas discovery.
stration,
Sales of gasoline (in thousand barrels)
04
78
Total, 1922-38
1,085
10 138
144
1938
1926
49,371
1,345
30
796
8
14
7
180
1933
1934
Sept. 30, 1988
Daily crude oil refining capacity (In thousand
15
10
1933
87,820
52,760
Gross investment
$6,550,000,000
7,877,000,000
8,000,000,000
9,151,000,000
9,500,000,000
10,000,000,000
10,500,000,000
11,000,000,000
11,500,000,000
1930
1931
1932
1933
EXHIBIT 12.-Depletion, intangible development cost. and average selling price
of crude petroleum, 1931-34
Gross investment
12,000,000,000
2,100,000,000
1934
700,000,000
1935
13,276,000,000
1935
18,775,000,000
1937
14,825,000,000
14,750,000,000
1938
Source: Temporary National Economic Committee Hearings, pt. 14A. p. 7700.
Year
2,200,000,000
2,300,000,000
1931
Depletion
Intangible
developmeet cost
Average
selling
1
1927
1928
1929
1924
52.5
27
644
1922
671,992
14
1923
1924
1921
1,279,160
price
$0,084
$0,037
$0,643
.081
.043
ARE
1933
.073
.054
678
1934
.074
.000
984
1932
Average cost is based upon "company Interest" all, or approximately 16 of the total erade petroleum
production
As reported by producers east of the Mississippi For producers west of the Mississippi the reported
costs were charged to capital and amortized
Source U. 8. Department of Interior, Petroleum Administrative Board. report on the Cost of Producting
Crude Petroleum, loss.
REVENUE REVISION OF 1942
2880
Mr. PAUL Mr. Chairman, I have a letter I would like to read into
the record, addressed to the Secretary of the Treasury by the Secretary
of the Interior. The purpose of this letter is to state clearly the position of the Interior Department with respect to this proposal of the
Treasury.
The CHAIRMAN. You may proceed to read the letter.
Mr. PAUL (reading)
UNITED STATES DEPARTMENT OF THE INTERIOR
OFFICE OF PETBOLEUM COORDINATOR FOR NATIONAL DEFENSE
Washington, April 15, 1942
Hon. HENRY MORGENTHAU, Jr.
Secretary of the Treasury.
MY DEAR Ms. SECRETARY: It has been suggested to me that certain portions
of the testimony before the Ways and Means Committee given by Mr. Robert
E. Allen may possibly be interpreted as implying that the Office of Petroleum
Coordinator for National Defense is opposed to any modification of the present
271/2 percent depletion allowance as applied to the production of oil and gas.
While I believe Mr. Allen made it quite clear that my office has taken no posttion with respect to this matter. I wish you to understand that this office has no
opinion to express either for or against a modification of the existing depletion
allowance. Any change in the national tax structure as applied to any particular
industry must necessarily have some economic effect upon the operations of that
industry. Obviously. however, that effect in any particular Instance must be
weighed against the effect of other changes for other industries. It involves
a balancing of the economic effects of the many different methods of raising
revenue which are before you as well as a judgment of the equities of the whole
tax structure as between many classes of taxpayers
It is for these reasons that my office prefers not to render more difficult
your task of weighing these troublesome questions of national fiscal policy by
placing itself in the position of either advocating or not advocating one method
of raising necessary revenues as against a multitude of other methods which
may be pursued. For me to take other than a neutral position would require a
detailed study of the many tax suggestions which your Department has submitted to the Ways and Means Committee. Neither I nor my office has made
such a study.
Sincerely yours,
(Signed) HAROLD L. ICKER
Petroleum Coordinator for National Defense.
Mr. DISNEY. Mr. Chairman, may I make this observation with respect to Mr. Ickes' letter? Of course, Mr. Allen made it just as plain
as the lights shining here that he was simply here to give the committee whatever facts it might inquire for; and it was never an attempt to commit the Interior Department. So Mr. Ickes, letter simply is another page in the hearing. Mr. Allen's testimony was never
asked for as anything except factual, and he specifically made no
recommendation one way or the other.
Mr. Chairman, this makes several bites that we have had at this
cherry; this is the first time that the Treasury has really played all its
cards. I ask unanimous consent that later in the hearing I have leave
to file a statement or to produce a witness on this subject.
Mr. REED. I should like to join in that unanimous-consent request,
Mr. Chairman.
The CHAIRMAN. Without objection, the unanimous-consent request
of Mr. Disney and Mr. Reed will be agreed to.
Mr. DISNEY Mr. Paul, I am glad to note the appearance here of that
famous oil man, Mr. Tarleau, of the Treasury Department, as your
assistant. He has had a lot of experience on Manhattan Island in the
oil business and his testimony ought to be worth more than that of the
oil people.
REVENUE REVISION OF 1942
2881
Still in a light vein, although seriously, this is the first time the committee has had the information that $206,000,000 was involved. The
Secretary of the Treasury came down and gently hinted at $80,000,000,
and we proceeded on that theory.
I just wonder if Mr. Paul has a new pencil or some new figures, or
has sharpened his pencil.
Now, Mr. Chairman, I am going to be pretty tedious in this crossexamination, because in the long run we can save time by getting as
many of these questions asked and answers returned as possible; that
is, it will save time in executive session, in my judgment. So I hope
the committee will not be impatient with me, in my awkward way of
presenting the questions I am going to ask. It will take considerable
time.
I do not want to delay the committee. I assure you I am just as sick
and tired of these hearings as any other member of the committee.
But this is the first shot we have really had at this matter.
Mr. KNUTSON. May I suggest that we have it go over until some
other day, if that is the case
Mr. REED. Mr. Chairman, I shall probably want to ask a series of
questions myself on this matter, and f think we should have an opportunity to study the statement that the Treasury has made. The Treasury has been coming in here, in a sort of merry-go-round fashion, presenting these things, as Mr. Disney has indicated, a piece at a time.
This is an important subject, and I think it would be well for us to
have an opportunity to examine Mr. Paul's statement, as presented
this morning, to formulate our questions in an orderly way.
The CHAIRMAN. The Chair would like to inquire if it is agreeable
to have Mr. Paul come back, perhaps at the foot of the calendar this
afternoon.
Mr. DISNEY. Let me suggest that Mr. Paul, in the interest of saving
his own time, be recalled tomorrow morning.
Mr. REED. Mr. Chairman, if we were to recall Mr. Paul this afternoon, we could not pay attention to the other witnesses on the calendar
and study this oil question, too.
The CHAIRMAN. Would it be agreeable to you to come back tomor-
row morning, Mr. Paul
Mr. PAUL Entirely. That may fit in better because I see that you
have a number of people on the calendar today. Also, I have a short
statement on the matter of tax-exempt securities which I intended to
make to the committee, but in view of your arrangement for 11 o'clock
this morning, perhaps I cannot do that at this time.
Mr. DISNEY. I ask unanimous consent Mr. Paul return in the morning at 10 o'clock and be the first witness for inquiries.
The CHAIRMAN. Without objection, the unanimous-consent request
is agreed to.
Mr. CROWTHER. Mr. Chairman, I do not want to be overcritical, but
it seems to me that we have a different condition here than ever before.
I do not remember, during hearings of this kind, that the Treasury
made frequent entrances back into the hearings in what the lawyers
call rebuttal. I do not remembere that. It may be I am wrong about
it. However, if that procedure is extended to many of the other subjects that we have under discussion, and other interested witnesses
were allowed to appear again, these hearings would be of interminable
length, and we never would get through.
2882
REVENUE REVISION OF 1042
I just call attention to that fact, that this is rather a new procedure.
Mr. DISNEY. May I say that Mr. Robertson propounded a unanimousconsent request to bring Mr. Paul back. That is how that came about.
The CHAIRMAN. The Chair will observe that the Treasury is perhaps
more vitally interested in this matter than any other department, and
I am sure that in justice to the committee, all they want to do is to give
what information they have for the benefit of the committee. Of
course, if we were to recall any other witness who might want to
appear again, these hearings would drag out into an interminable
length, as the gentleman from New York says.
Mr. CROWTHER. What I had in mind was without any intent to
criticize, but it seemed to me, in fairness, that some appointed representative of the industry who has appeared ought to have an oppor-
tunity, after studying this last statement of the Treasury, to say
something about it. I had in mind Senator Gore, who made the
opening statement on that subject, for the industry. I have no doubt
that he would like, after a study of this statement, to make another
statement to the committee. But I am afraid that if we adopted that
policy generally we would be establishing a precedent that would cause
a great deal of trouble for us and lengthen the hearings too much. But
it does seem fair, after as exhaustive a study as has evidently been
made of this proposition, that somebody on the other side should have
an opportunity to say something about it.
The CHAIRMAN. The Chair feels that that point has been well taken
care of in the unanimous-consent request made by Mr. Disney.
Mr. CROWTHER. I am perfectly satisfied to have Mr. Disney and
Mr. Reed act as suggested.
Mr. PAUL Mr. Chairman, may I say that the last thing I want to
do is to inflict myself on the committee.
The CHAIRMAN. The Chair will state with reference to this unusual
procedure that has taken place, that on yesterday morning the Sec-
retary of the Treasury communicated with the chairman of this
committee, and said he would like to arrange for some representative
of the General Motors Corporation to appear here this morning: that
the Secretary himself was interested in the statement that would be
made. Arrangements were made which the chairman hopes are agreeable to the membership of the committee, that Secretary Morgenthau
would be here to introduce certain witnesses at 11 o'clock.
Without objection, we will hear the Secretary at this time.
STATEMENT OF HON. HENRY MORGENTHAU, JR., SECRETARY OF
THE TREASURY
Secretary MORGENTHAU. Mr. Chairman, Senator George, and gentlemen of the Ways and Means Committee
I appreciate-very much this opportunity to come here and explain
to you a part of the Treasury program now being carried on with
the help of management and labor, to bring to the attention of the
workers of this country our voluntary pay-roll-deduction plan. At
present this plan has been adopted in some 54,000 plants in this
country, employing about two-thirds of all the workers in industry,
or about 20,000,000 people out of a total of 30,000,000. General Motors,
in cooperation with the various members of employee unions, are to
REVENUE REVISION OF 1042
2883
start this plan today, and I thought that you gentlemen would like
to hear about it the way I heard about it. It was explained to the
President and it was very pleasing to him.
With your permission, before the General Motors people are presented, there are two representatives here of the employees whom I
would like to introduce, The first is Mr. Nixon, of the United Electrical Radio Workers.
The CHAIRMAN. We shall be glad to hear Mr. Nixon at this time.
STATEMENT OF RUSS NIXON, WASHINGTON REPRESENTATIVE,
UNITED ELECTRICAL, RADIO, AND MACHINE WORKERS, C.I.O.
The CHAIRMAN. You may proceed, Mr. Nixon.
Mr. NIXON. I am the Washington representative of the United
Electrical, Radio-and Machine Workers, a C. I. O. affiliated union.
We represent some 400,000 workers in this industry engaged very
largely in the production of war material. We represent the workers
in the electrical divisions of the General Motors Corporation numbering approximately 25,000 men and women.
I am extremely happy to have the opportunity, on behalf of the
union I represent, to come here at this time jointly with management
to tell you just a word about the steps that have been taken in the
development of a program, a joint management and labor program,
for the increased purchase of bonds, for the purpose, of course, of increasing the sale, increasing the strength of our all-out war production program, to defeat the Fascist enemies of the American people.
This program has been developed through the joint collaboration of
the unions and management in the various General Motors Corporation plants. It is the result of consultation and discussion between
the representatives of the men and the management
We are pleased to be able to come here on this matter with a complete
unity, with a common objective of increasing the sale of these bonds.
On the part of the workers who are represented by my organization,
I am happy to be able to say that without reservation we pledge every
ounce of our energy to the successful carrying out of this program.
We are talking about it in our union meetings. We are putting bulletins on the bulletin boards of the companies throughout the land.
We are writing about it in our union publications. We have committees working on this problem. We are trying, wherever possible,
to have a joint cooperative effort with management to make the sale
of these bonds a great success.
We are doing this, gentlemen, as I am sure you realize, in consistent
action with a program that my organization and I believe labor as an
entirety has long followed, of giving its support and unreserved support to every element of public policy and public action which will
culminate in an all-out war production to the defeat of the Fascist
Axis.
I am happy to be able to be here and to express with Mr. Anderson,
of the General Motors Corporation, and the other representatives of
that company, the complete unity in this great effort in which we are
engaged.
The CHAIRMAN. We thank you. Will you call your next witness,
Mr. Secretary?
2884
REVENUE REVISION OF 1942
Secretary MORGENTHAU. Mr. Chairman, we have two representatives
here of the employees; the next one is Mr. Walter Reuther, who
represents some 200,000 employees of General Motors
The CHAIRMAN. Mr. Reuther, please identify yourself for the benefit of the record.
STATEMENT OF WALTER REUTHER, DIRECTOR, GENERAL MOTORS
DIVISION, UNITED AUTOMOBILE WORKERS,
Mr. REUTHER. Mr. Chairman and gentlemen, my name is Walter
Reuther, director of the General Motors Division of the United Autobile Workers Union,
I represent about 200,000 General Motors workers in some ninetyodd plants throughout the country.
I want to say that we are in complete agreement with the plan that
is going to be submitted here today, and feel that it represents the
most effective way to mobilize the workers for full participation in the
war effort for purchasing the greatest amount of Defense bonds.
The United Automobile Workers Union, which has some 650,000
members in the automobile and aircraft industries, at its convention last
August, by unanimous vote of the convention, agreed to initiate a
movement in our industry to have these voluntary pay-roll check-offs
for the purchase of bonds,
When the Japs attacked Pearl Harbor our union pledged to buy
$50,000,000 worth of bonds, and yesterday the president of our union,
Mr. Thomas, announced that we had already purchased more than
$50,000,000 of bonds and we have pledged to buy $50,000,000 more of
bonds, as we put it, to replace the battleship Arizona that was lost,
because some of our boys were on that ship.
Five other C. O. unions have subscribed and pledged to buy
$111,000,000 worth of Defense bonds. One of our plants, having about
8,000 workers, agreed to buy $1,000,000 worth of bonds, and in 9 weeks'
time the workers of that plant oversubscribed the $1,000,000.
We think this is the most effective way of approaching the problem,
because it is the democratic way of mobilizing the workers on a voluntary basis,
We have not gone along with the recommendation of the Treasury
Department for 10 percent. We have recommended 20 percent, and we
are trying to get our people on a voluntary basis to subscribe 20 percent of their income for the purchase of Defense bonds. And in many
plants we are meeting that mark.
I think that such plans as will be submitted by the General Motors
Corporation, which represent joint management, Government, and
labor campaigns, can fully mobilize the people in the shops; it can
make them realize that this is a war where everything that they, as
citizens of a free, democratic country, have, is at stake, and I believe
they will do more on a voluntary basis, they will buy more bonds than
they will on a compulsory basis.
Also, it will have its effect on production, because in these campaigns we use posters, and in departmental meetings, in shift meetings,
in plant meetings, we get up competition between groups of workers
in the shop, which will all bring about a lot of enthusiasm for the
whole war effort. That enthusiasm will develop a very fine labor
REVENUE REVISION OF 1042
2885
morale, and that labor morale will be reflected in increased war production.
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 get
this enthusiasm that comes out of a voluntary campaign, and you will
not build the kind of morale that this kind of campaign will build,
when it is launched jointly by Government, management, and labor.
We feel that we can get more bonds purchased by our people; we
can build up a greater interest and understanding of what this war
effort means, the sacrifices it takes, the sweat it takes to win it-we
can build up better morale and out of that will come a greater effort
on the part of the individuals.
So we strongly urge-and I know I speak for all of the 200,000
workers in General Motors, and the other thousands of workers in
our industry-this voluntary method on the basis of these plans,
which will be submitted to you, as the real way to mobilize the Amer-
ican workers for full participation in the war, in terms of the war
effort, in terms of production, in terms of buying greater amounts
of Dafense bonds.
I hope that your committee will go along with that suggestion,
because it is the real democratic way; it is the basis on which we can
mobilize our people.
The CHAIRMAN. We all realize, I suppose, that it is not only necessary but expedient that a portion of the war program be financed by
the purchase of bonds. It could not reasonably be expected that it
could all be financed through taxation, and that portion which cannot
be financed through taxation must of necessity be financed by the
sale of securities,
You think, after studying the matter thoroughly, that the voluntary
plan, at least at this time, is much preferable, will work much better,
would be accepted by the American people with a greater degree
of satisfaction, than a compulsory plan? Is that your thought
Mr. REUTHER. Our whole experience has been, if you go to the
workers and explain why this money is needed, through such campaigns as are being proposed here, you can raise much more money
on that basis than you can on a compulsory basis. That is why we
were able to oversubscribe $50 020.000 in a very short time, and we
are now working on the second $50,000,000. If that had been done on
a compulsory basis, I do not think we could have gotten that much
money in that short a time; plus the enthusiasm that we build up for
the war effort.
Mr. COOPER. Mr. Chairman, I would like to inquire very briefly
just for information.
I am favorably impressed with the statement that you make here.
I have no doubt you have given it a great deal of study and thought.
And I am favorably impressed with the results that you anticipate
we will get from the organized workers of the country. I assume, of
course, if the plan is applied for the organized workers of the country,
it would have to be applied to everybody else in the country; is that
true?
Mr. REUTHER. That is correct, the same principle.
Mr. COOPER Could there be any difficulty anticipated in a situation
of this kind Let us take any small town, not having in mind organ-
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
ized workers for the moment, but just ordinary citizens of the country.
Here is a man living in a certain house, in any small town, who for
patriotic reasons buys all the bonds he can and makes a real sacrifice
Mr. CROWTHER. Along this line, I am very much interested, as we
all are, and impressed, with this statement of your combined effort.
This may not be exactly in line with what we are discussing at the
present moment, but do you not think that this question of hours,
that has been made so much of before the country, is one on which
we should come to an agreement voluntarily, between the members of
the union, the Government and the employers Do you not think that
could be arranged? You are pretty well versed in this matter. You
had a plan yourself here a year or more ago; perhaps if it had been
adopted, it might have helped.
Mr. REUTHER. I do not think there is a necessary relationship between the question of hours and the question of selling bonds.
2886
in buying them. Yet, you might find in the next block a man who
is much better situated financially, and is in a position to buy many
more bonds than the first man, but he does not follow the impulse of
patriotism, as the first man did. He declines to buy any at all,
What do you think of a possible situation of that kind!
Mr. REUTHER. I am not qualified to speak for the general public,
but I know that the workers, if given the facts, if told what the war is
all about, and what we have at stake, will respond on a voluntary
basis. And I think the public at large will respond in a similar manner if they are made aware of what the facts are; if we carry the war
to them, and make them understand what their stake is in this war.
I think in that event the people at large will respond voluntarily.
Mr. COOPER. That is your thought on it.
Mr. REUTHER. Yes.
Mr. TREADWAY. Would the witness kindly repeat the amounts that
he read off so hastily, that the different unions have already subscribed
Mr. REUTHER After Pearl Harbor, the United Automobile Workers,
C.I.O., put this poster out, all over the union halls and throughout
the plants where we have contracts, on which we stated that we pledged
to replace the battleship Arizona, which was sunk at Pearl Harbor.
And we pledged at that time-that is, our members-to buy $50,000,000
worth of bonds. We have already purchased $50,000,000 and we are
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
ocean.
Mr. TREADWAY. How far has that progressed
Mr. REUTHER. We have just started on the second $50,000,000. As
an illustration, I pointed out that in one plant, with 8,000 workers,
when we made the pledge to raise $50,000,000. that plant of 8,000
workers said that they would volunteer to subscribe $1,000,000, and it
took them 9 weeks to do it, on a voluntary basis.
We have our sights and that has been set by the international
executive board, the highest governing body in our union-at 20 percent instead of 10 percent. We are shooting at that 20 percent mark.
In addition to what our union has done, the textile workers, the
retail clerks union, the shipbuilders union, and the aluminum
workers of America, C. -those four unions, plus ours, jointly
agreed to buy $111,000,000 worth of bonds, not including our second
$50,000,000, which would make $161,000,000 altogether. That is on
a voluntary basis.
If we launch campaigns of the type being proposed here this morning, that have the support and cooperation of the Government, labor,
and management, working as a team, in a common effort, we think
that will generate tremendous enthusiasm, which will make it possible
to buy even more than we have bought in the past.
Mr. TREADWAY. These pledges that you speak of would add up to
$211,000,000; I think you said $161,000,000.
Mr. REUTHER. That is right; $211,000,000 is correct.
Mr. TREADWAY. Thank you; that is all.
2887
Mr. CROWTHER. That is true.
Mr. REUTHER. I think I can answer the question; at least I can give
you my viewpoint on it. Certainly, at the present time, in the plants
of General Motors-and I think Mr. Anderson, of the General Motors
Corporation will be able to tell workers are prepared and
the company is prepared to operate those plants as many hours per
day and as many days per week as necessary. The question of hours
is not holding up one single job in the General Motors Corporation
today. We have been able, through collective bargaining, around the
conference table, in a democratic manner, to work out all the problems
relative to the operation of these plants 7 days a week, 24 hours a day,
where necessary.
Mr. CROWTHER. Thank you very much. I know there is a difference
between the two subjects, but I wondered if something could not be
done along that line on this question that has apparently been so
troublesome.
Mr. DINGELL. If I may interject a thought that undoubtedly has
some bearing on what the committee will do: Obviously, we want to
reach all of the workers and as many of the people as possible in this
Treasury recommendation, and I have set out to ask what is your
idea of a voluntary plan described here as having been initiated by
your members, if it is to be adjusted to attain the Government's objec-
tive of keeping down inflation and winning the war, instead of a
compulsory plan, as more effective and desirable. How are you going
to reach a certain number of people who are not organized, as Mr.
Cooper touched upon and, perhaps, a certain number of slackers!
Undoubtedly, the country is going to insist that everybody buy bonds.
Of course, you and your organization, I think, can handle that fractional problem quite easily, by the competition among the men. I
think you can shame them into buying in the few instances where they
may be disposed not to participate, but what about the others? What
is your suggestion to the committee about handling that situation
I mean what methods would you use on the slacker dollar!
Secretary MORGENTHAU. Could I say something there
Mr. DINGELL Of course.
Secretary MORGENTHAU. Mr. Dingell, if it is agreeable, after you
gentlemen have heard General Motors explain the plan, if there are
any questions you would like to ask from the Treasury, along the
line you are asking, I think it is our responsibility and we are here
and Mr. Gamble is here to answer any questions along the line you
ask.
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. DINGELL Of course, Mr. Secretary, I am concerned about what
is labor's view, that is the reason I am asking Mr. Reuther what he
tion against labor; does that not necessarily get back to killing that
enthusiasm you are talking about
Mr. REUTHER. That is right. I think sooner or later the people who
are interested in running the war will realize that labor's morale, in
the final analysis, is the thing that determines production.
2888
thinks of trying to get at the slacker dollar that is in the pocket of
someone who may not be disposed to cooperate. Now, we won't have
that difficulty with the U. A. W., C. I. O., and probably won't have
it with the Textile Workers Union, and probably won't have it with
the Clerks Union, C.I.O. but we may have a definite problem of that
kind outside of that organization, particularly among the unorganized workers, and how are we going to get at that I would like to
ought
have your reaction or idea about that. Do not you think we
to apply some coercive legal force to it
Mr. REUTHER. I think it is unfortunate that we do not have all the
workers organized so that your union is a constructive force in all
of these plants. It seems to me, however, if the organized workers,
working jointly through their unions and the managements of the
companies, will set a fine example for the Government, then if the
management of corporations will follow through on the unorganized
plants, I think they will also do a pretty good job. Of course, with
the union in there pitching, we can do a better job, but I think the
Treasury Department, working with the respective plants, can do a
fairly good job on that basis,
Mr. DINGELL I presume, of course, the A. F. of L. will follow the
example of the C.I.C
Mr. REUTHER. I understand they are in agreement with the basic
principles I have stated here today.
Mr. DINGELL You think the unorganized worker might be left to
the Treasury to work out some sort of a plan with the management
and workers in the unorganized plants; but that still leaves the man
who refuses to cooperate out of the picture he is still not covered in
our discussion between you and me, and I feel there should be no
slacker, cannot be any slacker dollar in the country.
Mr. REUTHER. I agree with that; but I think the way you mobilize
democracy is by carrying this war to the people and make them understand, and I think you can jar 99.9 percent loose, and I do not think
one-tenth of 1 percent is going to be very important.
Mr. DINGELL I agree with you.
Mr. BOLAND. I was very much impressed with your statement here,
but there is one point I would like to bring out. What would be your
opinion of the workers' enthusiasm if Congress started to pass arbitrary labor legislation
Mr. REUTHER. I think, to a very large extent, any arbitrary action
on the part of Congress which would make this plan compulsory would
take the edge off the enthusiasm. I mean the point is in a plant where
we have local union officers, have local unions bargaining committees
in the plants, have shop stewards in each department, each of those
fellows will be captains in this campaign who are going to be beating
the drums and pepping the boys up, and there will be competition between the departments, each one trying to see who can buy the most
bonds, and there will be competition between the shifts in the shops, and
there will be competition between one plant and another plant. But
2889
Mr. BOLAND. After all, labor is going to win this war
Mr. REUTHER It is the man's attitude on the machine, and that is
morale, and, if any arbitrary action is directed against labor, it will
destroy that morale and, in destroying that morale, you destroy the
very thing out of which more production will flow.
Mr. BOLAND. That is all: thank you.
Mr. REUTHER. I would like to say, Mr. Chairman, I would like to
leave these with the committee, if you care to see them-some of the
literature we have put out in this connection.
The CHAIRMAN. Whom will you call next, Mr. Secretary
Secretary MORGENTHAU, Mr. Anderson, vice president of General
Motors in charge of personnel.
The CHAIRMAN. Mr. Anderson, please identify yourself for the
benefit of the record.
STATEMENT OF H. W. ANDERSON, VICE PRESIDENT, GENERAL
MOTORS CORPORATION
Mr. ANDERSON. H. W. Anderson, vice president, General Motors.
At the time the Defense bonds were offered for sale by the United
States Government we immediately developed a plan for the systematic
purchase of these bonds by pay-roll deductions. That plan was put
into effect in August 1941. We reviewed the results of that plan at the
end of the year, and the results were rather disappointing; so we
immediately said we would have to develop what we call a sales-promo-
tion campaign to bring enthusiasm into this particular organization
for the war effort.
This plan was developed in February. We could have introduced
it in March, but we did not want to introduce it on March 15, because
we thought it would have too much of a handicap at that date; so that
we had the plan ready for April 16.
Mr. Jerpe here can put the plan on and explain it as he goes along
and, if there are any questions before or after the plan is put on, I will
be very happy to try to answer them.
The CHAIRMAN. The Chairman would like to say we appreciate very
much and thank each and all of you for coming here this morning and
explaining the arrangement that has been worked out between the man-
agement and the employees of your great industry. I feel it will have
a most wholesome and reassuring effect, not only on those who have
purchased bonds in the financing of this great war program and inspir-
ing their patriotism, but at the same time it will reassure the taxpayers that there is full cooperation in the country, not only by the
the minute you make it compulsory, it is an automatic proposition
taxpayers but by industry and its employees, and that there is complete
unity. This demonstrates to the country that all of us are going forward with this great war program in which we are all so vitally interested, and on which the the very life and liberty and salvation of our
and you lose the benefit of all that campaign.
Mr. BOLAND. I appreciate all of what you say there, but I am assuming for the minute that Congress would start to pass arbitrary legisla-
I wish to congratulate you, and to congratulate the representatives
of your employees, and labor, upon your splendid work, your patriotic
69663 pt. 30
country depends.
REVENUE REVISION OF 1942
2890
REVENUE REVISION OF 1942
efforts, and the success you have made in getting together. I think it
will have a wonderful effect on the country.
Mr. ANDERSON. Thank you, Mr. Chairman.
Mr. DIRNET. I want to congratulate Secretary Morgenthau on being
2891
We have here [exhibiting], Mr. Chairman, a complete chart presentation that we wish to present to you at this time and to incorporate
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.
Mr. Anderson, how many employees has General Motors
Mr. ANDERSON. At the present time we have 220,479.
Mr. DISNEY. How many of them make more than $2,300 per year
Mr. ANDERSON. If you would like, I can give you some statistics here,
but maybe not just in that order.
Mr. DISNEY. Can you supply that in the record and not take the
time now
Mr. DISNEY. And give me just an answer to that question-how
many make more than $2,800 per year.
Mr. ANDERSON. Well, the average of the salaried group, which consists 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
of employment, which is currently going at 45 hours per week, the
hourly rated group will average $2,580.
(Mr. Anderson submitted the following table for the record:
Hourly rated
Total
arch 1942
221,709
43,605
50,769
1170,000
50,479
224,181
272,478
220,479
$1,049
$1.15
$0,958
Hourly rated
$37.40
$42.73
$850.80
Balaried
$48.00
$50.60
$60.90
$1,804
$2,141
$2.530
$2,496
$2,631
$3,167
Annual earnings storage
Hourly rated
Halaried
essential war materials needed to protect our homes and defeat our
enemies
ESSENTIALS OF WAR We are making the machines and fabricating materials for
instruments of war in ever-Increasing quantities.
While everyone in the main understands the importance of an all-out produce
tion effort in armament building, VERY Few PEOPLE REALIZE THE ADDED FINANCIAL
RESPONSIBILITY they must now share To PREVENT OUR DESTRUCTION AND RUIN.
war expenditures currently approximate $166,000,000 Think of It Almost
180,576
Hourly earnings- average
Weekly earnings average
RESOURCES PLANTS, EQUIPMENT AND PERSONNEL be geared to the production of
STAGGERING PROPORTIONS. From dawn 'til dawn-every 24 hours- our national
Employment:
Ralaried
General Motors Corporation has been called upon to play a vital part in today's
national emergency. THE UNITED STATES GOVERNMENT HAB ASKED THAT OUR
TODAY, the cost of the Nation's Victory armament building program is reaching
General Motors employment and pay rolls in United States
1941 average
Then a series of charts follow:
We have accepted that production responsibility and TODAY ARE PRODUCING THE
Mr. ANDERSON. Yes, sir; I can.
1940 average
AN URGENT APPEAL IN OUR NATION'S FIGHT FOR LIFE
I Excludes allowances in lieg of vacation and for military service
, Estimate based on " hours of work a week for 50 weeks a year. Present average is about 45 hours &
Regular employee including Intermittent workers
Note-With these earnings employees should be able to purchase $200 to $300 worth of bonds anually
despite increase in cost of living.
The CHAIRMAN. We thank you for your testimony.
Who is your next witness, Mr. Secretary
Secretary MORGENTHAU. Mr. Jerpe.
The CHAIRMAN. Please identify yourself for the benefit of the record.
STATEMENT OF JOHN M. JERPE. DIRECTOR OF GENERAL MOTORS
BOND DRIVE FOR VICTORY ACTIVITIES
Mr. JERPE. My name is John M. Jerpe; I am director of the General Motors Bond Drive for Victory activities.
$7,000,000 per hour-and the cost is steadily rising
Right nowAmerica must have the help of every living person to finance the cost of war
To INSURE ULTIMATE VICTORY. The importance of this cannot be exaggerated or
over-emphasized
NowThe General Motors Corporation and every member of the great General Motors
family as patriotic citizens have been called upon to do their part by liberally
investing In UNITED STATES WAR BONDS.
Early In August 1941-
General Motors Corporation became one of the first to Inaugurate a plan
whereby General Motors employees could purchase U. 8. WAR BONDA THROUGH
PAY ROLL DEDUCTIONS. The majority of our employees, however, did not take
advantage of this opportunity mainly through lack of understanding and because our Nation was not at war.
Since thenEvents have changed
Our shores have been attacked.
Our Island possessions invaded
Our citizens killed
Our future threatened
America has changed from A NATION AT PEACE TO A NATION AT WAR
May I call your attention, gentlemen, to a little thing above the banner 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 isTHE SITUATION Is VERY GRAVE
2892
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
THE ZERO HOUR-APRIL 16. General Motors Employees start a NEW DRIVE FOR
There is No TIME for Complacency
No TIME for Selfishness
VICTORY
No TIME for Hiding Facts
Uncle Sam is in a fight for Life and Freedom.
Therefore, to arouse the curiosity and maximum interest of the General Motors'
employees in the War Bond Program, A TEASER CAMPAIGN will be conducted be-
tween April 8th and April 15th. The following activities and materials have
ALL IDLE DOLLARS MUST Go To WORK.
been developed to help you attain your objectives
When I say "you," gentlemen, we have appointed 90 campaign man-
so TODAY
agers in 90 of our plants throughout the country. We have given
It becomes the responsibility of General Motors Corporation through Its man.
agerial and supervisory staffs to see to It that all employes thoroughly understand
these campaign managers this plan: We have told these men we are
interested in 100 percent results: that we want them to use the plan
as 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 a true
report of 100 percent employee participation.
the purposes and benefits of the WAS BOND PROGRAM and that they are given the
opportunity to participate to the fullest extent,
To properly discharge this responsibility General Motors will inaugurate and
BULLETIN BOARD POSTERS
conduct A BOND DRIVE For VICTORY designed to reach every employee at work
and at home!
2893
The majority of General Motors employes pass the time clock several times
day. On the morning of April 8th. this mystery poster will appear near time
clocks
on bulletin boards and other places where General Motors employee
will
see It.
a
THE PURPOSE OF THE CAMPAION will be to ENCOURAGE EVERY GENERAL MOTORS
EMPLOYEE to Invest in WAR BONDS EVERY PAY DAY.
THE ZERO HOUR
GENERAL MOTORS EMPLOYES VICTORY-APRIL 16TH
and, thereby gain the objective of 100 PERCENT EMPLOYEE PARTICIPATION
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:
1. THROUGH REGULAR PAY ROLL SAVINGS
The necessary procedure for employee investment In War Bonds through pay-
roll savings is already established.
2. OUTRIGHT PURCHASER THROUGH THE CORPORATION
This procedure is not intended to supplant the systematic pay-roll saving
method-but rather to supplement the pay-roll savings plan. Thus, General
Motors will accommodate those employees who can and will make outright purchases of war bonds through the company from idle accrued savings
The CAMPAIGN EMBLEM that will be in effect for the "Duration" will be-
GM-BAVE-BERVE
The Insignia contains the letter "Y" for Victory, and the words "Save" and
"Serve", which dramatize our fight for life in the present emergency
a campaign book with a very good lot of interpretations. One is
"Sacrifice, another "Small Donations for Victory," and a number of
others. No one knows, in General Motors, except we who built this
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
meetings-rallies, if you please- where S. S. V. is being explained as
"To Save and Serve for Victory."
The next is
TEARER STENCIL
To further arouse curiosity and interest in the campaign, this design will be
provided for stenciling on floors, sidewalks and walls in and around the plant.
8. V.-APRIL.16
We even furnish the paint, brushes, and stencils to be sure the job
is done, and done very beatuifully.
To make this campaign effective and to obtain desired results, It will be broken
into three phases.
1. PRr-ANNOUNCEMENT
The period to arouse curiosity and stimulate employee interest.
2. ANNOUNCEMENT.
Please notice, during the preannouncement period, April 8 to April
15, this teaser notice will be attached to the pay check or time card of
all employees:
ZERO HOUR-APRIL 16TH. General Motors Employee start new Victory Drive.
The period
when
all employees will be contacted and given an opportunity to
subscribe
for the
bonds
DIRECT BY MAIL
8. POST ANNOUNCEMENT.
The period involving Individual employee follow-up and checking for results.
To Intrigue the interest of every General Motors worker and his entire family
this direct-by-mail card, embodying teaser copy. will be mailed to all employes at
their home addresses.
PEE-ANNOUNCEMENT
Past campaigns prove that RESPONSE was greatest where INTEREST was built
up prior to the formal announcement.
The teaser copy is what we call that, and all it says on that is "Zero
Hour-April 16th. Employees save and serve," so as to build up
interest in the thing, before we announce the campaign. By the way,
2894
REVENUE REVISION OF 1942
we mailed out approximately 250,000 of those cards to employees'
homes.
The next is-
PLANT PUBLICATIONS
Articles of a teaser nature regarding the campaign will be carried in all plant
papers during the preannouncement period
The next poster isThe right kind of organization and execution of preannouncement activities
will HELP INSURE THE ULTIMATE SUCCESS of the BOND DRIVE for VICTORY and
enable you to launch your BOND SALES DRIVE with an outstanding announcement,
Then the-
ANNOUNCEMENT
It is highly important that the campaign announcement be made with all the
force and drive that can be mustered. The announcement must be inspirational
and stirring. It should reach the majority of General Motors employees onANNOUNCEMENT DAY-APRIL 16TH
The following materials and suggested activities are provided to help you make
your announcement most successful.
We have a 40 by 60 announcement rally poster posted in all of our
plants at 7 o'clock this morning so that when the men came to work
they saw they had to buck up to win the United States war program.
ANNOUNCEMENT RALLIES
Announcement rallies should be held at all plants and division locations on
April 16th At plant locations where more than one shift is involved, the
announcement should be repeated for each shift
In any event it should be made at a time when It will not interfere with
production.
REVENUE REVISION OF 1942
2895
us. In addition to that, we have a button he puts on that says "I am
buying
Drive. bonds in General Motors Save and Serve for Victory Bond
Now I think I should explain to you gentlemen how the cards will
be handled. Within 3 days, or on April 19th, we want all cards
returned. Then those cards will be sorted and those who agree to participate, their names go to our comptroller's office and pay-roll deduc-
tions start. Those who do not agree to participate must certainly
have good, definite reasons for doing that. We will try to encourage
them to do a little bit more than what they fail to do in the origin of the
campaign. We also have a plant letter that goes to every employee
from his plant manager, which reads:
GENERAL MOTORS CORPORATION
Detroit, Mich April 16, 1942.
An Important Message to All General Motors Employee:
Today you saw the announcement of the GENERAL MOTORS EMPLOYER BOND DRIVE
FOR VICTORY. Its purpose is expressed in the theme, "Save and Serve for Victory.
This drive deserves your support. We are engaged in a strenuous war that
demands
every
before
victory
canlast
be ounce
won. of energy, every ability and every resource available
Beside working hard at our jobs, you and I can help in another way. We can
help by raising funds to pay for planes, tanks, guns, ships, ammunition, and other
war
equipment produced in such large quantities that no enemy can compete
with us.
Our subscription to a bond enables the United States Government to carry on
these war
ventence
in production
the future. activities It likewise sets aside cash for our own conSave through bonds. Every bond is redeemable in cash with Interest. This
means a useful personal savings fund on hand when the war is over-a protection
for you and the welfare of your family.
Serve with bonds They provide the material for our fighting forces to defeat
the
enemy. They produce the military power that will protect our lives and
liberty.
All the information on how to obtain bonds Is given in the attached booklet.
Read It carefully.
Announcement rallies should be planned with care and consist of
1. Martial music.
2 Campaign speaker
The program should be of less than 30 minutes duration, and it is highly important that the speaker have the ability to make a stirring, inspirational address
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
take the substance therein and use that as a guide to get the job done.
The next poster is the meat of our entire campaign-
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
family and preserve liberty.
Save and Serve for Victory
Cordially yours,
C. E. WILSON, President,
B. Department heads and foremen should inform employees thatThe application card MUST BE RETURNED regardless of whether the employee
subscribes to the Drive, increases his participation in It or does nothing about It.
A return envelope is provided for this purpose.
APPLICATION CARD
A In order to facilitate employees' participation In the Bond Drive for Victory
dis
through authorized pay-roll savings, department heads and foremen will
Each new employee should be given a
tribute a specially addressed, sealed envelope containing-
And the container envelope itself has the name of the employee
printed on the outside and contains an application card for participation in the Bond Drive for Victory in this form [indicating], and on
the bottom of it we say:
Be sure that all Invest and save and serve for victory.
The employee's name is also on this card. In addition to the application card and container envelope, we have a booklet here that describes the Government's bond sale plan. We also have an envelope
that the employee can put his application card in and send that back
PAY-ROLL SAVINGS APPLICATION CARD
when he is signed up and an effort made to secure his participation in the plan
at that time. If he does not enroll in the plan, he should be followed up each
30 days thereafter.
Bulletin-board posters took the place of the teaser card this morning, and at 7 o'clock this morning we changed from the teaser card
to an announcement poster.
REVENUE REVISION OF 1942
2896
BULLEYTIN-BOARD POSTERS
On April 16th. immediately following the Announcement Rally, the teaser
posters on time clocks bulletin boards and other places where General Motors
employees congregate, will be replaced with this attention -arresting announcement
poster.
ILLUMINATED SIGN
To serve as a constant reminder of the drive. this animated and illuminated
sign will be placed near time clocks and at other points where It may be seen
by large groups of employees. It will remain in use throughout the entire drive
And here is the kind of sign we have [indicating]. We have 1,000
of them, and we have them over every time clock and everywhere our
people come. It reads:
General Motors Employees' Bond Drive for Victory.
REVENUE REVISION OF 1942
thermometer higher than No. 2 or No. 3, right there they will do a
better job than if we asked them to do it, because they do not want
to see anybody get 100 percent before they do, because that is the
American way.
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
people can see it, and that shows just what that particular plant is
doing. Remember, we have'93 plants, 80 we had to get 93 boards, and
they show what each plant is doing in the drive, and we are insisting,
in a kind way, on having everybody hit that ball on April 30th, when
the drive ends. But that, of course, is not the end of the activity; that
is merely a splash of enthusiasm that we are putting in the program,
and we will follow through every month to see that this activity is 100
percent every month until the war is over.
Then we have display banners [exhibiting]-
A Bond Pays Off-in Victory-In Liberty-In Cash
DISPLAYS
The next isWINDBRIELD STICKER
2897
To stimulate further Interest in the campaign. entrance, lobby, and window
displays should be used during the announcement period wherever possible.
This sticker on car windshields Is another means for publicizing the drive.
A larger size sticker for home windows is also supplied.
PLANT PUBLICATIONS
This sticker in your home window indicates you are a participant
in the drive.
The second mail piece is a piece of the teaser card mailed between
April 8 to April 15. This piece goes to every one of our employees at
home today-
Current Issues of all plant papers will publish reports on the progress and results
of General Motors Employees'
BOND DRIVE FOR VICTORY
DIRECT BY MAIL TO EMPLOYEE'S HOME
NEWSPAPER PUBLICHT
This attractive direct-by-mail folder containing complete information regard-
ing the Bond Drive for Victory will be mailed to the home address of all General
Motors employees on Announcement Day.
Appropriate newspaper publicity stories will be supplied. These should be
released following the Announcement, accompanied by photographs of Bond Drive
HE Is DOING His BEST
We have a picture of a soldier over anywhere where fighting is
going on and we say to our people, "You can help him. Let your
dollar fight. Save and Serve for Victory," with the balance of the
material therein.
The next step is-
activities at plant locations
The photographs are to be taken locally.
If Announcement activities are properly handled, every employee will thoroughly
understand the entire plan and be impressed with the importance of each individ
nal's participation.
POST ANNOUNGEMENT
QUOTA BOARDS
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, additional boards will be supplied to record the percentage of
participation among the employees of each shift.
A master quota board will be displayed in the General Motors building show-
ing the quotas established for all General Motors divisions
Behind you, gentlemen, we have two small quota boards that we
call "Departmental Boards." In our plants, we operate plants, departments, and shifts. Sometimes we have two shifts, sometimes
three, so we put a shift and a department quota board in line, and
then we post them at the same time, so if No. 1 shift gets red on the
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-organised, sustained Post-Announcement activity be
carried on.
To reach the ultimate goal of 100 percent EMPLOYEE PARTICEPATION in the
BOND DRIVE FOR VICTORY the following Post-Announcement Activities are pre-
sented-
MINUTE MEN BALLT
To maintain morale and keep Interest at a high pitch. Minute Men Rallies
should be conducted in all plants and divisions.
Programs conducted at these rallies should be short, carefully planned, and
Include reports on progress made to date.
REVENUE REVISION OF 1942
2898
We have changed this from a monthly basis to weekly and that
[indicating] will be posted all over our plants.
Here is an idea of the type of posters we are going to use:
REVENUE REVISION OF 1942
2890
THROUGH ENTHUNIANTIC AND UNIFIED EFFURT
Every individual employee in General Motors will gain full knowledge of the
urgency, the purposes, the excellence of U. 8. War Bonds as an investment and-
BONDS BUY BULLETS
THE SUCCESS OF THE a a v. CAMPAION WILL BE ASSURED
YOUR BONDS BUY BOMBS
BUY A BOND TODAY
AND General Motors and General Motors' employees will SAVE and
SERVE for VICTORY.
For THEIR SAKES [A poster containing a picture of children in bed] BUY BONDS
(The following charts were displayed by Mr. Jerpe:)
SLAP THAT JAP. EVERYONE BUYING BONDS
THEY FLY WHEN You BUY BONDS For VICTORY TOMORROW, BUY A BOND TODAY
PURLICITY
Following the Announcement a continuous flow of publicity will be directed
to employees throughNEWSPAPERS PLANT PAPERS G. M. FOLKS, AND SALER NEWS
TODAY >
The cost of the nation's
VictoryArmament Building Program
is reaching
QUOTA ATTAINMENT AWARDS
In recognition of individual, plant or departmental participation, these special
STAGGERING PROPORTIONS
awards will be made.
I am just human and I know, if anyone gives me a card with my
name on it, that it at least has appreciation contained therein. I keep
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
this card, pocketbook size, to all employees who participate. It is
merely a recognition thing:
JACK JERPE,
Central Office, General Motors.
As a fellow employee, I congratulate you on your participation in the General
From Dawn til Dawn
every 24 Hours
OUR NATIONAL
WAR EXPENDITURES
CURRENTLY
Motors Employees' Bond Drive for Victory.
C.E. WILSON, President.
Every employee gets that.
DEPARTMENTAL AWARD
Each department securing 100 percent participation will be given this special
General Motors Award.
100 percent General Motors Employees BOND DRIVE FOR VICTORY.
We sales promotion men are always guilty of extravagance. I ordered 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
4,500 General Motors award banners. I may say now that the drive is
just starting and we have quite a few departments in the corporation
that are already 100 percent subscribed
Last, and very important, is ourPLANT AWARDS
Each plant attaining 90 percent EMPLOYER PARTICIPATION OR MORE will receive
this special flag from the United States Treasury Department.
Then there is a picture of the flag they will obtain.
Approximate
ONE HUNDRED SIXTY-SIX
MILLION DOLLARS
Think ofit! ALMOST
$ 7,000,000
PER
HOUR
and the cost is steadily rising!
2900
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
NOW
RIGHT NOW
phot
9110
The General Motors
America must have the
Corporation and every
help of every living person
to finance the cost of war
GM
DIESEL
POWER
CHEVROLET
member of the great
General Motors family
as patriotic citizens
To/Insure
have been called upon
ULTIMATE
VICTORY
ni
2901
to do their part by
liberally investing in
UNITED STATE
M
DELCO
UNITED
The Importance Of This
Cannot Be Exaggerated
Or Over-emphasized !
SERVICE
$5241
GENERAL
MOTORS
MOTORS
Hake
BONDS
2902
REVENUE REVISION OF 1942
ON
General Motors Corporation
Early in August, 1941
became one of the first to inaug.
urate a plan whereby employes
could purchase
REVENUE REVISION OF 1042
2903
Since then
EVENTS HAVE CHANGED!
our shores have been attacked.
our island possessions invaded.
our citizens killed.
our future threatened.
U.S. Wars BONDS
THROUGH PAYROLL
DEDUCTIONS
The majority of our employes
however, did not take advantage
of this opportunity
* mainly through lack of
understanding and because
our nation was not at war.
America has changed from
A NATION AT PEACE TO
A NATION AT WAR!
2904
REVENUE REVISION OF 1942
1190 THE
toda
REVENUE REVISION OF 1942
1110
SITUATION
IS
VERY
GRAVE
There is
NO TIME
for Complacency!
NO TIME
for Selfishness!
NO TIME STOTON
for Hiding Facts!
Uncle Sam is in a fight
for Life and Freedom.
ALL IDLE DOLLARS
MUST GO TO WORK!
00663-42-pt.80-4
2905
REVENUE REVISION OF-1942
2906
2007
SO TODAY
it becomes the
of
Responsibility
General Motors Corporation
through its Managerial and Supervisory Staffs
to see to it that all employes
thoroughly understand the
purposes and benefits of the
*
Warse
To properly discharge
this responsibility
GENERAL MOTORS
will Inaugurate and Conduct
A BOND
2803
DRIVE
BOND PROGRAM
and that they are given the
opportunity to participate
to the fullest extent.
* VICTORY
Designed to reachFOR
every
employe
at work and at home!
2908
REVENUE REVISION OF 1943
THE PURPOSE
REVENUE REVISION OF 1942
oT
OF THE CAMPAIGN aid
will be to
ENCOURAGE
EVERY
GENERAL MOTORS
EMPLOYE
to Invest in
Waise BONDS
Every Pay Day
2909
and, thereby gain
the objective
of
SHORYA9
100%
o
EMPLOYE
PARTICIPATION
REVENUE REVISION OF 1942
2910
REVENUE INNIVISION OF
THIS OBJECTIVE WILL BE
The
ACCOMPLISHED IN TWO WAYS:
THROUGH REGULAR
*
PAYROLL SAVINGS
1
The necessary procedure for
employee investment in Defense
Bonds through payroll savings
is already established.
2
THROUGH the CORPORATION
This procedure is not intended to
supplant the systematic payroll
01 bus
CAMPAIGN liw
EMBLEM
that will be in effect for
the Duration will be
OUTRIGHT PURCHASES
*
2999
GM
*
*
SA
SER
E
B
saving method but rather to
supplement the payroll savings plan.
Thus, General Motors will accommodate
those employes who can and will
make outright purchases of War
Bonds through the Company from
idle accrued savings.
The insignia contains the letter 'V'
for Victory and the words Save
Serve which dramatize our Fight
for Life in the present emergency.
REVENUE REVISION OF 1942
912
"To make this campaign effective
and to obtain desired results, .. it
will be broken into three phases..
I
2
PRE-ANNOUNCEMENT
PRE-ANNOUNCEMENT
Past campaigns prove that..
The period to arouse curiosity
and stimulate employe interest.
RESPONSE
ANNOUNCEMENT
was Greatest
The period when all employes
where
will be contacted and given
an opportunity to subscribe
INTEREST
POST-ANNOUNCEMENT
was Built up
The period involving individual
employe follow-up and checking
prior to the
formal Announcement.
for the Bonds
3
REVENUE REVISION OF
for results.
2913
REVENUE REVISION OF 1942
2914
REVENUE REVISION OF 1942
BULLETIN BOARD POSTERS
HOUR
ZERO
NEW DRIVE
FOR VICTORY !
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 clocks on
bulletin boards and other places where
General Motors employes will see it.
allswobia
tasia
THE
ZERO HOUR
Therefore
,
THI
to arouse the curiosity and maximum
interest of the General Motors employes
GENERAL MOTORS EMPLOYES
VICTORY
in the War Bond Program.
A TEASER CAMPAIGN
will be conducted between
APRIL 8TH and APRIL 15TH
The following activities and materials have been
{
developed to help you attain your objectives
APR
16th
2915
2916
REVENUE REVISION OF 1942
REVENUE REVISION OF 1042
2917
TEASER STENCIL
TEASER NOTICE
To further arouse curiosity and
During the Pre-Announcement
interest in the campaign . this
design will be provided for
stenciling on floors, sidewalks
and walls in and around the plant.
period April 8th to April 15th.
w. this teaser notice will be
attached to the pay check or
time card of all employes.
ZERO HOUR
NEW DRIVE
DRVICTORY
SSV
APRIL 16
2918
REVENUE REVISION OF 1942
DIRECT-BY-MAIL
REVENUE
PLANT PUBLICATIONS
To intrigue the interest of every
General Motors worker and his
entire family this Direct-by-Mail
card, embodying teaser copy,will
be mailed to all employes at their
Articles of a teaser nature regarding the campaign will be carried
in all plant papers during the
Pre-Announcement period.
home addresses. to biso emit
Olbsmobile Cannoneer
BRAKER
2919
REVENUE REVISION OF 1942
2920
REVENUE REVISION OF 1942
..The right kind of organization and execution of
ANNOUNCEMENT
pre-announcement activities
will
It is highly important that
the Campaign announcement
HelpInsure
be made with all the force
and drive that can be mustered. The announcement
must be inspirational and
stirring. It should reach the
majority of General Motors
employes on
THE
ULTIMATE SUCCESS
of the
BOND DRIVE
for VICTORY
ANNOUNCEMENT DAY
APRIL 16 TH
The following materials and suggested
and enable you to launch
your Bond Sales Drive with
activities are provided to help you
make your announcement most
successful
an outstanding announcement
69663
42
2921
2922:
REVENUE REVISION OF 1042
REVENUE REVISION 0F 1942
ANNOUNCEMENT
RALLIES
* Announcement rallies
should be held at all plants
and division locations on
April 16th * At plant
locations where more than
one shift is involved, the
announcement should be
repeated for each shift.
In any event it should
be made at a time when it
will not interfere with
production
Announcement Rallies
should be planned with care
and consist of
1. MARTIAL MUSIC
2 CAMPAIGN SPEAKER
The program should be of less than thirty
minutes duration, and it is highly important
that the speaker have the ability to make
a stirring, inspirational address
GM
BOND DRIVE
VICTORY
2928:
REVENUE REVISION OF 1942
2924
REVENUE REVISION OF 1943
APPLICATION CARD
B
A
In order to facilitate employes' participation
in the Bond Drive for Victory through authorized
payroll savings, department heads and foremen
will distribute a specially addressed, sealed
envelope containing:
BOOKLET
GENERAL Moroes EMPLOYES
BOND DRIVE FOR
VICTORY
Department heads and
foremen should inform
employes that
The Application Card
MUST BE RETURNED
regardless of whether
the employe subscribes
LETTER
RETURN
ENVELOPE
DIVISION LATTERREAR
to the Drive, increases
his participation in it or
does nothing about it.
>> A return envelope is
provided for this purpose.
FD
APPLICATION CARD
2925
2926
REVENUE
OF
1942
Each new employe should be
given a
PAYROLL
SAVINGS
APPLICATION
CARD
when he is signed up
and an effort made to secure
his participation in the plan at
that time
If he does not
enroll in the plan, he should
*
be followed-up each thirty days
thereafter *
REVENUE REVISION OF 1942
BULLETIN BOARD POSTERS
On April 16th, immediately following the
Announcement Rally, the teaser posters
on time clocks, bulletin boards and other
places where General Motors employes
congregate, will be replaced with this
attention-arresting announcement poster.
01
GM
SA
SER
GENERAL MOTORS
Employes
D DRIV
TOR
PRIL 16th
2927
2928
REVENUE REVISION OF 1942
ENVENTS REVISION OF 1942
ILLUMINATED SIGN
WINDSHIELD STICKER
vistaiberami did linqA no
To serve as a constant reminder of the drive, this animated
This sticker on car windshields
is another means for publicizing
and illuminated sign will be
placed near time clocks and
at other points where it may
A larger size sticker for
be seen by large groups of
home windows is also supplied.
It will remain in
employes
use throughout the entire drive.
II
MOTORS
EMPLOYES
DRIVER for VICTORY
A Bond Pays Off in Victory in Liberty in Cash
the drive.
2929:
30:
REVENUE REVISION OF:10/21
DIRECT-BY-MAIL
TO EMPLOYE'S HOME
This attractive direct-by-mail folder
containing complete information
regarding the Bond Drive for Victory
will be mailed to the home address of
all General Motors employes on
REVENUE REVISION -
QUOTA BOARDS
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,
additional boards will be supplied to record the percentage
of participation among the employes of each shift.
A master Quota board will be displayed in the General
Motors Building showing the Quotas established for
all General Motors Divisions.
Announcement Day.
COME ON.EVERYBODY/
JOIN THE
GENERAL MOTORS
EMPLOYES
BOND DRIVE
FOR VICTORY
100
2931
REVENUE REVISION OF 1942
2932
DRIVE
VICTORY
APRIL 16
BOND
DRIVE
VICTORY
REVENUE REVISION OF 1942
APRIL
16th
T
PLANT PUBLICATIONS
N
atsingorgaA
BOND DRIVE
VICTORY
APRIL 16
Current issues of all plant
papers will publish reports
on the progress and results
of General Motors Employes'
DISPLAYS
To stimulate further
interest in the campaignentrance, lobby and window
displays should be used
during the announcement
period wherever possible.
"BOND
DRIVE
II
for
VICTORY'
2933
$2934
REVENUEEREVISION OF 1942
NEWSPAPER PUBLICITY
Appropriate newspaper publicity
stories 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.
OF
G.M. OPENS BOND DRIVER
min
DAILY
NEWS
I
f Announcement activities
are properly handled, every
employe will thoroughly
understand the entire
plan and be impressed with
the importance of each
individual's participation.
aniwalled
asitivitoA
2985
32936
REVENUE REVISION OF 1942
2987
POSTANNOUNCEMENT
BOND DRIVE
CRY
190010 SIG
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
Post-Announcement activity be
carried on.
To reach the ultimate goal of
100%-EMPLOYE PARTICIPATION
MINUTE MEN RALLY
To maintain morale and keep interest
at a high pitch, Minute Men Rallies
should be conducted in all plants
and divisions
in the
BOND DRIVE FOR VICTORY
the following Post-Announcement
Programs conducted at these rallies
should be short, carefully planned, and
include reports on progress made to date.
Activities are presented
C9C63-42-pt 30-0
REVENUE
2938
REVENUEREVISION OF 1942
MONTHLY POSTERS
Following the Announcement posters,
NEW POSTERS
will be furnished monthly.
*
" Following the Announcement,
a continuous flow of publicity
will be directed to employes.
through
NEWSPAPERS
PLANT PAPERS
G.M. FOLKS . and
APRIL
JUNE
PUBLICITY
BONDS
SALES NEWS
MAY
AUGUST
Everyone
BONDS
BUYING
2939
2940
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
QUOTA
ATTAINMENT
AWARDS
DEPARTMENTAL
AWARD
Each department securing
100% participation will be
given this special General
Motors Award.
In Recognition
of individual, plant or
departmental participation,
these special awards will
be made:
100%
General Motors Employes
BOND DRIVE
FOR VICTORY
2941
2:
REVENUE REVISION
REVENUE REVISION 08/1942
PLANT AWARDS
THROUGH ENTHUSIASTIC
AND UNIFIED EFFORT
EVE
Each plant attaining
Every individual employe
90%
a
EMPLOYE PARTICIPATION
OR MORE
in General Motors will
gain full knowledge of W
the urgency.. the purposes
will receive this special flag from the
United States Treasury Department
the excellence of Ú.S.War
Bonds as an investment-and
THE SUCCESS
*
*
OF THE
S.S.V. CAMPAIGN
WILL BE
ASSURED
2948:
2944
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
and
*General Motors and
AN
General Motors employes
Urgent
will ,
on
*
03
*
APPEAL
*
*
SAVE
AND
*
*
*
SERVE
FOR
VICTORY
*
in
OUR NATION'S
FIGHT
FOR LIFE
2943
REVENUE REVISION OF 1942
2946
REVENUE REVISION OF 1942
GM
GENERAL
MOTORS
General Motors Corporation
has been called upon to
play a vital part in today's
national emergency.
THE UNITED STATES GOVERNMENT
has asked that our
*
RESOURCES
We have accepted that
production responsibility
and
TODAY
THE
PLANTS
ARE PRODUCING
EQUIPMENT and
ESSENTIALS of
PERSONNEL
We are making the machines
materials for
and fabricating
be geared to the production of essential
war materials needed to protect our
homes and defeat our enemies
WAR
instruments of war in ever
increasing Quantities
2947
48
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
2949
Mr. JERFR I thank you, gentlemen.
Mr. ROBERTSON. Mr. Jerpe, do you have a dealer in each city and
county in the United States
While everyone in the main
understands the importance
of an *all-out production effort
in armament building
Mr. JERPER Yes; we do have, sir.
Mr. ROBERTSON. The Secretary of the Treasury has a voluntary com-
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
of your dealers, to be used in each county and city to give them an
idea of how you are putting this campaign on
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
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.
VERY FEW PEOPLE
Realize the
ADDED FINANCIAL
RESPONSIBILITY
they must now share
TO PREVENT OUR
DESTRUCTION
AND RUIN
Mr. TREADWAY. I want to say if there is anything lacking in the
campaign of General Motors, for one individual here, I fail to see it.
I think you have covered the case wonderfully.
Mr. JERPE. Thank you, sir.
Mr. TREADWAY. I want to ask you just one question: The representative of the C.I.O. made a very definite statement as to what
members of the C. I. 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
Mr. JERPE. I am not qualified to answer that, sir. I think Mr. Anderson 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
the employees in our plant will join in the purchase of bonds.
Mr. HEALEY. It is very likely that during the progress of this campaign you will coordinate your efforts with the efforts of the representatives of the employees
Mr. ANDERSON. That is right.
Mr. HEALEY. 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.
Mr. HEALEY 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
gentlemen.
Mr. REED. I just want to say to you gentlemen that I think you made
a marvelous presentation.
I wish to make this further comment, that if the employees of General Motors do as magnificent a job in this drive as they did during the
first World War I know of no institution that will surpass them.
Mr. JERPE 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 MORGENTHAU. 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
General Motors have done a very fine job. As Isaid earlier, we have
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 thought.
out and elaborate plan of General Motors and apply that, we hope,
all of those 54,000 corporations. That number is constantly increasing. We now have enough corporations who have established such a
plan that we are reaching 20,000,000 out of the 30,000,000 employees
in industry, and our program is to reach the entire 30,000,000 people
in industry so there will be regular pay-roll deductions every week on
a voluntary basis.
The thing I wanted the opportunity to show was that it is not only
a question of the amount of money, but it is the amount of enthusiasm
which goes into the plan, and which can only be instilléd if it is
voluntary. If it is a matter of legislation, with an automatic deduc
tion, then all of this thought and effort which is going into this, work
naturally would not be necessary. It would be very much easier from
the Treasury's standpoint, if there were a law which provided for the
deduction of a certain amount each week. But I personally feel that
when each employee decides in his own home that this is what he wants
to do, then that will go a long way toward helping win this battle
we are facing.
Mr. COOPER. Mr. Secretary, I am glad to join with other members of
the committee in congratulating you and the General Motor Corporation and the employees of that corporation for this splendid, patriotic
effort, and for this excellent presentation which has been made here
today.
I am likewise interested in the effort which I am sure, you are exerting to reach the other 100,000,000 people of the country, in addition
to the 30,000,000 employees in industry.
lineDo
you desire to give us any information at this time along that
Secretary MORGENTHAU. I do not want to try the patience of .committee, but we have plans we are preparing now whereby we hope to
fix a definite amount that we expect from every county and town in
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
committees already organized with over 100,000 volunteer members of
the committees, and we expect to go into every community and ring
every doorbell in the United States at least once a month.
Mr. DINGELL Mr. Secretary, I am still persistent in trying to obtain
some answer to the question raised with Mr. Reuther.
The vountary side of the game is well and good, and I presume that
probably the number of slacker dollars will be very few as the cam-
paign develops. But would you recommend in that connection, or
would there be any coercion whatsover directed toward certain people
who may scoff at the plan and not have anything to do with it
Secretary MORGENTHAU. Mr. Dingell, when you have a trne volunteer
plan
cannot have coercion, and we cannot bring pressure to bear
on theyou
people.
We in the Treasury very carefully weighed two alternatives, the
volunteer plan, with the possibility that there would be a residue in
each community who will not subscribe, as against forced savings.
We made a very close study of the various campaign methods used
during the First World War. We do not expect to paint anybody's
REVENUE REVISION OF 1942
2951
house-yellow, and we do not expect to put them behind barbed wiré if
they do not subscribe to these bonds.
Those people who do not will have to decide in their own conscience
why they do not, and the community itself will be able to judge them.
But I am hopeful, and I have sufficient confidence in the American
people to believe that the number of people who have the money but
refuse to buy the bonds will be such a small number that the good of
this campaign, I believe, so far outweighs the possibility of an unfavorable effect that, as far as I am concerned, and Congress being
willing, we will continue along this path, unless Congress directs us to
do otherwise.
Mr. DINGELL Mr. Secretary, I am not advocating any stockade or
coercive, repressive methods, but the Treasury did make a recommendation here, I think the last time you appeared before the com-
mittee, which led me to ask that question, and I was wondering
whether you would be satisfied with skimming off what you could
obtain from a volunteer effort, with the cooperation of labor and management and the Government, and if so, with that percentage, how-
ever small it may be, the Treasury may be willing to pass that by,
or make certain recommendations.
Mr. COOPER. I do not think he meant the Treasury recommended a
compulsory plan. The Secretary recommended the installment paying of taxes.
Mr. DINGEL. That is right.
Mr. ROBERTSON. Mr. Secretary, when you appeared before us on
March 3 I asked you about compulsory savings, and you very strongly
recommended that we do not at this time adopt compulsory savings,
but give you an opportunity to try out the voluntary plan.
When you returned on March 6 and we had the debt limit bill before
us, I again brought up the subject and asked you how long you
thought it would take you to arrive at a conclusion as to whether or
not the voluntary plan would successfully function, and to that question you replied as follows:
I would say between now and the 1st of July
Are you still of that opinion
Secretary MORGENTHAU. Yes, sir.
Mr. ROBERTSON. You realize that you only have 2 months and 14
days before the 1st of July.
Mr. CARLSON. Mr. Secretary, I could not let this opportunity go by
without referring to one large voluntary sales organization in the
United States for the sale of bonds, and that is the triple A organi-
zation under the Department of Agriculture.
I am personally acquainted with this program in the State of
Kansas. They held a State meeting and decided to sell $1,000,000
worth of bonds between January 1 and March 1, actually they sold
$3,000,000 worth of bonds between January 15th and April 15th.
This means that the Kansas farm organization has sold on the overage one $25 bond for every farm in the State during this period.
The 13 States that comprise the western region of the A. A. A. have
sold at least $20,000,000 worth of bonds during the same period. I
do not have the figures for all of the States but do want to mention
that the State of Wisconsin has sold over $5,000,000 worth of bonds
2952
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
and this is an average of six $25 bonds per farm. This workshop
gressing very satisfactorily without much noise or fanfare, There
no more patriotic group in the United States than the farmers of
this Nation.
Secretary MORGENTHAU. Under the triple A organization they have
their county committees, and the National Grange had a meeting in
Worcester and gave us wholehearted support of the farm organiza-
tions, and they have been perfectly magnificent.
Of course, I do not need to tell you that this is a big country, and
while it might be questioned whether it would be generally followed,
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
satisfaction is that in a drive like this, which must have cost General
Motors many thousands of dollars to prepare, they are perfectly
willing, not only to put the literature at the disposal of any other
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
help us to present this to other companies and show them its technique which they, on account of their experience and intelligence, are
able to devise.
Mr. TREADWAY. Mr. Secretary, pardon me for intruding again, but
Mr. Healey, a member of our committee, made the observation a few
minutes ago that he wished every Member of Congress could have
been present to hear this presentation this morning.
I offer the suggestion, and, if it is in order, I will make it in the
form of a motion, that the clerk of the committee be authorized to
secure from the Government Printing Office a thousand copies of this
hearing for distribution
If that is in order, Mr. Chairman, I make such a motion.
The CHAIRMAN. Whether it is in order or not, without objection,
it will be acceded to.
Mr. Secretary, I want again to congratulate you and each of the
witnesses who came with you for the fine presentation that has been
made of this subject, and also for the splendid exhibits you have shown
us. I want not only to congratulate you but thank you, because the
chairman believes it will be most helpful to the committee, and the
publicity
of
the land.will have a salutary effect throughout the length and breadth
We are glad to have with us this morning Senator George, the chairman of the Senate Committee on Finance, and we will be very glad
to have a statement from him at this time, if he desires to make one.
STATEMENT OF SENATOR WALTER F. GEORGE, A SENATOR FROM
THE STATE OF GEORGIA
Senator GEORGE. Mr. Secretary, I simply want to say that I think
the job done by General Motors and the workers in General Motors was
most thorough, and I believe it will be productive of great enthusiasm
throughout the country for the voluntary program.
I think a voluntary program must be all voluntary, or else the program must be compulsory, and if it can be worked out on the volun-
tary basis-an I am convinced it can be-it will be infinitely better
for the
and
better for the Treasury in the long run, although
there
is country
more work
involved.
is
2953
I am very happy to have been invited this morning to attend this
hearing and to have heard about this plan.
I thank you very much, Mr. Chairman, for giving me the privilege.
The CHAIRMAN. Let me say, Mr. Secretary, am 100 percent behind
the voluntary program.
The committee will take a recess at this time until 1:30 o'clock this
afternoon.
(Thereupon, the committee took a recess until 1:30 m. of the same
day.)
AFTERNOON SESSION
(The committee reassembled, pursuant to the taking of recess, at
1:30 Hon. Jere Cooper presiding.)
Mr. COOPER. The committee will please come to order. Mr. Paul,
you may proceed.
ADDITIONAL STATEMENT OF RANDOLPH E. PAUL, SPECIAL TAX
ADVISER TO THE SECRETARY OF THE TREASURY
Mr. PAUL Mr. Chairman and gentlemen, in his statement to your
committee on March 3, 1942, the Secretary of the Treasury recommended the taxation of interest from outstanding as well as future
issues of State and local securities. I should like now to discuss this
recommendation more fully and to present supporting evidence.
I. THE ECONOMIC ISSUES
The present war emergency makes the immediate elimination of
tax-exempt securities an important step in sound war finance. Under war conditions the withdrawal of the tax immunity from future
issues alone will not be enough. What is required now is the immediate removal of tax exemption in all cases in which the Federal Gov.
ernment is not bound by its own pledge.
1. The revenue loss from tax exemption is substantial.-The annual
loss in revenue from the tax exemption of State and local securities
under
rates
at
1942the
levels
of proposed
business. by the Treasury is estimated at $275,000,000
2. The revenue loss from tax exemption will continue to increase.This is a large amount, but the continuance of the existing tax exemption would not stabilize the revenue loss even at that large figure. If
the tax exemption were removed only from future issues, a considerably larger revenue loss could result merely from the shifting of outstanding issues from holders subject to little or no income taxes to those
subject to higher rates.
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,
banks, insurance companies, and, to a small extent, other business corporations (table 1 and chart 1). The securities of these holders are a
huge reservoir from which individuals could increase their ax-free
holdings by as much as 150 percent, even if the tax-exemption privilege
were immediately removed from all new issues. Additional shifts are
possible
from individuals in low-income groups to individuals in highincome groups.
Some At of the detailed evidence la supplied In appendixes
present rates the loss is estimated at $184,000,000.
69663
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
All such transfers of outstanding tax exempts to individuals with
large incomes yield nothing by way of lower interest rates to State or
local governments. The benefits of such transfers are confined mainly
to the sellers, who obtain windfall capital gains, and to the buyers, who
obtain exemption from regular and wartime income taxes.
8. Tax rate increases stimulate tax avoidance.-Even before 1941,
the trend toward the concentration of tax-exempt securities in the
hands of individuals in the upper income brackets had become noticeable. State and local securities have constituted an increasing percentage of the total assets of large estates, and there has been a pronounced and consistent tendency for tax-exempt securities to constitute
a greater percentage of the larger than of the smaller estates. For
net estates of $1,100,000 and over, State and local securities averaged
6.2 percent of the gross estate in 1928 and 15.1 percent in 1940 (table
and chart 2).
We may reasonably expect a further increase in the movement of
tax-exempt securities into the hands of those with large incomes
because the recent and anticipated tax rate increases provide new
and powerful motives to individuals with large incomes to use this
means of tax avoidance. Under the 1942 tax rates proposed by the
Treasury, an individual with a surtax net income of $100,000 from
other sources would obtain as large a net return, after taxes, from a
21/2 percent municipal bond as from a taxable investment yielding 20.8
percent. Other illustrations are presented in table 3.
4. The outstanding tax-emempt securities were not purchased in an-
ticipation of wartime tax continuance of the tax exemp-
tion of interest on State and local securities enables the holders of
these securities to avoid not only the pre-war scale of income taxes,
but also the tax rate increases necessitated by the war. Most of the
outstanding bonds were issued long before there could have been any
serious expectation of wartime tax rates. Of the $20,000,000,000 of
State and local securities outstanding, $14,400,000,000, or almost three-
quarters of the total, has been outstanding for 5 years or more, and
$10,700,000,000, or over half of the total, for 10 years or more (table 4).
Tax exemption enables the holders of State and local securities
to enjoy an exemption for which few, if any, can be said to have paid
a price at all commensurate with the benefits received. Insofar as
the coupon rates of interest and the market prices of State and local
securities reflected the tax exemption privilege at all, they reflected
exemption from much lower tax rates than those in prospect, and, in
most cases, than those already in force. A person with income from
other sources of $100,000. who purchased a 4-percent tax-exempt security in 1929, obtained therefrom the equivalent of a taxable return
of 5.26 percent under 1929 rates. Under the rates proposed by the
Treasury this individual would derive as much benefit from his 4-percent tax-free
percent
(tablebond
5). as he would from a taxable security yielding 331/3
5. Holders of tax-exempt securities have enjoyed substantial wind
falls during recent years.-Because of the rise in tax rates, and also
because of the decline in interest rates, most holders of tax-exempt
securities have enjoyed substantial windfalls during recent years. The
most common rates of interest on State and municipal bonds now outstanding are 4 to 41/2 percent, whereas the present market yield of such
2955
securities is generally below 8 percent (table 6 and chart 8). For 1941
the average coupon rate on all outstanding State and local government
securities was just over 4 percent, while the Standard Statistics Co.'s
index of municipal-bond yields for April 1942 was only 2.49 percent.
6. Tax exemption results in inequitable taxation.-Tax-exempl accurities produce sharp inequalities in tax burdens. Persons with income
from property are in a position to benefit most from this means of tax
avoidance; persons who derive their incomes from earnings benefit
inequalities. least. Every increase in tax rates increases the importance of these
The discrimination between individuals and between classes of indi-
viduals constitutes, from an equitable standpoint, the most funds.
mental of all the objections to tax-exempt securities A survey of 25
actual returns for the taxable year 1940 reveals how striking are the
differences in burden resulting from tax-exempt securities: If the rate
schedule proposed by the Treasury were applied to the tax-exempt, as
well as the taxable, income reported on these returns, the aggregate tax
liability would be almost doubled-$21,400,000, instead of $12,500,000.
Several of the cases summarized in table 7 are spectacular. In one
case, out of a total reported income of approximately $974,600, no less
than $668,700 came from State and local securities. The tax liability
under the proposed'r would be $254,300. if the tax-exemption privilege were retained, but $856,100 if the tax-exemption privilege were
removed. In a second case, $817,400 out of a total income of $1,106,300
was in the form of State and local interest. The tax liability of
$289,600
under
proposed rates would be raised to $975,800 if the entire
income were
taxable.
7. The premium paid for tax-exempt securities does not reflect the
value of the tax exemption.-The differences between taxes paid by
recipients of taxable and tax-exempt income would be less inequit
able if the holders of tax-exempt securities had paid a premium that
reflected in full the value of the tax exemption. This is not the case.
The price that is set upon the tax-exemption privilege in the open
market differs substantially in most cases, and spectacularly in the
extreme cases, from the value of the exemption privilege to the
individual purchaser. The current market value of the tax-exemption feature of State and local securities is roughly, one-half of 1
percent. This means that an investor who purchases a municipal
bond must content himself with a yield that is about one-half of 1
percent lower, before allowance for taxes, than the yield he could
obtain from a corporate bond of comparable quality. But to an
individual with a surtax net income of $150,000, under the rates
proposed by the Treasury, the tax-exemption feature of the municipal
bond is worth five times as much as he has to pay for it. A high
grade 3-percent corporation bond purchased at par would yield him
only three-tenths of 1 percent after income taxes, compared with the
21/2 percent tax-free yield that he could get from a municipal bond
of at least comparable quality. The investor pays a half percent. It
would be worth his while to pay as much as 2.7 percent.
The value of the tax-exemption privilege varies with the size of
individual incomes. To a person with an income below the personal
exemption. a 3-percent tax-free security is worth no more than
taxable security of comparable cost. To a married man with no
a
2954
2956
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
dependents, with a net income of $10,000, the same 3-percent tax.
free security is equivalent, under the proposed rates, to a taxable
issue yielding 4.84 percent. To a similar individual with a net income
of $100,000, the 3-percent -free security is equivalent to a taxable
security yielding 25 percent; and to an individual with a taxable
income of half a million dollars, to a taxable security yielding 30
percent (table 3).
If the volume of State and local securities were so small that the
whole amount available was purchased by individuals in the upper
income brackets, the premium paid for these securities in the form of
lower interest rates might reflect roughly the value of the tax exemption to the purchasers. However, the larger part of the outstanding
securities was held by Federal and State trust funds, banks, insurance
companies, and other corporations (table 1). Some of these institu.
tional investors enjoy a tax-free status. To them the tax exemption
feature hes no value at all. Others are subject to effective rates of
taxation much lower than the rates imposed on income received by
individuals in the upper income brackets. Normally, the price paid
for a privilege of this sort in the open market will reflect the importance of that privilege, not to the most urgent, but to the least urgent,
of the actual buyers. That is to say, the premium paid for the taxexempt security will reflect the importance of the exemption privilege
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
of State and local securities. Some investors, because of legal requirements, their desire for greater safety, or ignorance of superior
alternatives, purchase or retain State and local securities even at some
sacrifice in interest rates and without any regard to the tax exemption.
Many wealthy individuals do not choose their investments solely with
an eye on net yields after taxes. They are also influenced by the desire
to control particular business enterprises, and reluctance to alter radically the composition of large bequests or other large holdings, par-
ticularly when such an alternation would entail the liquidation of
2957
Further, in subjecting interest from State and local securities to the
same tax laws that apply to other kinds of income, the Federal Government would only be doing what all of the 32 States imposing personal income taxes already do themselves with respect to the obligations of other States and the subdivisions thereof (table 10).
9. Elimination of tax exemption would only moderately increase
State and local interest costs.-The removal of tax exemption is frequently opposed on the ground that it would greatly increase State
and local interest costs. These fears appear to be exaggerated. Tax
exemption is only one of the many influences affecting the market rate
of interest for State and local securities. Some persons mistakenly
ascribe the whole difference between corporate and municipal bond
yields to the tax exemption privilege. But a large part of the difference is due to the superior quality or greater safety of State and local
obligations. The differential in yield in favor of municipal bonds was
greater in 1900, before the adoption of the Federal income tax, than
it is today (table 9)
Although the precise effect of the tax-exemption privilege on the
market interest rate is subject to some difference of opinion, the
Treasury believes that it is somewhere between one-fourth and fiveeighths of 1 percent. Hence, it is reasonable to suppose that the
removal of the tax-exemption privilege would increase interest rates
on new State and local issues by something less than one-half of 1
percent on the average.
The interest costs of outstanding obligations would not be affected
unless and until the obligations were refunded by new issues. It will
be 1970 before 90 percent of the outstanding State and local obligations
have matured (table 11).
If other interest rates remained at approximately their present
levels, the refunding of outstanding tax-exempt obligations with taxable securities would not increase the interest costs of State and local
governments in the vast majority of cases since the removal of the
tax exemption would be more than offset by the drastic decline that
has taken place in the general level of interest rates.
In recent years new and refunding State and local issues have
averaged about $1,000,000,000 annually. If this volume should continue, the immediate effect of the elimination of the tax immunity
properties with poor markets.
The net balance of these factors has been such that wealthy individuals have consistently been able to purchase tax exemption at bargain prices. This fact is reflected in tables 8 and 9 and charts 4 and
5, which show the spread in yield between corporate and municipal
bonds is small relative to possible tax benefits.
8. The removal of the tax exemption will not reduce State and local
000 during the first year. Eventually, the annual difference would
Federal Government the power to levy special or discriminatory taxes
upon any or all operations of State and local governments. Nothing
reach about $100,000,000 if the debt of State and local governments
remained at its recent level.
The net cost to State and local governments would be less than
$100,000,000 since they would obtain increased revenues from the
application of their income taxes to new Federal issues, if Congress
consents to such taxation.
govereignty.-The claim is frequently made that the removal of tax
exemption would undermine State and local sovereignty. Some persons have argued as if the adoption of this proposal would give the
could be further from the truth. The elimination of tax exemption
would not give the Federal Government the right to tax State and
local interest at rates any higher than apply to other forms of income.
It would give the Federal Government no new powers over the operations of State and local governments.
The securities of local governments in Great Britain do not enjoy
exemption from the income tax of the central government, nor do
those of the local governments and provinces of Canada or Australia.
would be an increase in State and local interest costs of about $5,000,-
10. Tax exemption should be appraised as a joint Federal, State,
and local problem.-The individual citizen is not only a citizen and
taxpayer of his city and State: he is no less a citizen and taxpayer of
his National Government, He is subject at one and the same time to
The fact that new a-refunding Issues have been appearing at the rate of a billion
have year must not be made the basis for the expectation that the entire outstanding debt will
which been
refunded were
in 20 refunding
years. A portion
in themselves
issues.of the refunding issues merely replace securities
2958
REVENUE REVISION OF 1942
taxes imposed by all governments-Federal, State, and local. The
additional burden imposed on the State and local governments must
be balanced against the new revenue that would be derived from Federal taxation. The net burden on the taxpayers of the Nation as a
whole will not be increased by the removal of the exemption privilege.
Whereas the immediate difference in interest costs to State and local
governments would be about $5,000,000 a year and the ultimate difference in the neighborhood of $100,000,000 a year, the Federal Government would, under the proposed rates for 1942, avoid an immediate
annual loss in revenue of $275,000,000 and the possibility of even
larger future losses in revenue. Finally, the taxpayers of the Nation
as a whole would be benefited by the elimination of an important
source of tax avoidance, and by a resulting increase in the equity with
which the total tax load is distributed among our citizens,
II. THE LEGAL AND CONSTITUTIONAL ISSUES INVOLVED IN THE PROPOSAL OF
THE TREASURY MARCH 3, 1942, TO ELIMINATE THE EXEMPTION OF INTEREST ON OBLIGATIONS OF STATES AND-THEIR POLITICAL SUBDIVISIONS
The Congress possesses the power to levy a tax on incomes. Interest
paid on State and municipal obligations clearly constitutes income.
It would follow, therefore, that such interest is subject to the Federal
income tax. Certainly there is no provision of the Constitution which
prohibits the imposition of a Federal income tax upon the interest
derived from State and municipal obligations. The only possible basis
for questioning the constitutional validity of such a tax is therefore
the assertion that the holders of such obligations are cloaked with an
immunity that may be implied from the Constitution. In 1895 the
Supreme Court in Pollock V. Farmers Loan & Trust Co. (157 U. S.
429; 158 U. S. 601) stated that such an immunity existed. But the
foundations of this opinion have been so weakened by subsequent de-
cisions that it cannot withstand a direct attack. With it falls the
only barrier to the validity of a Federal income tax on the interest
received by such bondholders.
A. The belief that the Pollook decision has no validity today rests
upon these bases: First, it may be argued that the adoption of the
sixteenth amendment to the Constitution affirmatively sanctioned taxation of the income from State obligations, through the express grant
of
power source
to the Congress
whatever
derived." "to lay and collect taxes on incomes, from
Second, every other claim to private immunity from Federal income
taxation, even those formerly recognized by the Court has now been
rejected. The income derived by Government contractors from their
contracts was denied immunity in Metcalf & Eddy V. Mitchell (269
U.S.514 (1926) and James V. Dravo Contracting Co. (302 134
(1937)) the income derived by lessees of Government property from
their leased property was denied immunity in Helvering V. Mountain
Producers Corporation (303 U. S. 376 (1936)) the income derived
by Federal judges from their salary was in effect denied immunity
in O'Malley V. Woodrough (307 U. S. 277 (1939)) Most significant
of all, State employees, who had enjoyed under Collector V. Day (11
Wall. 113 (1870)), an immunity from Federal income taxation antedating that given to the bondholder by the Pollock case, were held in
REVENUE REVISION OF 1942
2959
Graves V. O'Keefe (306 466 (1939)) to be subject to Federal
income taxation on their salaries. Like the State employee, the bondholder offers services, his capital, to the State at a price and like the
employee that price must pay its contribution to the Federal revenues
Third, the theoretical basis of the Pollock decision, that a tax on the
income from State obligations is equivalent to a tax on the bonds
themselves and thus is a tax on the power of the State to borrow
money, has been flatly rejected by the Supreme Court. In Graves V.
O'Keefe Justice Stone said "The theory, which once won a qualified
approval, that a tax on income is legally or economically a tax on its
source, is no longer tenable." In place of that discarded theory there
has been substituted by the Supreme Court the view that a nondiscriminatory Federal income tax, directed at all citizens alike, is valid
as against any claim to constitutional immunity based upon dealings
with State governments. That the economic burden of a State sales
tax upon materials sold to a cost-plus-a-fixed-fee contractor with the
Federal Government "is but a normal incident of the organization
within the same territory of two independent taxing sovereignties'
was recently announced in Alabama V. King & Boozer (314 S.
(1941)). From this case it would follow that any burden that may be
passed on economically to State governments because of a tax upon
the interest derived from bonds issued by such governments is but
the normal incident of the existence of two governments within the
same territory. Such an indirect and incidental effect does not warrant a restriction of the Federal taxing power.
Fourth, great emphasis is placed by the Supreme Court in its recent
opinions on the duty of all individuals to contribute their share to the
costs of Government. Equally stressed is the recognition of the
dangers inherent in placing restrictions upon the Federal taxing
power. The Court has thus clearly recognized that recognition of any
immunity on the part of the holders of State obligations would relieve
one group of taxpayers from the duty of financial support to the
National Government and curtail the sovereign power of that government to maintain its existence. When the issue is so viewed, the urgency of our present needs for revenue, greater than ever before,
compels the conviction that the Supreme Court will refuse to exempt
the holders of State bonds from their obligations to the Nation.
B. Some individuals have asserted that while the Federal Government may possess the power to tax the interest on future issues of
State and municipal obligations, such power does not extend to the
interest on the outstanding obligations. They support this assertion
by claiming that a contract of exemption exists between the Federal
Government and the holders of such outstanding obligations.
However, no such contract exists. Although the various revenue
acts have excluded from gross income the interest upon such obligations, the exemption provisions in these acts cannot be regarded as contracts between the Federal Government and the States or the bond-
holders. This exemption, like any other exemption, is simply an
expression of legislative policy which may be changed at any time.
If such a provision were said to be a contract, on like grounds a salaried taxpayer might claim he had a binding contract right to the
earned income credit, a father to the credit for dependent children
and so on. In short, to these taxpayers, and to the taxpayer who pos-
2960
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
sesses State and local obligations, the Federal Government has made
no promises that existing laws would not be changed.
But, it has been asserted, while no contract exists, at least there is a
of the sixteenth amendment. But the rule of the Pollock case has
since been rejected by the Supreme Court, so that there is no immunity
moral obligation upon the Federal Government not to tax such interest in view of the exemption existing at the time of their issuance.
But here again the granting of an exemption does not carry with it
the understanding that it will be forever continued. No doubt many
investors expected a continued ax-free yield when they purchased the
obligations. But it has been pointed out previously that such expectation did not extend to the high rates necessitated by emergency conditions. And every taxpayer takes the chance that the rates of tax
and the exemptions thereunder will change. Any other view of the
situation would turn the tax laws into static rules and by thus straitjacketing revenue legislation make it impossible for the Congress to
adapt its tax policies to changing conditions.
afforded by the Constitution to the interest on these obligations. In
this light the references to the sixteenth amendment become wholly
irrelevant.
TABLE 1.-Toz-ezempt State and local
securities, by classes of holder, June
30, 1941
(In billions of dollars)
Class of holder
of the Federal Government to tax incomes. In other words, the
sixteenth amendment simply permitted Congress to levy an income
tax without apportionment among the several States, and that therefore the amendment did not give to the Congress any power that it
did not previously have, so that the rule of the Pollock case was unaffected by its passage. This was also Senator Borah's position.
While the New York Legislature rejected the amendment on Governor
Hughes' advice, it was ratified by that State after his departure from
office. It is thus apparent that at the time of the ratification of the
sixeenth amendment by the several States there was reputable authority
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 indicated above, the observations of Senators Borah and Root amount
to the assertion that the Pollock case was unaffected by the adoption
Commercial banks
7.8
Insurance companies
3.7
2.1
Corporations other than banks and Insurance companies
Tax-exempt holders:
5
Federal funds
7
When the sixteenth amendment was before the New York State
Legislature for ratification Governor Hughes recommended its rejection on the ground that the amendment gave to the Federal Government the right to tax the interest on State and municipal securities.
Senator Root took the position that the amendment merely dealt with
the problem of apportionment and did not affect the inherent power
Estimated amounts
of par volue
Individuals
C. Finally, it has been contended that history of the ratification of the sixteenth amendment proves that at that time it was the
understanding that the words "from whatever source derived" did
not give to the Congress the power to levy a tax upon interest from
State and local obligations. The communications and speeches of
Senator Borah, of Idaho, and Root. of New York, have been cited
in an effort to show that Congress did not intend to tax the interest on
State and municipal obligations. It should be noted that this issue
was not raised until after the amendment had been submitted to the
States for ratification. In fact, there is nothing that was said in the
course of the debate in the Congress from which it may be inferred
that a single Member expected or intended that the income from State
and municipal bonds and the salaries of State and municipal officers
and employees should be constitutionally immune under the proposed
amendment.
2961
State and local government funds
4.1
Mutual savings banks
.5
Other tax-exempt institutions
6
All tax-exempt holders
5.9
All holders
20.0
Including estates
securities
of trusts.
Territories and Insular possessions.
including
and
Includingfunds.
trust. investment, and sinking funds, and holdings of Territorial and Insular
governmental
Source
Treasury
Treasury,
1941.
Bulletin, February 1942. and Annual Report of the Secretary of the
TABLE 2-State and local government securities as G percent of gross estate,
by size classes of net estate, estate-tax returns filed in 1928-40
Net estate (in thousands of dollars)
Filing year
100 under
200 under
200
300
Percent
.6
1.6
1930
1931
1932
1933
3.4
16
1938
1939
1940
6.0
9.2
13.3
11.2
4.4
5.8
10.0
23.9
8.7
6.7
11.0
14.4
6.3
8.2
12.5
3.1
5.3
5.7
2.9
4.4
5.3
3.2
4.4
3.1
3.6
, Includes securities of Territories and Insular possessions.
Source: Complied from Statistics of Income
4.8
8.3
6.0
3.0
1 Gross estate includes tax-exempt insurance,
Before specific exemption
6.2
7.3
50
5.1
Percent
4.3
3.6
3.0
4.2
2.6
over
4.5
2.5
22
1,100 and
1,100
2.2
1.9
2.9
500 under
Percent
2.7
1.8
2.4
1935
1937
Percent
23
1.4
1934
1936
500
Percent
1928
1929
300 under
7.1
6.2
21.9
9.2
11.4
8.0
16.1
11.6
22.7
8.8
15.1
2962
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
TABLE 8.-Gross annual yields from a famable security equivalent to specified
yields from a scholly tas-exempt security
2963
TABLE 5.-Gross annual yield from d taxable security equivalent to a 4-percent
yield from
a wholly
tas-exempt
security. under tax rates in effect in 1929,
1935,
and 1941,
and proposed
for 1942
Gross annual yield from a taxable security equivalent to a tax-exempt
yield of-
Net income from other
.
sources
Net Income from other sources
234 percent
1941
3 percent
Proposed
rates
rates
1941
rates
314 percent
Proposed
rates
1941
rates
1929
Proposed
rates
1941
rates
Proposed
Percent
$1,500
rates
$2,500
$10,000
$1,000
2.50
$2,600
2.77
4.42
$5,000
2.87
an
3.47
3.45
4.17
4.02
4.88
4.00
$10,000
5.55
3.33
4.03
4.00
4.84
4.07
5.65
5.33
$20,000
2.50
3.00
3.21
3.32
3.85
5.56
3.50
3.87
3.50
4.49
4.00
4.00
6.03
7.78
6.90
$50,000
6.10
10.42
7.32
12.50
8.64
14.58
9.76
16.67
7.81
20.83
9.38
25.00
10.94
29.17
12.50
$500,000
33.33
10.42
25.00
12.50
30.00
14.58
35.00
16.67
$1,000,000
40.00
11.36
25.00
13.64
30.00
15.91
35.00
18.18
40.00
5.17
6.67
$20,000
$50,000
$100,000
6.45
$100,000
4.31
1941
posed
rates ,
$5,000
3.00
1942 (pro-
1935
. percent
Percent
4.00
4.00
4.42
4.02
4.17
4.60
4.12
AM
4.37
5.33
4.40
0.45
4.71
6.90
4.82
5.80
9.76
4.00
5.13
0.00
##
12.50
age
5.26
$1,000,000
Percent
4.00
4.00
5.26
$500,000
8.89
Peronal
4.00
5.26
10.82
33.33
16.67
60.00
18.18
60.00
It is assumed that both the taxable and the tax-exempt security are bought at par; and that the Incorps
from additional Investments If taxable, would not be large enough to become subject to higher rate than
that applicable to the first dollar of the additional Income The calculations apply to married person with
I It is assumed that both the taxable and the tax-exempt security are bought at par; and that the Income
from additional investments if taxable, would not be large enough to become subject to a higher rate than
no dependents and take into account variations in the personal exemption and earned income credit as well
as to tax rates. The earned Income credit assumed to be unaffected by the additional taxable income exart Before
In those
cases where
by statutory definition all net income is deemed earned
personal
exemption
that applicable to the first dollar of the additional income The calculations apply to a married person
with DO dependents, and take into account variations in the personal exemption and earned Income credit
as well as in tax rates, The earned income credit is assumed to be unaffected by the additional taxable in
come except in those cases where by statutory definition all net income is deemed earned,
# As presented by Secretary Morgenthau to the Ways and Means Committee, Mar. 3, 1942
. Before personal exemption
TABLE 6.-Securities of States, and of cities with more than 100,000 population,
by interest rate, 1939
. As presented by Secretary Morgenthan to the Ways and Means Committee, Mar. 3, 1942
TABLE 4.-State and local government securities, by length of time outstanding
[Amounts in thousands of dollars)
June 30, 1941
[In billions of dollars)
Length of time outstanding
Less than 1 year.
Less than 2 years
Less than 3 years
Less than 4 years
Less than 5 years
Less than 6 years
Less than 7 years
Less than 8 years
Less than 9 years
Less than 10 years
Securities outstanding, at par value
Estimated
Interest rate (percent)
amount
Cities over 100,000
population
States
100,000 population
2.3
Amount
3.1
4.2
Percent
of total
Amount
Percent
of total
Amount
Percent
of total
4.9
1.50
5.6
$75,980
43,888
131,814
233,516
1.75
6.5
2.25
7.3
2.00
7.9
8.4
718,118
402,411
848,107
230,617
8.35
9.3
3.50
20.0
2,267,298
1,580,990
1,730,479
294,902
4
$75,990
43,388
1.4
1.3
65,153
2.1
$66,661
92,946
98,986
105,307
412,997
265,572
652,436
2.4
4.25
4.50
4.75
2.4
140,570
4.4
1.5
50,188
1.0
1.8
72,600
2.3
7.3
9.5
117,453
8.7
23.1
782,670
24.7
1,484,628
22.3
16.1
349,750
11.0
435,485
13.7
1,231,240
1,294,994
18.5
17.6
3.0
124,284
3.9
7.2
227,626
7.2
8.6
24
5.25
IN
4.3
6.2
BE
5.50
6
130,671
Total
Other rates
Rates not reported
9,819,812
1,066,476
6,999
113,134
170,618
479,078
15,809
81,963
the
5.70
1.6
MB
4.1
&
, Interest-bearing securities only. including those of Territories and insular possessions
Source
Compiled from data supplied by the Bureau of the Census, Division of State and
Local
Government.
0.8
2.75
3.75
Total amount outstanding
States and cities over
6.2
4.0
9.8
1.7
19.5
20
7.2
1.2
14,764
1.2
52,328
100.0
3,170,146
1.6
100.0
68,543
6,649,000
166,795
919,681
1,087
5,912
. Securities
outstanding at close of fiscal years ended in 1939. Debt with original maturity of less than
1 year
is not included
Source: Bureau of the Census, Division of State and Local Government.
1.0
100.0
REVENUE REVISION OF 1942
2964
REVENUE REVISION OF 1942
2965
TABLE 7 -Tax liability assuming interest from State and local government accuri
ties, (a) tax exempt and (b) tarable, under present and proposed individual
TABLE 9.-Yields of corporate and municipal bonds, spread, and Federal indl-
income-tax rates, for 25 selected individuals
vidual income tax rates, 1900-42
(In thousands of dollars)
Annual average
Case
State
Taxable
net in
and
come
Total
local
from
other
income
interest
sources
Tax liability
Interest
Interest
exempt
taxable
Proposed rates
Reve
Tax liability
one loss
from
taxe
Year
Reve.
our from loss
Interest
emp-
Interest
taxable
exempt
tion
High-
grade oorporate
bonds
tax exemp
tion
4.05
1900
601.9
221.9
238.2
195.7
424.2
171.5
521.4
721.0
164.6
377.1
148.9
409.8
126.4
87.0
174.8
260.4
276.8
189.8
113.6
348.0
230.9
1,337.5
1,081.0
1,568.4
999.2
1,181.6
182.4
182.7
1,307.9
796.6
975.8
179.2
951.9
1,156.0
226.9
297.9
215.0
444.1
301.2
362.8
83.8
241.8
158.0
110.2
303.7
144.2
493.7
82.6
839.6
257.0
107.H
422.4
820.7
835.8
1,656.3
147.8
605.0
1,251.6
646.6
731.7
1,470.1
162.7
249.8
412.5
158.1
279.1
121.1
204.4
350.9
351.7
278.1
626.8
175.9
442.7
266.1
226.5
543.0
330.7
373.6
704.3
249.1
503.0
253.1
315.8
613.5
773.0
765.1
668.7
305.9
817.4
288.9
394.6
206.
160.1
564.4
318.1
915.1
1,231.4
313.
278.7
179.2
1,538.1
1,157.1
549.4
974.
608.3
199.6
667.6
207.8
314.4
316.5
1,363.2
198.6
712.8
514.2
1,106.3
186.6
817.2
376.6
771.2
250.7
553.2
603.0
899.5
423.2
94.8
653.0
395.3
630.6
302.5
229.8
123.
487.6
666.8
915.8
363.9
249.0
803.
1,087.1
284.7
416.6
237.
230.4
592.1
254.1
856.1
239.
300.5
001
975.3
735.7
316.8
672.0
355.2
520.1
787.0
#
512.5
266.8
282.1
356.1
135.4
75.1
836.0
261.8
1,083.1
1,321.4
5,405
3,880.8
4,251.3
871.0
172.6
170.7
343.1
102.2
165.9
288.6
99.5
155.4
393.
227.2
264.5
125.0
226.2
165.0
129.8
331.7
333.4
314.8
203.6
646.1
217.5
457.3
239.8
276.9
424.8
560.1
218.9
643.
283.1
136.2
366.3
230.1
176.6
558.9
382.1
a 969.4
291.9
98 9
3,868.8
133.2
14,441.724,411110,348.8 17,91417,565.312
470.5
419 7
320 8
4,844.2
975.4
1,442.9
1901
3.90
1902
3.80
1903
4.07
1904
4.03
212.6
1,390.5
349.5
404.
Total
823.8
8,972
i Exclusive of net long-term capital gains and losses
, As presented by Secretary Moreenthan to the Ways and Means Committee Mar. 3, 1942
Source: Income items from returns on Form 1040 for 1940
Spread
Munici
3.99
yield
imme
Year
distely
above
nal
bonds
3.12
0.93
1922
Muniel-
Spread
et Imme-
distely
above
pal
$100,000
bonds
4.23
0.87
5.12
1924
5.00
1935
45
Tax rate
on brack
5.10
1923
4.88
1936
4.73
25
1997
3.57
1907
4.27
3.86
1938
4.22
3.93
1909
4.06
3.78
4.57
1928
4.55
1929
4.73
1930
1931
1900
4.16
3.97
1932
1911
4.17
3.98
1933
1912
4.21
4.02
1934
1913
4.42
4.22
1914
4.46
4.12
1915
4.64
4.16
1916
4.49
3.94
1038
4.79
4.20
1939
1018
5.20
4.50
1919
$5.49
1920
6.12
4.98
5.97
5.09
1921
High-
grade corporate
$100,000
bonds
3.80
1006
Average annual
Tax rate
on brack
yield
0
Present rates
1935
20
1935
34
1937
1940
1.03
1941
1.14
1942
2.84
2.49
35
88
From 1900 through 1918, Standard Statistics Co. average for 15 high-grade railroad bonds: other years
Moody's
Investors
Service
average for high-grade corporate (Ass) bonds
Standard
Co.
Statistics
average
Standard
Statistics
Co average
of yields
of high-grade railroad bonds was 5.29 percent for 1919, and the
spread
based upon
this average
was 0.88
percent.
Apr. 1942
TABLE 10. -Treatment of interest from Federal State, and local government
obligations under State individual income taxes, as of January 1, 1942
TABLE 8.-Comparison of the yields of high-grade corporate and municipal bonds
Interests from obligations of the
Yield on first day
Yield on first day
of month
Month
of month
Highgrade
Month
Spread
bonds
High-
grade
High-
pal
corporate
bonds
bonds
Spread
May
June
July
Aurust
September
October
November
December
1.01
2.36
2.94
2.33
2.86
2.38
2.93
2.32
90
82
0.65
Home
States
January
2.26
February
March
2.26
2.27
April
2.75
May
June
2.94
2.M
1.00
90
July
January
February
2.69
2.01
0.68
as
2.24
1.94
2.61
1.82
Colorado
Delaware
2.57
1.80
Georgia
daho
2.61
1.97
2.70
2.13
July
August
March
September
April
Kentucky
2.02
75
1.92
Louisiana
1.77
Maryland
1.65
64
1.00
1.70
Massachusetts
Minnesota
Mississippi
62
1.57
Montana
2.71
1.91
Hampshire
New Mexico
New York
2.80
2.04
2.19
2.06
61
Treasury Department average of high-grade corporate bonds
Taxed
Exempt
Taxed
Exempt
Exempt
Exempt.
l'axed
Exempt
Exempt
Exempt
l'axed
Exempt.
Exempt.
Exempt
l'axed
Taxed
l'axed
l'axed
Exempt.
Exempt.
Taxed
Taxed
Taxed
Taxed
Exempt
Exempt
Taxed
Taxed
Taxed
Exempt
Exempt
Taxed
Taxed
Taxed
Taxed
Taxed
Exempt.
Taxed
Taxed
Taxed
Taxed
Taxed
Taxed
Taxed
Taxed
Exempt
Exempt
Exempt.
Exempt.
Taxed
Taxed
Exempt
Exempt
Exempt
Exempt
Exempt
Taxed
Exempt
Exempt
Exempt
Taxed
Taxed
Taxed
Taxed
Exempt.
Exempt.*
Exempt.
Exempt.
Exempt/
Taxed
Exempt
Taxed
Exempt.
Exempt
Exempt
Taxed
Exempt
Exempt
North Carolina
North Dakota
Oklahoma
See footnotes at end of table
Bond Buyer average. 11 first grade bonds
its agencies
Exempt
1:65
1942
January
February
Cansas
74
December
May
T7
2.72
November
83
March.
April
Arizona
Arkanssa
California
2.70
August
September
October
3.35
1940
ment and
Other
States
bonds .
1941
2.37
Govern
States
pal
HO-Continued
October
November
December
Other
munici-
Alabama
1939
Federal
the
Home
States
grade
grade
corporate
January
February
March
April
Political subdivisions
State
High-
Taxed
Taxed
Taxed
Exempt.
2966
REVENUE REVISION OF 1943
REVENUE REVISION OF 1942
TABLE 10.-Treatment of interest from Federal, State, and local government oble
gations under State individual income taxes, as of January 1, 1948-Con
Interests from obligations of the
Political subdivisions
State
the
Oregon
Home
Other
States
States
Taxed
South Carolina
Taxed
Federal
Govern.
Home
Other
States
States
ment and
its agencies
Taxed
Exempts
Taxed
South Delrota
Taxed
Utah
Vermont
Virginia
Virginia
Wisconsin
1
Recent legislation (1939 to 1942 provides that Interest from obligations of the United States shall be
cluded In gross Income
Insofer
M the State
is constitutionally or legally authorised to tax such income
restricted
to interest
from bonds
Exempt
by
regulation.
Restricted to bonds Issued after 1902
or laws Excludes the from United gross States. Income all income which the State is prohibited from taxing under the Constitution
obligations Recent legislation of the United (1939 States to 1942) repealed the section which excluded from gross Income the Interest upon
Restricted to post-1906 State and post-1908 local Issues marked "tax-exempt."
No
exemption in statute or regulation
Applicable to post-1923 Issues.
subdivisions being conditions exempt from upon United Interest States upon Income obligations taxes of the State of North Carolina or of its political
" Interest
soldiers'
comofpensation
bonds
on rural
credit bonds
Issued prior to July 1. 1927, is except
Exempton
when
the rate
Interest does
notand
exceed
5 percent
per annum.
TABLE 11.-Estimated maturities of State and local government securities out
standing June 30, 1941 1
[Amounts in millions of dollars)
Yearly maturities ,
Cumulative materi
the
Date of maturity. fiscal years ended June 30
Amount
Percent
of total
Amount
1942
10.2
1943
4.6
(1)
Total
19,860
Excluding securities of Territories and Insular possessions
By maturity dates reference to optional earlier rall dates
Includes
than 14,000,000
0.05 percent. short-term interest-bearing securities
Source: Bureau of the Census, Division of State and Local Government
100.0
2021
Percent
of total
is.
2967
2968
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Chart 2
PERCENTAGE OF ESTATES
IN STATE AND LOCAL SECURITIES
Estate Tax Returns Filed. 1928-1940
PERCENT
PERCENT
15
15
1928
1929.
10
1930
1931
1932
10
5
am
5
0
0
25
25
20
1933
1934
1935
1936
1937
20
15
15
10
10
5
5
0
0
25
25
20
20
1938
1939
1940
15
15
10
10
5
0
NET ESTATE. BEFORE EXEMPTION IN THOUSANDS OF DOLLARS
8
69663 42 pt.30
2969
75
..
"
.00
1.79
1.50
0.00
2.75
230
225
1.00
125
PERCENT
PERCENT
15
so
76
1.00
M
3.00
1.75
150
us
2.00
1.75
425
400
1.75
150
4.78
450
an
1.00
4.00
a.m
1.50
PERCENT
PERCENT
1948Treasury Average
1948
-
Individual Income For
-
-
1941
Spread
-
Moody's Age
Corporate Bandy
Chart 4
High Grade
Chart 5
Rendere Rebetics
Spread
Municipal Bonds
(Yields Are Annual Averages)
1940
COMPARISON OF THE YIELDS OF
High GrodeCorporate BandsMunicipal Bonds
-
And
First Day of the Month Figures 1939 to Date
Bond Buyer -
High-Grode
Corporate Bonds
Standard Statistics
HIGH-GRADE CORPORATE AND MUNICIPAL BONDS
1939
COMPARISON OF THE SPREAD IN YIELD BETWEEN CORPORATE AND
MUNICIPAL BONDS WITH THE FEDERAL INDIVIDUAL INCOME TAX, 1900-'42
.
21
-
31
1.50
1.75
2.00
2.23
0.00
an
1.00
123
1.00
25
21
1.00
1.50
is
200
2.25
250
an
100
an
190
175
400
an
450
an
5.00
5.25
5.50
LTS
PERCENT
6.00
PERCENT
PERCENT
Spread
PERCENT
2972
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. PAUL Mr. Chairman, I would like to insert in the record an
opinion dated April 14, 1942, addressed to me and signed by the Assistant Attorney General of the United States with respect to the constitu.
tionality of imposing an income tax on the interest from State and
municipal obligations.
Mr. REED. Who was the Assistant Attorney General who wrote that
opinion
Mr. PAUL. That is Assistant Attorney General Samuel O. Clark, Jr.
Mr. COOPER. Without objection, the letter may be inserted in the
record.
(The letter referred to is as follows:)
DEPARTMENT OF JUSTICE
Washington, April 14. 1942
Hon. RANDOLPH E. PAUL
Tax Adviser to the Secretary of the Treasury.
Washington, D. C.
DEAR MR PAUL: On June 24, 1938. Hon. James W. Morris, Assistant Attorney
General In charge of the Tax Division of the Department of Justice, transmitted
to the Honorable Herman Oliphant, General Counsel of the Treasury Department,
a comprehensive study of the constitutional aspects of the taxation of Government
bondholders and employees. Copies of this study were also made available to the
appropriate congressional committees.
You have requested our opinion on the constitutionality of the proposal by
your Department to subject to Federal income tax the interest received hereafter on outstanding and future issues of State and municipal bonds, with special
emphasis on legal developments subsequent to the publication of our study. We
are pleased to comply with your request and submit the following views.
In our earlier study we expressed the following conclusion
"It is believed that there can no longer be found In the decisions of the Supreme
Court and rule of continuing authority which would raise a constitutional prohibition against applying the Federal income tax to State bondholders, officers,
and employees.'
You are no doubt aware that since that time the decisions of the Supreme
Court on the question of constitutional tax immunity have all served to reinforce
and confirm that conclusion. The trend toward a limitation of such Immunity,
which had developed when we published our study in 1938, has continued without
interruption to the present date.
We are, of course, no longer concerned with the power of the Federal
Government to tax the income of State officers and employees. The decision
of the Supreme Court in Graves N. Y. oz rel. O'Keete (306 U. S. 466), and
the enactment of the Public Salary Tax Act of 1939, have removed that problem
from the field of controversy. Taxation by both State and Federal Governments of the salaries of public employees is now an accepted incident of our
fiscal system. The only remaining question is whether the income received from
State and municipal obligations may be subjected to Federal taxation. In our
view, the answer is as clear and certain as the solution of any legal problem
can ever be prior to a final determination of the precise Issue by the Supreme
Court,
is our considered opinion that the Congress does have the power to
tax
such ItIncome
It is of course, true that the Supreme Court concluded in Pollock V. Farmers Loan & Trust Co. (157 U. S. 429, 158 U. 8. 601), that a Federal tax could
not validly be imposed upon income derived from municipal obligations That
decision was based upon the theory that a tax on Income was a tax upon the
source from which the Income was derived Thus, a tax on the Income from
municipal bonds was the equivalent of a tax upon the bonds themselves, and,
therefore, an unconstitutional burden upon the power to borrow. However, this
reasoning has been completely discredited in later opinions of the Supreme
Court.
With
must
also
fall. the destruction of the premise of the Pollock case, its conclusion
"The theory, which once won a qualified approval. that a tax on income is
legally or economically a tax on Its source, is no longer tenable .." said
the Supreme Court in March 1939, In Graves V. N. Y. or rel. O'Keete (306 U. S.
480). Less than a year earlier in Helvering v. Gerhardt (304 U. 8. 405), the Court
2973
had sustained a Federal tax upon the salaries received by employees of the Port
of New York Authority. The claimed immunity, If allowed, would In the Court's
opinion (p. 424) have imposed "to an inadmissible extent a restriction upon the
taxing power which the Constitution has granted to the Federal Government."
The Imposition of P State tax upon the salary of a Federal employee was sim.
ilarly held in the O'Keefe case not to place an unconstitutional burden upon the
employing sovereign. Collector V. Day (11 Wall 113), another landmark decision
like the Pollock case, was thus overruled. The express dental In the O'Keefe case
that a tax on income was the equivalent of a tax upon the source represented
no new thought but was rather a reiteration of a principle which had been
applied in the Court's prior decision In New York oz rel. Cohn v. Graves (300
U. 308), and In Hale v. State Board (302 U. 8. 95). There, too, it had been
recognized
"income is not necessarily clothed with the tax Immunity
enjoyed
by itsthat
source."
The opponents of the pending proposal urge that It would produce an uncon-
stitutional "Interference" with State governments Translated into practical
terms, the interference complained of is merely the Increased cost of future
public borrowing which might be occasioned by the tax It is significant that
this Increased cost involves no discriminatory burden. Rather, It represents
the effect of placing Income from private and public sources upon the same
plane of equality The absence of any element of discrimination would be help
ful In sustaining the constitutionality of the proposed tax.
Until the Supreme Court handed down its decision in Alabama v. King & Boozer
on November 10, 1941 (314 U. S. 1), there was room for the view that, despite
the decisions affecting public employees, a constitutional Immunity from taxation
might possibly be accorded to Government bondholders. Mr. Justice Stone had
stated in the O'Keefe opinion, p. 486, that there was no basis "for the assumption
that any tangible or certain economic burden is imposed on the gov-
ernment concerned as would justify' a decision that the tax upon the employee's
salary was invalid On the other hand, it is no doubt true that the issuing
government would bear a part of the economic burden of an income tax imposed
upon the bondholder. Nevertheless, this Department did not attach to the state
ment of Mr. Justice Stone the significance urged for It by those who have opposed
the legislation now suggested. The recent decision in Alabama v. King & Boozer
confirms our view. It is now clearly established that the validity of a tax upon
bond interest will not be affected by the increased likellhood that the economic
burden will in some measure be passed on to the Government.
The question in the Alabama case was whether an Alabama sales tax. which
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 cost-plus-a-
fixed-fee contract. It was quite clear, of course, that the entire burden of the
tax would be borne by the Government. In fact, the Government had agreed
with the contractor that State taxes, if valid, would constitute part of the cost
of the project and would be assumed and borne by the Government. Hence there
was no uncertainty as to the economic effect of the tax as in the earlier case of
James V. Dravo Contracting Co. (302 U. 8. 134), which involved a lump sum
contract. The Supreme Court nevertheless sustained the State exaction. In
the course of Its opinion the Court made the following observation (pp. 8-9):
"So far as such a nondiscriminatory State tax upon the contractor enters
into the cost of the materials to the Government, that is but a normal incident
of the organization within the same territory of two Independent taxing SOVereigntles. The asserted right of the one to be free of taxation by the other does
not spell immunity from paying the added costs, attributable to the taxation of
those who furnish supplies to the Government and who have been granted no
tax immunity.
Thus, the Supreme Court finally laid to rest the theory that an economic
burden in terms of Increased governmental costs invalidates a tax. The earlier
opinions in Panhandle on Co. V. Know (277 U. S. 218), and Graves V. Tezas Co.
(298 U. 8. 393), were held untenable so far as they supported the contrary
conclusion.
A decision which supports State taxation of Federal cost-plus-a-fixed-fee contractors would operate at least equally to sustain a Federal tax imposed upon
State bondholders Both relationships rest upon contract: one involves the
furnishing of supplies and services, the other money. The tax in each Instance
would increase the cost of governmental operations: In the case of the State tax
on the Federal contractor, to the full extent of the tax exacted: in the case of
2974
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
the State bondholders, to some extent which is difficult of precise ascertainment
Paraphrasing the language of the Supreme Court in the Alabama case, we may
therefore conclude that so far as a nondiscriminatory Federal income tax upon
a holder of a State obligation enters into the cost of borrowing. that is but a
normal incident of the organization within the same territory of two independent
taxing sovereigns.
What has. been said thus far as to the power of the Federal Government to
impose a tax upon income received from State obligations applies with equal
force to all interest hereafter received whether upon future issues or upon
outstanding obligations. No constitutional question as to the validity of a retroactive tax is involved. See United States v. Hudson (299 U. S. 498), and cases
cited therein. The proposed tax reaches only future income. and is therefore
entirely prospective in operation. It possesses the same constitutional validity
as the income tax imposed by the Public Salary Tax Act of 1939. upon the
income received after 1938 by all Federal judges, irrespective of the date of
their appointment to office.
The assumption, which was formerly prevalent that interest received upon
State securities was immune from Federal taxation, is analogous to the assumption of many years standing that under Evans V. Gore (253 U. S. 245). an income
tax upon the salaries of Federal judges would be unconstitutional as a diminution of their compensation. The Falaries of some Federal judges were made
subject to the income-tax laws by the Revenue Act of 1932, which required that
all compensation received by judges taking office after June 6. 1932, the effective
date of the act. be included in gross income. Judges who had taken office prior
to June 6, 1982, were thus given a statutory tax Immunity. In the case of the
bondholder, express statutory exemption was included in the act of October 8,
1913, and this provision was repeated in later acts With the realization that
tax immunity of judges who had taken office prior to June 6, 1932, was not a
constitutional requirement, the Congress by the Public Salary Tax Act of 1939,
took the final step to remove it. The present proposal to tax future income
of all State securities is therefore consistent with the procedure and objective
of the Public Salary Tax Act of 1939. A further illustration of the application
of the Income-tax Jaws to future Income arising out of transactions which were
closed before the particular taxing provision was adopted may be found in
Burnet v. Wells (289 U. 670). The grantor of an irrevocable trust was there
held constitutionally taxable upon the trust income although the trust had been
created before the enactment of the statute imposing the tax.
There is no constitutional basis for contending that income hereafter received
upon outstanding State bonds must be free from Federal taxation because the
obligations were issued and purchased on that implied or expressed understand
ing. The Federal Government was not a party to such contracts and the power
of the Congress to enact a revenue measure Is not fettered by any agreement
between Individuals or between an Individual and a State. There are many
Illustrations of this proposition. Thus, in Louisville & Nashville R. v. Mottley
(219 467), an act of Congress which prohibited the enforcement of certain
contracts for transportation was upheld, although applied to a preexisting contract. In New York v. United States (257 U. 8. 591). an order of the Interstate
Commerce Commission which increased an intrastate railroad rate was upheld
even thought the State charter had provided that a lesser rate should be charged
by the company. See also Norman v. B. R. Co. (294 U. 240).
It accordingly appears that no objection on constitutional grounds can be
successfully raised against the proposal to fax the income hereafter received upon
outstanding State obligations. Indeed, the assistant secretary of the Conference
on State Defense has admitted that If Federal taxation of income arising out
of future Issues of State bonds is constitutional, "there remains no constitutional
bar to Federal taxation of the income received from the bonds now outstanding.
(Tax Immunity and the Revenue Bond, by Daniel B, Goldberg. a printed memorandum distributed by the Conference on State Defense. March 1940.1
The Department's study of 1938, referred to above, reached a Record and alterna-
tive conclusion that Irrespective of the weakened vitality of the Pollock case and
Collector v. Day. there Is sound basis for a construction of the sixteenth amend
ment which would remove the immunity of the State bondholder and officer. We
there examined at length the history of the ratification of the amendment and
presented as exhibits the evidence which would support that conclusion. Accordingly, we refrain from entering into that rhase of the problem in detail. One
brief observation, however, seems appropriate.
2975
At the hearings last month before the Committee on Ways and Means of the
House of Representatives reference was made to the fears expressed in 1910 by
then Governor Hughes, of New York, that the proposed sixteenth amendment
would authorize the taxation of interest received from State and municipal obligations Reference was also made to the subsequent assurances of Senator Root
and Senator Borah leading to the conclusion that the amendment was adopted by
the legislatures of all views the latter two is mind. The
statements of Governor Hughes and of Senators Root and Borah, and of many
others, were gathered and commented upon in our study. It is significant that a
large number of public officials (some agreeing and others disagreeing with the
construction placed upon the amendment by Governor Hughes) urged that if the
Hughes construction was correct, It furnished an additional ground for the adop
tion of the amendment. Among these was Frederick M. Davenport, to whom
Senator Root's letter had been addressed. and Senator Brown, of Nebraska. who
was the father of the joint resolution submitting the amendment to the States.
It is also significant that the New York Legislature rejected the amendment in
1910 after the message of Governor Hughes, but ratified It subsequently under the
administration
of Gov. John A. Dix. who vigorously championed the broadest
interpretation of the amendment.
The foregoing and an abundance of similar evidence permitted the conclusion
to be reached in our study that the preponderant understanding of the States at
the time of the ratification of the sixteenth amendment was that its adoption
would
In all probability
carry with It the power to tax the income from State
and
municipal
bonds
We should like to reiterate, however, that the constitutionality of the proposed
legislation does not depend exclusively upon the acceptance of our construction
of the sixteenth amendment, namely, that the words "from whatever source
derived" mean exactly what they say. and as so interpreted clearly embrace
income from Government securities With full confidence, the validity of our
conclusion may rest upon the basic proposition previously discussed that no implied constitutional Immunity from Federal taxation attaches to interest received
from State and municipal obligations
Very truly yours,
SAMUEL O. CLARK, Jr.
Assistant Attorney General
Mr. BUCK. Mr. Paul, I rather think I am in sympathy with the
proposition of the Treasury that income on State and municipal bonds
hereafter issued should be taxable. I certainly am not in sympathy
with any attempt to tax income from similar bonds which have been
issued hitherto. This Treasury proposal covers the latter as well as
the former class of securities.
Mr. PAUL The Treasury proposal covers both outstanding and
future State and local securities. The opinion of Mr. Clark, of the
Department of Justice, covers the constitutional issues with respect
to both outstanding and future issues.
Mr. BUCK. Then he does not agree with Daniel Webster.
Mr.statements.
PAUL, I do not know what you are referring to in Daniel Webster's
Mr. BUCK. I mean the fact that any obligations entered into, any
contract entered into, is inviolate.
Mr. PAUL I do not see any inconsistency between the two statements, Mr. Buck. The Federal Government is proposing to respect
its own contractual obligations.
The Federal Government never made any contract with respect
to State obligations.
All that the Federal Government has ever done is to put into the
statute an exemption provision, and surely there is no taxpayer
Mr. BUCK. I want to raise as much money as we can, but I want to
do so legitimately. The States have made contracts with their citizens
2976
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
who have bought securities, have they not! I do not know whether
you own any State bonds, or whether any of my conferees own any of
them, but if they do they bought them under the assumption that they
were going to be tax free, did they not!
Mr. PAUL The purchasers of these bonds may have thought when
they bought their bonds that they would be exempt. They bet on the
continuance of the exemption provision. Those who bought such
bonds, I would add, before the O'Keefe case was decided in 1939,
bought their bonds in reliance upon an erroneous interpretation of
the Constitution. When we buy such bonds we must take those risks.
At any rate, there is no contract between the Federal Government
and the purchaser of State securities.
Mr. BUCK. I do not think that the Dartmouth College case had
anything to do with the Federal Government. It did have to do
with one of the clauses in the Federal Constitution, and I think that
Applies as much to any attempt on the part of the Federal Government to tax hitherto issued securities. Understand, I am not talking
about anything which may be issued hereafter, but about hitherto
issued bonds issued by the States.
I have not had an opportunity to read the opinion you have put
into the record. I shall do so with great care and painstaking under-
standing as soon as I get the opportunity.
But it seems to me that, after all, what has happened hitherto
must be taken as something that has gone off and is water over the dam,
and we cannot go back there and recapture taxation from people who
have bought bonds and securities or anything else on the basis that was
authorized at that time.
What is your opinion about that
Mr. PAUL Of course, I would not be here urging this recommenda-
tion of the Treasury if I did not believe it was the right thing to
do. I do not believe that the Dartmouth College case affects the
issue here, because there are no contracts here that have been made
by the Federal Government.
Mr. BUCK. A contract has been made between the State of California, let us say, and the man who buys the bonds.
Mr. PAUL. That is true; but that contract is not a contract with
the Federal Government, and the State has no right to make any
contract
with respect
way
of future
taxation.to what the Federal Government would do by
Mr. BUCK. How far do you want to advance the authority of the
Federal Government to override contracts that States make
Mr. PAUL I do not think it is a question of overriding a contract,
Mr. Buck. The two Governments, Federal and State, are both SOVereign under our system, and neither has the right to make any
contract except within the limitation of its inherent sovereign ca-
pacity, and it cannot bind the other.
Mr. BUCK. I am glad to hear you say that. Every proposal that
the Treasury has made so far in the last 2 months has been one to
override the authority of the States to make their own tax rules.
There is a bill pending now in the Committee on Rules, which
I am going to try to defeat when it comes on the floor of the House,
if it does, which tends to destroy the States' rights in taxing matters.
Mr. PAUL. You are referring to the Cochran bill.
Mr. BUCK. Yes.
2977
Mr. PAUL The Treasury is also opposed to that bill and completely
agrees with you about that bill, and objected to its passage.
BUCK. For
heaven's
sake,fordothat.
I find that I and the Treasury are
in Mr.
agreement
once
Thank you
On page 3 of your statement you say:
For 1941
thejust
average
rate on all outstanding State and local government
securities
was
over 4coupon
percent.
statement?
Is it not
a matter of fact, Mr. Paul, that that is a misleading
Mr. PAUL. I certainly did not intend it to be misleading, Mr. Buck.
Mr. BUCK. Is it not a matter of fact, Mr. Paul, that if you go to any
responsible dealer in municipal or State securities to buy such securities you will get what they sell you, regardless of what the coupon
rate is. You will get just about 11/4- or 11/2-percent interest.
Mr. PAUL. You will get more than 11/2 percent. The index of the
Standard Statistics Co. for April 1942, was 2.49, or approximately
21/2.
Mr. BUCK. How does a man with an income, say, of $150,000, know
that he can go ahead and pick up some of these great bargains on
which he can get an income-tax exemption. I may want to buy some
municipal securities for safety.
Mr. PAUL.
the fact that a great many people have
bought
them forI mentioned
safety.
Mr. BUCK. Do you not think that is a misleading statement
Mr. PAUL. I do not think it is misleading because in the same sent-
ence I refer to the average coupon rate which is 4 percentMr. BUCK. That is what I am speaking about.
Mr. PAUL. And we give the yield rate for April 1942.
Mr. BUCK. Do you think that the yield upon municipal and State
securities bought is 2.49 on the price the individual has to pay
Mr. PAUL. It is the average of 15 municipal bonds included in the
Standard Statistics Co.'s index. Of course, some of the very finest of
those will
have a lower yield. Some of the weaker bonds will have a
higher
yield.
Mr. BUCK. May in inquire whether you included in the list of mu-
nicipal and
securities bonds of water districts, irrigation
districts,
and State
so forth?
Mr. PAUL We are not using any average of our own. We are taking the Standard Statistics index which, I am told, is accepted by the
market.
Mr. BUCK. Suppose you were like I am. Suppose I wanted to buy
$5,000 or $10,000 of municipal bonds, and I get a quotation from a
responsible firm, and I find that the average was under 1 percent.
Mr. PAUL Well, I do not see how one could get such a low rate.
The
is
2.49Standard
percent. Statistics Co.'s index for April 1942, the average rate
Mr. BUCK. Mr. Paul, what is the interest that the Treasury is pay:
ing on the last two offers they made to the public?
Mr. PAUL. It is paying 21/2 percent on some of its offerings. I do
not know whether you are referring to Defense bonds or not, but on
long-term securities generally it is higher. But, of course, on their
short-term securities it is around one-half of 1 percent. It will depend, I think, on the length of the maturity.
REVENUE REVISION OF 1942
2978
Mr. BUCK. The interest you can obtain from Treasury securities
ranges from one-half of 1 percent to 11/2 percent; I think that is the
correct figure.
Mr. PAUL We will check the figures.
Mr. BUCK. I read that in the paper this morning.
Mr. PAUL. We will check those figures. I am quite sure the average
is 21/2 percent.
Mr. BUCK. Is it not fair to assume that you cannot sell any municipal or State bonds with any greater return to the investor than that!
Mr. PAUL. No: the situation with respect to municipal bonds is
much more complicated because we have in the market special demands for those bonds because they enjoy tax exemption which our
Federal bonds do not enjoy. We are issuing no more tax-exempt
Federal bonds. How that affects the equation I could not say precisely. But the situations are not comparable.
Mr. BUCK. On page 7 of your prepared statement you say thatthe removal of the tax exemption would be more than offset by the drastic
decline that has taken place in the general level of interest rates.
bit.
I wish, for my own information, you would amplify that a little
I do not get the theory, because I do not believe there has been
any drastic decline in interest rates; and in the second place I do
not know where the tax exemption would be offset by such a thing,
if it occurred.
Mr. PAUL. I said in my statement that these bonds of States and
municipalities were issued a number of years ago, in great part carrying coupon rates of about 4 percent.
For instance, if you will look
Mr. Buck. So far as coupon rates are concerned, that is probably
correct. The State may have issued their bonds at 4, 41/2, or 5. But
that does not mean anything to the investor who goes in and buys
them at 120 or 125 as against $100 at which they were issued, does it
Mr. PAUL. That is correct. If you will look at table 9 in my state-
ment you will find an answer to your question.
Mr. BUCK. I have looked at table 9.
Mr. PAUL. You will see there in the third column from the right,
municipal bond yields, from 1922 to 1942, and you will see that the
yield on those bonds has dropped from 4.23 to 2.49 percent. For
instance, at its peak, in 1933, the rate was as high as 4.71 percent
That clearly indicates a drop in the interest rate, and as long as the
interest rates stay at their present level there will be a considerable
less interest load on the States because they can issue bonds now at
about 21/2 percent as against 5 percent in 1933.
Mr. BUCK. Let us not quarrel about future issues. What I have been
talking about is those which have been issued, and which you say the
Treasury also wants tax-exempt.
Mr. PAUL. That is right.
Mr. BUCK. You want to base that on the fact that the bonds have
been issued with 4-percent coupons or 5-percent coupons on them. Is
not that right
Mr. PAUL Those remarks about 4 percent were addressedMr. BUCK. Regardless of what the purchaser may have paid for them
and whether he is earning 4 percent, 11/2 percent, or one-half of 1
percent. Is not that true
REVENUE REVISION OF 1942
2979
Mr. PAUL The remark you quoted and asked me to amplify was
made with reference primarily to the question of how much it would
cost the States. It was only secondarily with reference to the question
of the elimination of the outstanding-exemption In other words, I
was trying to answer the argument made that it would be costly to
the States, and I answered it in part by saying with respect to new
issues the interest will be at present rates and would be at much less
than the rate they are now paying on outstanding issues.
Mr. BUCK. I am not particularly worried about the States, but about
what it will cost the individual who has already entered into his
contract with the State for these bonds, where he has built up his own
individual income basis. What will it cost him
Mr. PAUL In table 9 we give, in the next to the last column on the
right, the spread between high-grade corporate bond yields and municipal bond yields, and I think that, generally speaking, that spread
represents
the bond.
individual investor to purchase a tax-exempt
bond
ratherwhat
than ita cost
taxable
Mr. BUCK. Mr. Paul, would it be any trouble for you to put into
the record a statement showing what is used as a basis of the April 1,
1942, average yield of municipal bond interest
Mr. PAUL. We can only put that in the record if we can get that
computation from the Standard Statistics Co.
(The information requested is as follows:)
List of bonds included in Standard Statistics Municipal Bond Indes
Baltimore, Md., 4's, March 1, 1961.
Boston, Mass. 4's. June 1. 1961.
Cincinnati, Ohio, 4's. September 1. 1961
Dallas, Tex., 41/4's April 2. 1961.
Denver, Colo. 41/4's June 1. 1961.
Los Angeles, Calif. 4's. March 16, 1961.
Memphis, Tenn. 41/2'8, September 1, 1961.
Newark, N.J., 4's, June 1. 1961.
New York City, N. Y. 41/4's March 1. 1962
Philadelphia, Pa., 4's, November 1. 1966.
Pittsburgh, Pa., 3%'s April 1. 1961.
Providence, R. I., 4's July 1. 1961.
Richmond, Va., 41/4's, July 1, 1961
St. Louis, Mo., 31/4's October 1, 1955
San Francisco, Calif., 4's. June 1. 1961.
Mr. BUCK. Mr. Paul, I have investigated this subject somewhat
thoroughly, with the idea in my mind that income of this kind ought
to be taxed from now on.
I believe you think it should go back, to be retroactive with respect to
contracts hitherto entered into.
If you cannot get that information from your own organization,
but get it from this organization known as the Standard Statistics Co.,
it seems to me you are not utilizing your full ability.
I am not very much of an authority either in the committee or else-
where, but, Mr. Chairman, I am going to ask authority to insert in
the record a list from a very reputable bond house that deals in municipal and State securities, which indicates that the 2.49 percent figure
inserted
time.
in table 9 by Mr. Paul is entirely out of line at the present
A great many people have invested in these securities, Mr. Paul,
and,
as you know, they are dependent upon their interest from them
for their income.
2980
REVENUE REVISION OF 1942
Future income should be taxed thoroughly-the is no question
about that-whether it is my salary or anybody else's salary.
But it seems to me that if you propose to go back retroactively and
take away something that they have invested their life savings in, you
are doing something that is entirely wrong.
Mr. BOEHNE. Either in your main statement, Mr. Paul, or in one
of your answers to a question, you said that a citizen of this country
is a citizen both of the State and the Nation.
Mr. PAUL That was in my main statement at the end.
Mr. BOEHNE. And you said that both the State and the Nation are
sovereign
Mr. PAUL That is correct.
Mr. BOEHNE. Is it not true, however, that the Nation is sovereign
only in the regularly constituted delegated powers?
Mr. PAUL. That is true.
Mr. BOEHNE. Which the Constitution gives to the Nation!
Mr. PAUL. That is true.
Mr. BOEHNE And the burden of proof, therefore, rests with the
Nation to show that this is proper constitutional legislation
Mr. PAUL Well, Mr. Boehne, I realize that the Federal Government is a Government with delegated powers, and I am perfectly willing to take the constitutional burden. That is why I called upon the
Assistant Attorney General of the United States for expression of an
opinion-o point.
Mr. BOEHNE. That was my next question. And the opinion of the
Assistant Attorney General as written is based on that point, is it not!
REVENUE REVISION OF 1942
2981
Mr. COOPER. You believe it is the only reason
Mr. PAUL That is right.
Mr. COOPER. Following that line of reasoning a little further, there
have also been other exemptions in the Federal income-tax law all
through the years!
Mr. PAUL A great many: yes, sir.
Mr. COOPER. A great many exemptions!
Mr. PAUL. That is right. Section 22 contains a list of quite a number of statutory exemptions or exclusions from gross income.
Mr. COOPER. I now remember that the first income tax act exempted
a thousand dollars for single persons and two thousand dollars or
twenty-five hundred for married persons from individual income tax.
ation.
Is that right
Mr. PAUL. The first act?
Mr. COOPER. Was it not the first
Mr. PAUL. I think they were higher in those days-$3,500 or something like that, as I remember it.
Mr. COOPER. Anyhow, whatever the amount of the first act was,
every act since then has given specific exemptions for individuals
Mr. PAUL, That is right.
Mr. COOPER. Of course, the exemption now stands at $750 for single
people and $1,500 for married people.
Mr. PAUL. Yes, sir: that is right.
That exemption has been changed many times through
outMr.
theCOOPER.
years
subject.
Mr. PAUL That is right.
Mr.see
COOPER.
may
proper And is subject to change at any time that Congress
Mr. COOPER. Mr. Paul, without intending to reflect any views that
I may have on this subject, I would like to inquire of you briefly in
order to get a clear understanding of the Treasury's position. Is it
the position of the Treasury Department that there is no legal or
moral obligation on the Federal Government to continue the exemption that exists in law now with respect to the State and municipal
securities?
Mr. PAUL. It might even be eliminated altogether, I should think.
Mr. COOPER.
Because
line with your position it is only a specific
exemption
provided
in theinlaw
Mr. PAUL. That is right.
Mr. COOPER. Then, of course, under section 101 there are quite a
number of corporations that are exempt
Mr. PAUL. That is right.
Mr. PAUL. It is. It is quite a thorough discussion of the whole
Mr. PAUL That is a correct statement of the Treasury's position,
which was somewhat stated just below the middle of page 10 of my
statement, which I did not bother to read to the committee this afternoon. And then, Mr. Cooper, the Assistant Attorney General's opinion also deals with the legal issue.
Mr. COOPER. It is correct that the income from these bonds is not
now taxed, because there is a specific exemption in the income-tax
law!
Mr. PAUL That is right. In section 22.
Mr. COOPER. And that exemption has continued throughout the existence of the Federal income-tax law!
Mr. PAUL Yes. It was put in originally, I think, in the 1913 act,
and has been in every act since that time.
Mr. COOPER. All right. And it is by reason of the existence of that
specific exemption that the income from these securities is not now
and has never been taxed by the Federal Government?
Mr. PAUL I believe that that is true, Mr. Cooper. Of course, that
is subject to the question of constitutionality. I believe it is the only
reason.
Mr. COOPER. From the income-tax law, I mean.
Mr. PAUL. That is right.
Mr. COOPER. I just happen to have that section before me. In
section 101 there are 19 different paragraphs covering various types
of
corporations that are exempt under this section. That is true, is
it not
Mr. PAUL. That is true. Then you might also refer to section 23,
which has a list of deductions, which may be equivalent to exemptions.
Mr. COOPER. Under this section 101, No. 1 under that is labor, agri-
cultural, and horticultural organizations; 2, mutual savings banks;
3, fraternal beneficiary societies; 4, domestic building and loan associations: 5, cemetery companies; 6, corporations and any community
chest fund or foundation: 7. business leagues, chambers of commerce,
real estate boards, and so forth; 8, civic leagues or organizations;
9, clubs organized and operated exclusively for pleasure, recreation,
and other nonprofitable purposes; 10, benevolent life insurance associations; 11, farmers' or other mutual hail, cyclone, or gasoline fire
insurance companies or associations; 12, farmers', fruit growers', or
2982
REVENUE REVISION OF 1942
like associations; 13, corporations organized by any association exempt
from the provisions of paragraph 12 or members thereof; 14, corpora-
tions organized for the exclusive purpose of holding title to property,
collecting the income therefrom, and turning over the entire amount
thereof, less exemptions, to any organization which itself is exempt
from the tax imposed by is chapter; 15, corporations organized under
an act of Congress, and so forth: 16, voluntary employees' beneficiary
associations; 17, teachers' retirement fund associations; 18, religious
or apostolic associations or corporations; 19, voluntary employees'
beneficiary associations.
As understand it, it is the position of the Treasury that this exemption now in the law as to income from State and local securities stands
as an exemption in many respects like all these other exemptions now
included in the income-tax law.
Mr. PAUL That is right.
Mr. COOPER. And may be altered, changed, or removed at any time
if Congress would see proper to do so?
Mr. PAUL That is the Treasury's position.
Another thing that you might mention by way of analogy is the
dividends which were formerly exempted from the normal income
tax. We took that exemption out in 1936. We had it in the statute,
and we took it out of the statute, and we may do the same thing with
respect to this exemption of income from State and municipal bonds,
always assuming that we are correct in our constitutional position,
which we base on the Assistant Attorney General's opinion.
Mr. COOPER. I thank you.
Mr. McLEAN. Mr. Paul, do I understand you to say that the only
reason why State and municipal securities are now exempt from taxation is because of a statutory enactment of the Congress in the income
tax law of 1913
Mr. PAUL No. It is a provision in the Internal Revenue Code now.
Mr. MCLEAN. Well, as reenacted in the code. I mean to say, do I
understand the Treasury's position to be that the only reason why
State and municipal securities are now not subject to taxation is because
of the exemption in the statute, disregarding the decision in McCul
lough v. Maryland, which established the immunity rule
Mr. PAUL That provision is the only thing that bars the taxation of
the interest on those bonds. In other words, there is no constitutional
barrier to taxation, and the only thing that keeps them exempt is this
exemption provision of section 22. Without that exemption provision
they would be swept into the orbit of taxation by the beginning of
section 22 (a), which refers to the taxation of gains, profits, and in-
come from any source whatever.
Mr. MCLEAN. What I want to get at is the approach of the Treasury
Department to this proposal. There are two schools of thought.
Your school of thought is that State and municipal security holders are
now evading taxation because of this situation
Mr. PAUL I do not say that they are evading it. I think they are
enabled by the statute to avoid their just share of the tax.
I do not blame any holder of these bonds for not paying a tax. I
simply say that the statute ought to be changed so that they cannot
avoid their just share of the tax burden.
REVENUE REVISION OF 1942
2983
Mr. McLEAN. But your approach to the proposition is one that has
entirely to do with revenue, is it not
Mr. PAUL No. It is not.
Mr. McLEAN. It is not
Mr. PAUL. Our approach is from the revenue and
Mr. McLEAN. What object are you seeking to attain
Mr. PAUL Two things. The first thing is that we are trying to obtain a just distribution of the tax burden, and we think this exemption
prevents us from making that just distribution. Secondly, we are
interested in the large amount of revenue which would ensue from the
taxability of this interest.
Mr. MOLEAN. It goes without saying that you are more interested
in revenue than you are in other considerations, does it not
Mr. PAUL I do not think that it goes without saying.
Mr. McLEAN. Isn't this true: that in the approach which you have
just stated on the two grounds which you have mentioned you absolutely disregard the danger of placing the weapon of taxation in the
hands of the Federal Government, with its threat against the preservation of the sovereignty of the States
Mr. PAUL Mr. McLean, I do not think it is a question of placing it
one place or the other. I think Congress has this power, and the Assistant
opinion, which I have just put in the record,
agrees Attorney
with that General's
view.
In other words, with no constitutional barrier the responsibility is
on Congress to exempt or to tax.
Mr. McLEAN. Would you in the light of what has happened under
our experience under the Constitution of the United States place all
power and authority in a strong centralized government In other
words, would you call a constitutional convention today to reconstruct
our Government in the light of the experience that we have had in
the last 150 years
Mr. PAUL I think, if I may say soMr. McLEAN. Supplementing that question: In reaching the conclusion to call a new constitutional convention would you disregard
the doctrine of McCulloch V. Maryland and the wisdom of John Marshall and Daniel Webster?
Mr. PAUL. Answering the first part of your question, Mr. McLean,
I would not call a constitutional convention at this time. I am perfectly satisfied with the Constitution as we have it.
The question here is, What does the Constitution mean, the Consti-
tution that we now have! It is not the Constitution that might
emerge from some convention. I am saying that the Constitution that
we have today enables us to tax the interest on State and municipal
securities
Mr. McLEAN. Is it any different from the Constitution that we had
in 1818
Mr. PAUL In this respect it is no different. It is no different in that
there is no provision in the Constitution an where about this subject.
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
hung the flesh on the skeleton of the Constitution and gave it life, and
which became and have been recognized as fundamentals of our constitutional system, and recognized and restated as constitutional provisions right on down until as recently as Collector V. Day?
2984
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. PAUL. That doctrine that you refer to, Day-that
case was decided a great many years ago, too.
Mr. McLEAN. How many years ago
Mr. PAUL About 70 years ago.
Mr. McLEAN. And the other case was decided 150 years agoi
Mr. PAUL The question is not how long ago that decision was, Mr.
McLean. The question is what the Supreme Court will do.
Mr. McLEAN. 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-
2985
Mr. McLEAN. They said, "You cannot issue notes unless you print
them on paper provided by the State of Maryland."
Mr. PAUL That is right.
Mr. McLEAN.
"And
that paper must have a stamp on it."
Mr.
PAUL That
is right.
Mr. McLEAN. "Which represents a tax.'
Mr. PAUL That is right.
Mr. McLEAN. "A tax so high that you cannot do any business in
Therefore we will have the State of Maryland for our own
cause it was decided 150 years ago, I do not understand your legal
Maryland.
bank.'
Mr. PAUL did not mean to say that.
Mr. McLEAN. Let us put it this way: You think that the doctrine
of Collector v. Day was good doctrine at the time it was decided
Mr. PAUL I think it was probably an unwise decision. But I cannot question the Supreme Court. I say that now it has been overruled
Mr. PAUL That is right. That is a correct description.
Mr. McLEAN. And when Daniel Webster wrote the brief didn't he
say
that 1this was an illustration of how the power to tax is the power
to destroy
philosophy.
by the Supreme Court.
Mr. McLEAN. And McCulloch V. Maryland was good doctrine
Mr. PAUL. I think so. It emphasized the power of the Central Government, and was probably a wise decision at the time. I am not
questioning it.
Mr. McLEAN. Would you disregard McCulloch V. Maryland today
Mr. PAUL. I do not think I would.
Mr. McLEAN. Didn't that decide that the power to tax was the power
to destroy, and that you put a dangerous instrumentality in the hands
of concurrent governments when you gave them the power to tax the
instrumentalities of each other
Mr. PAUL The case did not decide that question, Mr. McLean. It
had a statement in it. You are quoting one of Mr. Justice Marshall's
statements, which is a very general statement and which has been some-
what criticized by the late Mr. Justice Holmes in his opinion in the
Panhandle case. It is such a broad generalization, that the power to
tax
is the power to destroy. And Mr. Justice Holmes said, "Not while
this Court sits."
Mr. McLEAN. Let us lay aside words and phrases. Let us look at the
principle. Were not these the facts: The Government of the United
States established a bank, and the State of Maryland wanted to keep
that bank out of the State of Maryland, and they put such a big tax
on it that
bank could not come into the State That was their purpose,
was the
it not?
Mr. PAUL.
is true.
The Court held that it was discriminatory taxation. That
Mr. McLEAN. I am not asking you the nature of the tax. That is
what happened in that case, was it not?
Mr. PAUL. There was a statute passed. That is right.
Mr. McLEAN. There were two banks, There was a bank of the
State of Maryland. There was a bank of the United States. The
State of Maryland desired to keep the bank of the United States out
of Maryland. Isn't that true?
Mr. PAUL. I think that that was the purpose; yes.
Mr. McLEAN. And the State of Maryland put a tax on any business
done by the bank of the United States in the State of Maryland.
Mr. PAUL That is right.
willMr.
notPAUL.
quote It is a good many years since I have read the case, and I
Mr. McLEAN. That is what he said, and John Marshall accepted it.
Mr. PAUL I know that John Marshall seconded the opinion.
Mr. McLEAN. And he also said this: He said "that the State
tax mails, may tax the mint, may tax patent rights, may tax the may
m the customs house, may tax judicial process, may tax all the papers means
employed by the Government to an excess which would defeat all the
ends of government. That was not intended by the American people.
They did not intend to make their government dependent the
States.' That has been a principle of our Government ever since, upon and
that was the idea when the sixteenth amendment was adopted.
When the sixteenth amendment was proposed, Governor Hughes
said, in effect, "The danger about this thing is that it will the
door to the Federal Government taxing instrumentalities open of the
State
of NewofYork
my approval
it.' and thereby affect its sovereignty, and I withhold
It was not until the now famous letter of Senator Root. and the
argument of Senator Borah, convinced the governor of New York and
the governors of other States that the immunity rule as recognized
would prevent the Federal Government from interfering with instrumentalities of the States and that the immunity rule would continue thattoNew
York andamendment.
New Jersey and some other States gave their
approval
the sixteenth
In everything that I have read that has come to me from the Treasury before you came on the scene, and in your brief today, there is a
strained effort to explain away the circumstances surrounding the
Root letter. For instance, in your brief you say that the State of New
York did not approve of the sixteenth amendment until Governor
Hughes had retired from office.
Governor Hughes' retirement from office is a very slim reason to
amendment. advance as to why the State of New York approved the sixteenth
In this situation, why does the Treasury not consent to the people
by a constitutional amendment deciding that the immunity rule be
eliminated,
and the Federal Government given the right to tax State
instrumentalities
Mr. PAUL. The reason why the Treasury does not urge a constitutional69669
amendment
is because it deems such an amendment unnecessary.
42 pt.
2986
REVENUE REVISION OF 1942
That same line of discussion was before us at the time we had so
much in the forefront the question of taxing State salaries, and the
Supreme Court held in the Gerhardt case that that amendment was
not necessary; that we had the power. We are in the same position
with respect to municipal bond interest that we were before with
respect to State salaries. And we were upheld by the Supreme Court.
Mr. McLEAN. Then, laying aside all judicial determinations and all
decisions, the Congress is faced with a broad question. Let us set all
other considerations aside, and face the broad question Is it good
governmental policy to allow two concurrent governments to have the
right to reciprocal taxation
Mr. PAUL. I think it is. The position of the Treasury for some time
has been in favor of eliminating these intergovernmental immunities
applicable to obligations.
Mr. MCLEAN. Let us lay aside the question of the Treasury's position,
and let us argue this thing academically from the standpoint of the
experience of the Nation and of the people. Does your proposition
contemplate that the State of New Jersey shall have the right to tax
Federal instrumentalities!
Mr. PAUL. Yes, it does. We want to have the immunity of both
eliminated as to their obligations.
Mr. McLEAN. You would give the State of Tennessee the right to
tax the Tennessee Valley Authority on its bonds
Mr. PAUL We would insofar as we had not already made a contract.
I don't know about the Tennessee Valley bonds. In some bonds, in a
great many of our previous Federal issues up to about a year ago, we
contracted the exemption.
Mr. McLEAN. You contracted the exemption with the Tennessee
Valley Authority
Mr. PAUL. I am not sure about that particular one.
Mr. MCLEAN. I am asking you
Mr. PAUL. I am not familiar with the Tennessee Valley bonds.
Mr. McLEAN. Let us suppose now, no matter what you did-I am
just talking academically-let us suppose that you found it desirable
to exempt bonds of the Tennessee Valley Authority from Federal
taxation, and suppose you did not find it so desirab e to exempt the
bonds of the South Carolina Power Authority. You could tax the
bonds of the South Carolina Power Authority. You cou'd tax them
out of existence, could you not, and still leave the Tennessee Valley
Authority the beneficiary Could you not by that means drive out
of existence the South Carolina Power Authority and turn all of its
assets over to the T. V. A.
Mr. PAUL do not think that you could. I think that that would be
discriminatory taxation, and would be therefore unconstitutional.
Mr. McLEAN. No matter what we may think, it is possible, is it not!
Mr. PAUL. I do not think so.
Mr. McLEAN. Given a friendly Supreme Court, what is going to
prevent it
Mr. PAUL. I cannot do anything but accept the Supreme Court
that we have.
Mr. McLEAN. Don't let us hide behind the present Supreme Court
or any others. I am asking you now, and I want you to tell me as
a Member of the Congress what is the thing for me to do now for
REVENUE REVISION OF 1942
2987
the best interest and preservation of my Government, irrespective
I of John Marshall or Daniel Webster or any Supreme Court decision.
am asking you to tell me if you think it is safe for two concurrent
governments to have equal power of taxation, and I am giving
situation. an illustration and asking you if you think there is any danger in that you
Mr. PAUL. The answer is that I do not think there is any danger in
that situation: that it is entirely safe to follow the Treasury recom-
mendations insofar as the point that you raise is concerned.
Mr. McLEAN. You do not think that the Federal Government might
come
and put a tax on a State authority so high that they could
not
do along
business
Mr. PAUL I would have confidence that the Congress would not
do that, in the first place; and in the second place, that if the Congress
did do it, our Supreme Court would hold that the tax was discriminatory
and therefore unconstitutional.
Mr. McLEAN. Well, Mr. Paul, when we studied the Constitution
we were taught that it was to protect against human frailties; that
it was to preserve certain principles which experience had taught
were essential to human freedom. And therefore there were put
in the Constitution certain restraints and certain limitations.
It does not make any difference what We think individually. The
fact is that certain things had happened. And one of the things
that had happened was the abuse of the power of taxation by the
government in power; and with those thoughts in mind the Constitution was adopted, and with those thoughts in mind the Constitution
was accepted. And over all these years we have had this immunity
enactment. rule which you do not dignify as anything more than a stautory
For instance, Mr. Cooper has cited a number of exemptions under
the Federal Code. And I can understand that there is a reason for
them.
instance,inthere
is a reason why a man should be exempted
for
the For
dependents
his home.
Mr. PAUL That is right.
Mr. McLEAN. That is quite a different reason from that upon which
theMr.
taxation
of State securities is exempted, is it not
PAUL. Yes.
Mr. McLEAN. There is a reason for agricultural products to be
exempted to some extent. The mere fact that there are a number of
exemptions mentioned in the Revenue Code does not give them any
particular dignity or importance. Nor does it drag down the great
it? time-honored rule of immunity to the level of those other things, does
Mr. PAUL I quite agree that those exemptions in the statute have
a different history and a different underlying cause.
Mr. McLEAN. The mere fact that there are a great many of them
does not add any importance to the argument for this exemption or
add any relevancy at all to the taxing of bonds.
Mr. PAUL.
There were different reasons underlying each different
exemption,
of course.
Mr. McLEAN. That is what I say. The mere fact that there are
15
16 exemptions does not mean that they have any relevancy to
eachor
other.
2988
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. PAUL. I think what Mr. Cooper had in mind was not that
but, rather, that he was trying to show that there were other ex.
emptions in the statute, and he was trying to show that any provision of the statute which is nothing more than an exemption could
Mr. DISNEY I remember very distinctly Mr. Sullivan made a speech
at St. Louis a year ago at a conference of mayors in which he stated
flatly that it would be a breach of a moral obligation.
Mr. PAUL Of course. I do not have the speech to which you refer.
But the answer to your question as far as I am concerned is that considerations of equity and morale with our increased tax load today and
the various other considerations that I have mentioned in my statement make it altogether a different question today from what it was
before.
be changed.
Mr. McLEAN. I gathered from his enumeration of so many exemptions that he was lending importance to the fact that this immunity from taxation did not amount to anything more than a mere
statutory enactment. But I put it on a much higher plane. I put
it on the plane of a fundamental principle which goes to the preservation of our institutions, the sovereignty of the States, and the im-
Mr. DISNEY. I would not think personally that the advent of the
war
would make a difference in the moral aspects of a contract, express
or
implied.
portance of the States; and to protect the States, as well as the Federal
Government, from putting into the hands of any governments with
concurrent jurisdiction an instrumentality by which one can destory
the other or ruin its institutions.
Mr. PAUL Neither would I. I do not think that there is any con-
tract, express or implied.
Mr. DISNEY We will pass that. I still remember the very broad
assertions of there being a moral issue involved, and I do not think
And I may say and I do not have to tell you-I sympathize with
you in your position-a distinguished member of the bar, who has
written a number of textbooks, who is called down here to argue
against this fundamental proposition before a committee of Congress, and I am satisfied that you must know that underlying the
whole argument is this rule of immunity and the reason for it. the
that they should change so suddenly, although we do need money, and
I believe that we ought to go out and get it by all the different methods
and means that we can. Did I understand you to say in answer to Mr.
McLean that you would dispose of the immunity on both sides, that of
the States and of the Government
Mr. PAUL I think we should be consistent, Mr. Disney.
reason which actuated Governor Hughes and Senator Root and Senator Borah, the reason that actuates me in my opposition as I under-
Mr. DISNEY How far. now. would that 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
For instance, would you permit a State to put a tax on a Federal building and the Federal court pay a special assessment for that Federal
actuated Marshall and Webster and all the rest.
And in your brief and in your statement here today, I have not
been able to find to my satisfaction sufficient explanation of how
you can give the Congress the right to say that this great immunity
rule, coming down to us from McCulloch V. Maryland, has only the
weight of a mere statutory enactment, which Congress can legislate
building?
Mr. PAUL. I think we may leave that to the legislatures, which will
certainly not pass a statute that will go to too great extremes.
Mr. DISNEY
turnit loose
lature
could do Ifit,you
could
not this doctrine of immunity, the legis-
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
inserted in the record a statement by Mr. Friedman in answer to the
statement made by Mr. Paul, in regard to the capital-gains tax.
The CHAIRMAN. Without objection, that may be inserted.
(The document referred to will appear in the revised edition.)
Mr. DISNEY. Mr. Paul, first, I wish to satisfy myself that you are
right on this proposition, and then I want to ask you about some
trine of immunity. It is loose. Under the present interpretation of
the Constitution there is no immunity with respect to these obligations.
That, at least, is our position. Now the only question before us is
whether we shall pass a particular provision in this statute.
Mr. DISNEY. I want to clear this up and see whether I am thinking
clearly. If it is loose, as you say, what is to prevent the Oklahoma
Legislature from passing a State statute saying that Oklahoma may
have a right to put a tax on the Federal building there!
other things.
Mr. PAUL The only thing that we are talking about is taxation of
Last year, when we had this proposal or another related proposal
before us, when the Treasury was down here, an odor of sanctity
spread over the room which suggested that the Treasury would be
income
from
obligations. We do not have the question of imposing a
tax
on the
Government.
Mr. DISNEY I am coming to that a little later. Now I want to stick
close
to this theoretical waiver of immunity on the part of both Governments.
horrified at any attempt to upset this immunity. But now in less
than a year's time we are confronted with that very proposition. How
do you explain that!
It seems to my idea on it is rather nebulous, I agree-that
Mr. PAUL I think December had a lot. to do with it, Mr. Disney.
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
ridiculous; but you make it possible.
Mr. DISNEY. It becomes a need for money instead of a moral obligation?
Mr. PAUL No. I think the Secretary in his original statement to
I
this committee made reference to the point that you have in mind.
think he said that the war had changed the situation so as to make a
gradual elimination of the exemptions insufficient in his opinion.
2989
Mr. PAUL I do not think that you do. The question here is the
question
of whether to tax certain income. It is not a question of taxing
the
Government.
2990
REVENUE REVISION OF 1942
Mr. DISNEY. But am taking you at your word on what you said to
Mr. McLean about disposing of this mutual immunity.
Mr. PAUL. What I said to Mr. McLean may have been pretty broadly
stated, as frequently happens when one is talking extemporaneously.
But all that I meant to say there was that I thought there should be a
complete reciprocity as to the right to tax income from these obligations.
Mr. DISNEY. Let us take that proposition, then. I do not want to
take a lot of time. If there is that complete reciprocity, then the illus.
tration that I suggested would not be inconceivable, would it
Mr. PAUL. It would.
Mr. DISNEY. Of the State taxing the Federal Government's real
estate.
Mr. PAUL. I do not believe that the Constitution would be interpreted so broadly as to enable one government to tax another govern-
ment directly. I am talking here, as I say on page 8, about private
immunity from Federal income tax.
Mr. DISNEY. I want to stick to that subject. I want to see if I can
follow this thing through and do a little thinking on the subject. Evidently Congress thought it was sound that neither government should
tax the other directly or indirectly. Evidently the earlier decisions of
the Court were to that effect.
Mr. PAUL Of course, the King and Boozer case is the most recent
case.
Mr. DISNEY. Yes. I agree that Mr. Justice Marshall was wrong
when he announced that the power to tax was the power to destroy.
Mr. PAUL Of course, the position of the Treasury is that the States
ought to have won the Boozer case.
Mr. DISNEY. What was that
Mr. PAUL The position of the Treasury is in favor of the right
of the States to tax also.
Mr. DISNEY. To tax what
Mr. PAUL. To tax the income, for instance, of Federal employees.
To tax the income of Federal securities where there is no previous
contract made by the Federal Government.
Mr. DISNEY. It seems to me that that leads into a taxation by one
Government of the other sooner or later, whichever one seems to be
the most powerful. And, of course, you and I know that the central
government finally gets to be the most powerful.
Now, let me ask you this: Were you before the committee here a
week or so ago when we were speaking about this?
Mr. PAUL. I do not think so.
Mr. DISNEY. Suppose we do give the Federal Government the right
to tax the income from State and municipal issues. We will suppose
that the Congress would decide to put some regulations on those issues
and determine what particular issues that income should come from.
Then let us say that after a while some other Congress should decide
to make a difference between the issues and tax some and exempt
others. Certainly the Federal Government and Congress could decide
to take jurisdiction over the issues of municipal and State bonds. You
would have that authority under this doctrine, would you not
Mr. PAUL. No. I would say, decidedly not. I think that the first
part of your statement would involve very definitely the discrimination rule.
REVENUE REVISION OF 1942
2991
Mr. DISNEY. On this question of discrimination, how far can you
go in taxing the income of States and municipalities Can you go
further than the subjects that I have indicated
Mr. PAUL I do not think you could, because you would be prevented
by various provisions of the Constitution. You would be discriminat-
ing if you made any unfair distinction between issues. In other
words, all classifications must be reasonable, and I think a classification
to distinguish unreasonably between different issues would be unconstitutional.
Mr. DISNEY. But suppose that the Supreme Court sustained it
Mr. PAUL Of course, if the Supreme Court sustained it, that would
answer the question. That seems to me to beg the real question here.
Mr.
amcorrect
not trying
to beg the question. I am trying to
find
outDISNEY.
whether II am
or not.
Mr. PAUL. I do not base our position merely on the question of
revenue. I think it is a question of revenue, as f told you before, but
I would also put it on morale.
Mr. DISNEY. In the old declaration there is something said about a
swarm of Federal agents. I can visualize that if you carry this thing
far enough you may actually see sitting down at the city council a
swarm of Federal agents telling them what kind of bonds to issue, and
not letting any county issue bonds that do not come up to specifications.
Mr. PAUL I have not considered that precise apprehension of yours,
but I think it is pretty far removed from the question that we have
before us, of taxing the income.
Mr. DISNEY. If we tax the income of the States and municipalities,
it seems to me that we do not have much further to go to let us tax
each State directly or indirectly or let the States tax the Federal
Government directly or indirectly.
That is all.
Mr. KNUTSON. Does the Treasury recommend reciprocal taxation
Mr. PAUL It does, Mr. Knutson.
Mr. KNUTSON. Would you confine such right to Federal and local
securities
Mr. PAUL I do not believe I understand that question. That is all
that we have involved here.
Mr. KNUTSON. Would you confine the right to tax on the part of the
States only to Federal bonds, like victory bonds and liberty bonds
Mr. PAUL I would say that if this Congress should remove this
exemption from the statute now contained in section 22, it ought to
consent to the taxation by the States of Federal bonds. In other
words, all we have here is a question of taxing the interest on bonds.
Mr. KNUTSON. I understand that. I am speaking of the income,
the interest on the bonds. I thought that it was understood that that
was the subject that we are discussing.
What about the numerous bond issues that were guaranteed by the
Federal Government both as to principal and interest? To name a
few of them The Federal land bank bonds, the Home Owners' Loan
Corporation bonds, Tennessee Valley Authority bonds, Columbia
Valley Authority bonds, and others, of which I understand there are
nobody knows just how many, but I understand that there are twelve
or fifteen billion dollars outstanding in those bonds, both in interest
and principal.
2992
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. PAUL I do not have those figures before me.
Mr. KNUTSON. The figures would not make any difference. It
would not matter whether it was two billion or twenty billion. The
principle is the thing that I am considering here.
Mr. PAUL I want to be sure that I understand your question.
Mr. KNUTSON. What about the numerous bond issues that have been
guaranteed by the Federal Government both as to principal and interest? To name a few: The Federal land bank bonds, the Home Owners'
Loan Corporation bonds, the Tennessee Valley Authority bonds, the
Columbia Valley Authority bonds, and others.
Mr. PAUL. Wherever in connection with those issues we have made
a contract that the interest should not be taxable, I would not suggest
that we break that contract. And I think that in a great many of
those cases we have so contracted.
Mr. KNUTSON. But, Mr. Paul, you are asking us to break contracts,
You are asking us to have this bill carry a provision that would permit
the Federal Government to tax outstanding State and municipal bonds
that were sold subject to being tax-exempt.
Mr. PAUL. But that was not our contract. That was not the Federal
Government's contract.
Mr. KNUTSON. What is the Federal Government?
Mr. PAUL Historically, of course, it is the Government that was
created under the Constitution, as somebody has said, with delegated
powers under the Constitution.
Mr. KNUTSON. Delegated by whom
Mr. PAUL By the States.
Mr. KNUTSON. In other words, those States were the creator of the
Federal Government!
Mr. PAUL The States made a compact which resulted in a Federal
Government. That is right.
Mr. KNUTSON. The Thirteen States?
Mr. PAUL Yes, sir.
Mr. KNUTSON. The Commonwealth got together and drafted a Con-
stitution and set up a Federal Government. Isn't that right
Mr. PAUL. That is right.
Mr. KNUTSON. So the Federal Government is the creature of the
2993
to its owntax.
tax. What the State could do was to make an exemption as
Federal
But, notwithstanding the fact that the Federal Government was
created originally in a historical sense by the compact of the States,
it is the sovereign government; and the whole doctrine of immunity,
indeed, is premised on the doctrine of sovereignty.
Mr. KNUTSON. I agree with you that it is a sovereignty question. I
think it was settled very definitely back in the sixties. But what is
worrying
measistax-exempt.
if we have a moral right to tax bonds that have already
been
issued
Mr. PAUL Of course, I may be wholly wrong about it: but it seems
to me that we have every moral right. Indeed, it seems to me that
on the moral side of the question the shoe is on the other foot.
We have a moral right to tax, in my opinion, because all the States
could do was to grant an immunity as to their own tax: and we are
not violating our own contract and we are not proposing to take away
from the holders of these bonds anything that the State issuing the
bonds had the right to give to those bondholders.
Mr. KNUTSON. As I recall it, a year ago the Treasury Department
suggested
Am rightthat only outstanding State and municipal issues be taxed.
PAUL
oneMr.
time.
That is right. The Secretary did take that position at
Mr.it.KNUTSON. The Treasury took that position a year ago, as I
recall
Mr. PAUL About a year ago. That is right.
Mr. KNUTSON. I concede, of course, that this situation is vastly
different now: and if I can be persuaded that it is necessary to do
this in order to raise money to save the Republic, I am going to vote
for it. But you say that the primary purpose is not to derive more
income, but, rather, to equalize taxation throughout the country.
Mr. PAUL. Oh, no. I want to make my position clear.
Mr. KNUTSON. I thought that that was what you told us.
Mr. PAUL I may have said- may have used
The CHAIRMAN. There is too much confusion here. We cannot
States?
hear what is being said.
Mr. PAUL That is right.
Mr. KNUTSON. Now, if the States issue bonds which they say are
tax-exempt, that is the creator who says that. Then the creature says,
"We won't pay any attention to the provision that those bonds carry
would like to make it clear that there are no scales by which I can
precisely weigh the relative importance of the considerations that
about tax-exemption."
I am not a lawyer. I may seem very, very dense to some of your
legal advisers down there, who shake their heads. Nevertheless, I
am interested in this thing from the standpoint of principle. And
I know that you are, and I have a high regard for you, Mr. Paul.
Mr. PAUL. Thank you.
Mr. KNUTSON. But I am just wondering whether the Federal Government would have the right, even assuming that it is a legal right,
has it a moral right to take an action that would cause a violation of
a contract that had been entered into between the State and its people!
Mr. PAUL. I think it has the right, Mr. Knutson, because the State
never did have any right to create an exemption privilege as to the
Mr. PAUL I may have used the word "primary." But if I did, I
go into our decision to make these proposals.
I say this: That the revenue aspect of the problem is a very important aspect. Two-hundred-odd-million dollars of revenue at this
time is a very serious matter.
On the other hand, we are also motivated in making the proposal
by the fact that we think that this exemption discriminates in favor
of the high-income taxpayers and has a very bad effect on war morale
at this time, and it is inequitable and enables a large number of taxpayers
like
this, to pay no income tax, and that is particularly true at a time
Mr. KNUTSON. When Mr. Disney questioned you, or, rather, expressed the fear that in granting the Federal Government this power
of taxing the States, the income from State and municipal bonds,
he expressed the fear that it would serve to bring the States under
2994
REVENUE REVISION OF 1942
the direct control of the Government so far as their fiscal affairs are
concerned. You realize, I am sure, that you could wreck all the fiscal affairs
the States, insofar as they were tired up with bond issues, through
of taxation. You could impose a tax so high that nobody would buy
those bonds, which would result in an absolute stopping of future
issues of State and municipal bonds, which are badly needed for
sanitary and other purposes. I do not think that that is a violent
assumption at all.
Mr. PAUL Mr. Knutson, I do not want to stop the States from
issuing any bonds. All that we are proposing is a statute which
enables the Federal Government to collect a tax on the income from
State and municipal securities.
Now, we can certainly draw that statute in such a way that that
is all it will accomplish. Then these other things that may happen
or will not happen as future Congresses may determine and according to the Constitution as it may protect the States.
Mr. KNUTSON. That is where the rub -what future Congresses
may determine. As Hamlet said, "There is the rub."
Mr. PAUL. Not only that, but there is also in the equation the power
of the Supreme Court to decide any statute unconstitutional if it
violates the Constitution.
Mr. KNUTSON. At the rate that we are traveling it is not a violent
assumption to assume that we are headed for a pretty radical form
of government in this country.
Suppose some administration should succeed this one that is even
more radical than this administration, and that they made up their
minds that they wanted to break down the power of the States. You
have your law on the statute books. One of the first things that they
would do to put the screws on the States would be to increase the tax
on the income from these bonds.
Mr. PAUL Then it would be discriminating against a certain type
of income, which, I think, would be unconstitutional.
Mr. KNUTSON. Who would stop them
Mr. PAUL I think that the Supreme Court would stop them.
Mr. KNUTSON. You are more optimistic than I am, Mr. Paul. I
happen to have read some recent decisions of the Court. I think
that this Court has in every case made the construction of the law
that they are told to make.
Mr. PAUL I, of course, disagree with you on that point.
Mr. KNUTSON. Some of the old Justices that have passed to their
reward must be turning over in their graves many times a month the
way things are going as far as the Supreme Court is concerned.
do not want to depend on the Supreme Court, and I do not think
that you do. It is no longer the anchorage that it used to be, in my
opinion.
I do not want to indict the Court. It may be that I have not kept
step with the times. But as far as I am concerned, I think that Congress ought to keep as much of this power in their own hands as they
possibly can.
There is no question in my mind but what we can tax all these issues
that I have mentioned, like the T. V. A. and the Columbia Valley
Authority and others.
That is all, Mr. Chairman.
REVENUE REVISION OF 1942
2995
Mr. REED. Mr. Paul, I believe you said when you were here about a
year ago that the Secretary disclaimed any intention of taxing municipal bonds that were outstanding, State and municipal bonds. That is
the way I understood your testimony here this afternoon.
Mr. PAUL I was not here then.
Mr. REED. Maybe it was Mr. Tarleau.
Mr. TARLEAU. I think that is substantially correct.
Mr. REED. I wonder if you have a record of the number of State
and municipal bonds that have been issued since that statement was
made by the Secretary of the Treasury here before this committee.
Mr. PAUL. I am told that we can get an approximation of that.
Mr.
would
to have you do that and put it in the record.
Mr. REED.
PAUL II will
dolike
that.
(The information requested is as follows:)
State and local sales of bonds and short-term
March 1942notes, by months, January 19411941
1942
1941
LONG-TERM LOANS
January
February
March
April
SHORT-TERM LOANS
$77,938,037
190,174,025
104,227,335
101,655,509
May
115,981,921
June
144,805,574
151,609,987
July
August
September
October.
November
December
Total
Number issues
1942
$118,540,246
45,534,825
28,453,120
April
June
5.548
September
October
November
December
838
$119,069,784
38,276,814
183.013.753
81,994,622
August
193, 528 191
63,074,002
138,682,759
July
65,052,005
78,478,803
60,722,461
90,578,249
$175,388,694
177,957,444
89,393,799
May
48,268,986
1,229,492,892
January
February
March.
Total
Number of issues
150,913,406
169.942.258
53,669,189
93.123.188
113,654,528
99,988,292
1,407,782,154
340,360.851
938
Source: The Bond Buyer, sec. II, Apr. 11, 1942. Treasury Department, Division of Tax Research, Apr.
17, 1942.
Mr.
REED.
Here to
is the statement by Mr. Morgenthau on that question
that
I referred
Unfortunately, tax-exemption clauses appear in many of the outstanding Issues
of Federal securities and these promises must not be violated. In the case of
State and local securities, however, there has never been any contract or moral
commitment between the Federal Government and the security holders or the
State and local governmental authorities regarding Federal taxation. Since
the Supreme Court decision in the case of Graces v. O'Keefe in 1989 fair-minded
experts in constitutional law have had no doubt of the Federal power and moral
right to tax the Income from State and municipal securities,
That statement was made on March 3.
I do not know how many bonds have been issued by State and
municipal authorities based upon the assurance of the Secretary of
the Treasury that these outstanding bonds will not be taxed.
Mr. PAUL. I would like to have it clear, Mr. Reed, that I do not
think the Secretary of the Treasury made any statement to the effect
that bonds issued could be eternally exempt from Federal tax.
Mr. REED. I do not claim that he did. I claim this: That in view
of the fact that the Supreme Court has held that a moral obligation
is a sufficient consideration upon which to base a case in the courts,
we should as Members of Congress, acting under an oath of office,
give some regard to moral obligation.
246
2996
REVENUE REVISION OF 1942
Mr. PAUL I certainly agree with you that we should. It is a
question of whether there is a moral obligation under all shoud the facts
dis-
of this case. I would be the last person to say that we
regard a moral obligation if I believed that one existed.
Mr. REED. Don't you think that when we have run along here over
period of years and have not taxed these municipal bonds, these
a municipal and State bonds, and people have invested in them, many
times for patriotic reasons, many times because of local pride in
some project out there-for instance, I know of one community with
less than 20,000 people who are going to bond themselves for $50,000
in order to do their part toward building an airport, and the Federal
Government to put up the rest. They never in the world in my
judgment would pass that bond issue if they thought those bonds
were going to be taxed by the Federal Government. And yet they
are going ahead on the theory that we never have taxed those obli
gations in the past. Now, when you start taxing these obligations,
you are attacking the borrowing power of the State and municipal
authorities.
Mr. PAUL I do not doubt, Mr. Reed, that a great many people
have invested in municipal securities in the manner that you suggest.
I also would like to point out, however, that a great many have invested in municipal securities for no such motive at all, but rather
simply to avoid their share of the tax burden. And I think that that
is very definitely proved by these figures contained in my statement
as to the increased amount of these securities in the larger estates.
Mr. REED. But we should not destroy the confidence of the people
in the Federal Government because a few have abused this privilege.
Mr. PAUL I do not think it is a few. I am sorry to say that I do
not think it is a few that have. Neither do I want to say that it is
necessarily an abuse. As long as there is that provision in the statute
do not blame anybody for buying municipal bonds.
Mr. REED. In some cases, for instance, in a community they were
ambitious to go ahead. It may be that some very selfish persons may
have put themselves in the light of patriotically minded individuals
by taking over a large number of these bonds in that locality which
might not be readily salable on the market. They may take them
over. Nevertheless, the community benefits by that operation when
they come to selling these bonds,
Mr. PAUL. I tried to show that in the average case there is a very
small interest differential.
Mr. REED. I do not think that that answers the question. I think
that if you adopt this principle and make it possible for the Federal
Government to step in and practically destroy the borrowing power
of a State or a municipality, you are then simply destroying the SOVereignty of the States.
Mr. PAUL. I do not think we would be destroying the borrowing
power. I am sorry to disagree with you there, but it seems to me
quite clear that we would not.
Mr. REED. Let me say, impair the borrowing power. You saw what
happened to the bond market after the speech of the Secretary of the
Treasury at Cleveland, did you not!
Mr. PAUL. I do not know just what happened to the bond market
after that speech. But one may make an analogy with our own Fed-
REVENUE REVISION OF 1942
2997
eral situation. We certainly have not destroyed our own borrowing
power by removing the exemption from Federal bonds.
Mr. REED. No: but you see what you are doing now to the borrow.
ing power. You had an exhibition here this morning of high-pressure salesmanship. You call it voluntary, but I have had too much
experience in that line in the World War. That is a beautiful set-up.
It is a perfect piece of work as campaign literature goes and as campaign pressure goes. But when we call it voluntary, I certainly cannot imagine anything short of a bombshell that would compare to
the pressure that is put on them to buy the bonds. And they ought
to buy them. That is all right. I am not criticizing that at all. We
have to sell those bonds in order to win this war.
But I would like to know what would have happened to the development of our cities and our States if this idea of taxing municipal securities and State securities had been invoked, say, for the last 75
years.
Mr. PAUL That is a prettty big question, but I think that our cities
and States uld not have suffered had we had the rule that we now
propose.
Mr. REED. They had that immunity taken off during the Civil War
so that they could tax those securities; did they not
Mr.that
PAUL
was
date I think they did tax the securities at that time. What
Mr. REED. The forh of October, that we had an income tax. The
reason that wy didn't do it then was because the Court at that time
would not permit us to.
Mr. TARLEAU. That was in 1894.
Mr. PAUL. The whole question of the ability to impose this kind of
tax arose by virtue of the Pollock decision about 1895 or something
like that. I think during the Civil War the income-tax law did tax
incomes from State and municipal securities,
Mr. REED. I can see in this, if it goes on as it has and there is no
restriction on it-I do not know just how long this is going on or how
far we are going-but just as sure as this philosophy is adopted in
this tax bill, you are just headed for a straight out-and-out central
government, with central taxing power, that will collect all of the taxes
eventually and then allocate them to the States: and they will allocate them on the basis of "You do thus and so. That is exactly where
you are heading, and I do not agree with the philosophy that we are
an indissoluble union of indestructible States if this goes through.
Mr. TREADWAY. Mr. Paul, I hesitate to get into a discussion on con-
stitutional questions from the standpoint of being just a very small
country businessman besides my membership up here. But isn't there
a case pending before the Tax Appeals Board that is likely to go to
the Supreme Court that will decide this whole question
Mr. PAUL. There is a case, a test case.
Mr. TREADWAY. Brought by the Treasury itself
Mr. PAUL, That is correct, and I believe that it is now pending
before the Board.
Mr. TREADWAY. Before the Board
Mr. PAUL That is right.
Mr. TREADWAY. But there has to be a decision rendered there before
it gets to the Supreme Court. There has to be a decision of the Board
of Tax Appeals before it can get to the Supreme Court
2998
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
Mr. PAUL That is right. That is the idea of bringing the case
2999
Mr. PAUL. That would have a bearing on the interpretation of a
before the Board.
Mr. TREADWAY. Why bring the question up here at this time when,
statute, yes; but I do not think it would have any bearing in connection
with a constitutional issue of this kind.
if we wait for the decision, we will have something definite to go by
one way or the other We are going to find out from the Supreme
Court that the position that you now take is constitutional, or you
are going to be told that it is not constitutional. Why ask Congress
to enact something that is so definitely uncertain as to its constitutionality in advance when such a decision is sure to come
Mr. PAUL Mr. Treadway, I do not want to get into a long discussion
Mr. TREADWAY. I cannot see the difference between the case pending,
that you admit yourself is there, and the relationship that it bears to
the case before us now.
That is all.
Mr. REED. Mr. Chairman, I would like to introduce a document.
The CHAIRMAN. Without objection, that will be done.
Mr. REED. The document that I refer to is entitled "Power of Congress to Tax the Interest From State and Local Securities and the
Compensation of State and Local Employees," a report to the Joint
Committee on Internal Revenue Taxation by its staff pursuant to
of the precise case-
Mr. TREADWAY. We have been having a long discussion all afternoon
here.
Mr. PAUL. I know it. But that case that you have mentioned involves the taxation of certain bonds of the New York Port Authority.
Answering your question, "Why don't we wait my answer is that
we cannot get a decision on the constitutionality of taxing State and
municipal bonds unless we pass a statute. The Supreme Court does
section 1203, Revenue Act of 1926. It was published in 1939. I merely
want to put in pages 1 to 85
The CHAIRMAN. Without-objection, that may be put in the record.
(The document referred to is as follows:)
POWER OF CONGRESS TO TAX THE INTEREST FROM STATE AND LOCAL
not take up moot questions.
SECURITIES AND THE COMPENSATION OF STATE AND LOCAL
Mr. TREADWAY. I do not know the procedure accurately; but isn't
this true? You say that that case is before the Board of Tax Appeals
as to the constitutionality of the taxation of the Port of New York
EMPLOYEES
SUMMARY
Authority bonds?
This
follows
Mr. PAUL. But, as I understand it, Mr. Treadway, that involves a
slightly different question. That involves the question of whether
these particular bonds are within the present statutory exemption.
study will consider four aspects of the question of tax exempt income. These are
PART I. WHETHER THE CONGRESS HAS THE POWER ro APPLY THE FEDERAL INCOME FAX
DIRECTLY TO THE INTEREST ON STATE AND LOCAL SECURITIES
Mr. TREADWAY. Whether the Treasury wins the decision in that case
or whether the other side wins it, that subject, which is the subject now
before us here in the broad sense, is going to the Supreme Court; is it
It is the opinion of this office that a constitutional amendment is the only effective way
by which the Federal income tax may be applied to this interest.
not
PART III. WHETHER THE RECIPROCAL OR MUTUAL TAXATION PLAN WOULD PROVE EFFECTIVE
Mr. PAUL That is true. But it is only in the very broadest sense
that that may be said.
Mr. TREADWAY. It seems to me that it would save Congress a great
The basis of this plan is waiver on the part of the Federal Government of the Immunity
of Federal bondholders, officers, and employees. There are several vital points Incident to
the plan that should be kept in mind The first of these is the lack of assurance that the
States may feel toward the possibility that future Congress may not feel bound to continue
deal of trouble and save the people in the Treasury a tremendous
being granted by may Federal through a compact entered between Immunity the
a statute and not into
the waiver but reseine It at any time that is. that the removal of the
Federal Government 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
to me it would be the better part of wisdom on your part not to press
this subject matter here before Congress today and get a decision be-
Secondly, the plan may work unfairly toward the Federal Government Itself It can
be corresponding presumed that waiver the walver, by the States, once granted and the could Federal not be Government withdrawn would There be would taking be the no
serious chance of relinquishing its own Immunity and securing In return only such breadth
of taxing
allow. power with respect to the State and local governments as the court might see ft
Moreover as the taxing powers of the Federal Government and the States rest on an
fore that question actually goes to the Supreme Court.
to
Mr. PAUL. I am informed that the decision in that particular case
entirely different basis. and as the rates and tax structures of those units are very die.
similar, It is felt that such a plan could never be truly reciprocal or mutual
may be such as to throw no light on this question.
Mr. TREADWAY. You are surmising something. There is no certainty
about that being the case. But the parallel exists between what you
are endeavoring to have Congress do and the possible decision.
When we get that decision, we will have something affirmative one
way or the other, either with the Treasury or against it. And I think
that it is very inopportune to bring this question up at this time while
awaiting that decision.
PART IV. WHETHER CONGRESS HAR THE POWER TO TAX THESE SUBJECTS BY OTHER METHODS
Among these methods of reaching tax-exempt interest are
(1) The taxation. by each level of government of subsequent Issues of its own securities
(2) The adding of the tax- exem Income to the taxable Income for the purpose of determining the rate which would be applicable only to the table income
(3) The entering into a series of mutual compacts or agreements between the Federal
Government
the
indiv Mual
States
by which each level would be permitted to tax the
the
Interest from and
of
secur rities
the
other
by
(4)
Imposition
of an
excise tax, based on the exercise of a privilege and measured
net The
income
from
all
ources:
(5) The objecting of tax-exempt securities to a higher estate tax than would be appll
I think another thing. I am inclined to think that one reason why
this question is before us today is that you want to get this enacted
cable
toTheother
property
on the theory that such securities had escaped the income tax and
of
adoption
(6)
into law by Congress before the Supreme Court passes on the question,
because then you can say to them, 'Gentlemen, here is the attitude of
Congress." Of course that has weight. I am told that even testimony
submitted to a committee and remarks made on the floor of Congress
have a certain amount of bearing on the Supreme Court decisions.
legal difficulties
problem.
constitutional
amendment.
With regard to each of these methods except the last, there are serious technical and
that render them incapable of providing a satisfactory solution to the
With respect to the Federal taxation of the salaries of State and local employees, recent
decisions of the Supreme Court have substa broadened the Federal power. In addi-
tion. existing law taxes such compensation to the full extent allowed by the Constitution
However, It is the opinion of this office that an amendment to the Constitution provides the
only
way in which the impensation of all State and local officers and employees may be
effectively subjected to the Federal income tax.
as
3000
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
PAST I. WHETHER THE CONGRESS HAS THE POWER TO APPLY THE FEDERAL INCOME
TAX DIRECTLY TO THE INTEREST ON STATE AND LOCAL BONDS
In
consideration of this question, an exhaustive study was made by the Depart.
of Justice in June of 1988. The conclusion reached in that study is that
ment "the Congress apparently has the power, under the present trend of decisions to
tax the net Income arising from the interest paid on State bonds." With this
conclusion, we are unable to agree.
In treating this question, the subject will be divided into two subparts, follow.
ing. inofthis
respect,
ment
Justice
study.the same line of approach as that contained in the DepartSubpart A will deal with the question independently of the Sixteenth amend
ment.
and subpart B will deal with the question as affected by the sixteenth
amendment.
SUBPART A. POWER INDEPENDENT OF THE SIXTEENTH AMENDMENT
(1) No express prohibition
3001
property tax. In fact, this tax has been referred to by the Court on several
occasions as an Income tax and not as a property tax. In the Pollock case, Mr.
Justice Fuller, in writing the majority opinion, held It to be an Income tax. In
Hale V. State Board of Assessment and Review," decided November 8, 1987, Mr.
Justice Cardozo, in distinguishing between a tax on the bonds and the inclusion
of the income from the bonds In a general income tax, said
"Nothing in this opinion is at war with Veston v. Charleston (2 Pet. 449) or
other cases declaring the Immunities of governmental agencies. In the case
cited and its congeners the problem for decision was whether a tax upon income, even though not a property tax in strictness or for every purpose, was
one in such a sense or In such a measure as to hamper the freedom of the Central
Government through the interference of the States or the freedom of the States
through the interference of the Central Government The limitations declared
in those decisions were gathered by implication from the structure of our Federal
at stake. and were accommodated, as the Court believed to the public policy
system,
Even If the Weston case can be regarded as preventing the States from levying
an income tax on the income from Federal securities It did not settle the question
as to whether or not the Federal Government could tax the Income from State
There la no provision in the Federal Constitution expressly prohibiting the
Federal Government from taxing the obligations or the Interest therefrom of a
State or political subdivision. This prohibition is implied from the independence
of the National and State Governments within their respective spheres and from
the provisions of the Constitution looking toward the maintenance of our dual
system of government; and was developed through judicial Interpretation of the
Constitution. The doctrine was first applied to limit State interference with
Federal functions, and then extended to limit the Federal Government from
interfering with State functions
In the first Pollock case," Pollock, a stockholder of the Farmers' Loan & Trust
Co., filed a bill in equity to prevent the Trust Co. from making returns and paying
Income taxes under the act of 1894. The records showed that the net income of
(2) Development of implied immunity doctrine
that It derived rental of $50,000 from its real estate, after deducting State and
(a) Weston case.-In the case of Weston v. Charleston, the Supreme Court
held invalid an ordinance of the City Council of Charleston subjecting to taxation "all personal estate, consisting of bonds, notes, Insurance stock. 6- and 7-per-
cent stock of the United States, or other obligations upon which interest has been
or will be received during the year, over and above the Interest which has been
paid (funded stock of this State, and stock of the incorporated banks of this
State and the United States bank excepted). 25 cents upon every $100."
Weston owned some of the 6-to-7-percent stock of the United States and claimed
that so far as such stock was concerned, the ordinance violated the Constitution
of the United States. The majority of the highest court in the State of South
Carolina thought this tax was an income tax and held that It was no Invalid as
applied to the United States stock. The Supreme Court of the United States, in
an opinion by Chief Justice Marshall, overruled the State court and held the tax
invalid. In this connection, the Court said:
"Congress has power to borrow money on the credit of the United States. The
stock it Issues is the evidence of a debt created by the exercise of this power.
The tax in question is a tax upon the contract subsisting between the Government and the individual. It bears directly upon that contract, while subsisting
and in full force. The power operates upon the contract the Instant It is framed,
and must imply a right to affect that contract.'
And the Court went on to state
The right to tax the contract to any extent, when made, must operate
upon the power to borrow, before It is exercised, and have a sensible influence on
the contract. The extent of this influence depends on the will of a distinct government: to any extent, however inconsiderable, It is a burden on the operations
of the Government It may be carried to an extent which shall arrest them
entirely."
Chief Justice Marshall did not rest his opinion upon the conclusion that this
tax was not an income tax. He states "that the tax was a tax upon the contract
subsisting between the Government and the Individual." The promise to pay
interest is an essential part of the contract with the Government. Therefore, to
tax the Interest is not any less a tax on the contract than a tax on the stock itself.
For these reasons, we are unable to conclude that the opinion of Chief Justice
Marshall can be regarded as holding that the tax was not an Income tax. but a
a Peters 449.
and local securities in the form of a general net Income tax.
(b) First Pollock Case." -That question was not decided until the Pollock cases
holding the income-tax provisions of the act of 1894 unconstitutional The income
taxincome
provisions
of thefrom
act State
of 1894
Inlocal
imposing
a general tax on net income, included
as
Interest
and
bonds
the company during the year ended December 31, 1894, amounted to over $300,000
local taxes, and an income of about $60,000 from Investments in municipal bonds.
The following contentions were made as to the unconstitutionality of the act:
1. The law in Imposing a tax on the income or rents of real estate imposed
a tax upon the real estate itself and, therefore, such a tax was a direct tax
and void because imposed without regard to the rule of apportionment.
2. The law in imposing a tax on the Interest or other income of bonds or
other personal property is a tax upon the personal estate Itself and is, there-
fore, a direct tax and vold because imposed without regard to the rule of
apportionment
Because
the tax
income from real property and personal property
is 3.
void,
the whole
lawonisthe
invalidated
4. The law is Invalid because imposing indirect taxes In violation of the
constitutional requirement of uniformity.
5. The law is Invalid so far as imposing a tax upon Income received from
State and municipal bonds is concerned.
The Court, in a majority opinion by Mr. Justice Fuller, passed upon only two
of the contentions raised In the case. It held the income tax provisions uneonstitutional Insofar as they taxed the rents and income of the real estate and the
income from municipal bonds. It did not pass upon the question as to whether
a tax on the income from personal property was a direct tax and, therefore, void
because of want of apportionment. The decision of the Court In regard to the
inability of the Federal Government to levy a tax on the income from municipal
bonds, was unanimous There were eight justices sitting In this case. However,
there were two dissents, one by Mr. Justice White and the other by Mr. Justice
Harlan, but these justices dissented from the majority opinion only Insofar as It
held that a tax on the rente or Income from real property was a direct tax.
While the justices were equally divided as to whether the Income from personal
property was a direct tax, and therefore, rendered no opinion as to this question,
they were in entire agreement that Congress had no power to tax the Income
frommajority.
State orsaid:
local bonds In this connection, Mr. Justice Fuller, In speaking for
the
302 U. 8 95.
157 U. 8. 429
3002
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
"The law under consideration provides 'that nothing herein contained shall
to States, counties, or municipalities. It is contended that although the
apply or revenues of the States or their instrumentalities cannot be taxed,
The Attorney General presented a suggestion that If any rehearing were
granted It should embrace the whole case, Treating this suggestion as amount
nevertheless property the Income derived from State, county, and municipal securities can be
ing In Itself to an application for rehearing the Court set down both applica-
taxed. But we think the same want of power to tax the property or revenues of
the States or their Instrumentalities exists in relation to a tax on the income from
tions
heard before
a full bench, Justice Jackson, who did not participate
In
the to
firstbe
decision,
being present.
securities, and for the same reason, and that reason is given by Chief Justice
their Marshall in Weston V. Charleston (2 Pet. 449, 468), where he said The right to
tax the contract to any extent, when made. must operate upon the power to borrow
before it is exercised, and have a sensible influence on the contract. The extent
of this influence depends on the will of a distinct government. To any extent,
however Inconsiderable, It is a burthen on the operations of government.The
It may
tax
be carried to an extent which shall arrest them entirely.
Government stock is thought by this court to be a tax on the contract, and tax on
the to borrow money on the credit of the United States, and consequently
Mr. Justice Fuller also delivered the opinion of the Court in this second case."
The majority opinion adhered to the opinion that taxes on real estate being
indisputably direct taxes, taxes on the rents or Income of real estate are equally
direct taxes. So far as the taxation of income from State and local bonds were
concerned, the Court also adhered to its opinion in the first case, stating:
"We have unanimously held in this ease that, so far as this law operates on
the receipts from municipal bonds, It cannot be sustained, because It is a tax
on the power of the States, and on their instrumentalities to borrow money. and
consequently repugnant to the Constitution.'
on
to be power repugnant to the Constitution Applying this language to these municipal
securities, it is obvious that taxation on the interest therefrom would operate on
the power to borrow before It is exercised, and would have a sensible influence
on the contract, and that the tax in question is a tax on the power of the States
and their Instrumentalities to borrow money and consequently repugnant to the
and
(1) That taxes on the income from personal property are direct taxes:
(2) That the income tax, so far as It fell on the Income of real and personal property, being a direct tax within the meaning of the Constitution,
and, therefore, unconstitutional and vold because not apportioned, the entire
Income-tax law, constituting one entire scheme of taxation, was necessarily
invalid.
Constitution. In other words. entirely Independent of the question of whether a tax on the
Income from personal property was a direct tax. It WAS held that the general net
Income tax Insofar as It applied to the Income from State or municipal bonds
was a tax on the power of the States and their Instrumentalities to borrow moneyJusand consequently repugnant to the Constitution. With this view, both Mr.
tice White and Mr. Justice Harlan agreed, Mr. Justice White stating
"In regard to the right to include in an income tax the Interest upon the
bonds of municipal corporations, I think the decisions of this Court, holding
that the Federal Government is without power to tax the agencies of the State
government, embrace such bonds, and that this settled line of authority
conclusive upon my judgment here. It determines the question that where
there is no power to tax for any purpose whatever, no direct or indirect tax
can be imposed. The authorities cited in the opinion are decisive of this question They are relevant to one case and not to the other, because, in the one
case there is full power in the Federal Government to tax. the only controversy
being whether the tax imposed is direct or Indirect: while in the other there
is no power whatever in the Federal Government, and, therefore, the levy,
whether direct or indirect, is beyond the taxing power.
And Mr. Justice Harlan concurring in the following statement:
"While property, and the gains, profits, and income derived from property,
belonging to private corporations and individuals, are subjects of taxation for
the purpose of paying the debts and providing for the common defense and the
general welfare of the United States, the Instrumentalities employed by the
States in execution of their powers are not subjects of taxation by the General
Government, any more than the Instrumentalities of the United States are the
subjects of taxation by the States: and any tax Imposed directly upon interest
derived from bonds Issued by a municipal corporation for public purposes,
under the authority of the State whose instrumentality It is. is a burden upon
the exercise of the powers of that corporation which only the State creating
It may impose. In such a case It is immaterial to Inquire whether the tax 18,
In Its nature or by its operation, a direct or an Indirect tax: for the Instrumentalities of the States-am which, as is well settled, are municipal corporations, exercising powers and holding property for the benefit of the public- while
are not subjects of national taxation in any form or for any purpose,
the property of private corporations and of individuals is subject to taxation
frequently
by the General Government for national purposes. So it has been
adjudged and the question is no longer an open one in this Court.
(c) The Second Pollock Case."-After the decision in the First Pollock case,
the appellant filed a petition for rehearing for the reason that the Court had
expressed no opinion in regard to the following contentions:
1. That the act was unconstitutional as to incomes from personal property as laying direct taxes without apportionment
2. That the void income-tax provisions invalidate the entire income-tax
is
law. 3. That If any part of the income tax is considered a direct tax it is
invalid for want of uniformity.
3003
Four Justices dissented from the majority opinion Mr. Justice Harlan dissentedbonds.
from the
majority
State
He
statedopinion,
that- except insofar as It related to the income from
am of the opinion that with the exception of capitation and land taxes, and
taxes on exports from the States and on the property and instrumentalities of
the State, the Government of the Union, in order to pay its debts and provide
for the common defense and the general welfare, and under its power to lay and
collect taxes, duties, imposts, and excises, may reach, under the rule of unlformity, all property and property rights in whatever State they may be found."
Mr. Justice White dissented in regard to the holding that the Income on real
and personal property was a direct tax, but agreed with the majority opinion
as
to the
of the Congress
bonds
In inability
this connection,
he said: to tax the income from State or municipal
"I deem it unnecessary to elaborate my reasons for adhering to the views
hitherto expressed by me, and content myself with the following statement of
points.
Mr. Justice Jackson dissented insofar as the Court held the tax on incomes
from real or personal property was a direct tax and agreed with the dissents
expressed by Mr. Justice White In the First Pollock case
Mr. Justice Brown dissented as to the holding that the income from real
or personal property was a direct tax. but he agreed with the majority that
an income tax on municipal bonds was invalid. In this connection, he stated:
"The tax upon the Income of municipal bonds falls obviously within the other
category, of an Indirect tax upon something which Congress has no right to
tax at all, and hence is invalid. Here is a question, not of the method of taxa-
tion, but of the power to subject the property to taxation in any form. It
seems to be that the cases of Collector v. Day (11 Wall, 113), holding that It
Is not competent for Congress to impose a tax upon the salary of a judicial
officer of a State: McCulloch V. Maryland (4 Wheat. 316), holding that a State
could not impose a tax upon the operation of the Bank of the United States:
and United States v. Railroad Co. (17 Wall. 322), holding that a municipal
corporation is a portion of the sovereign power of the State, and is not subject
to taxation by Congress upon Its municipal revenues: Wisconsin Central Railroad v. Price (183 U. S. 496). holding that no State has the power to tax the
property of the United States within its limits: and Van Brocklin v. Tennessee
(117 S. 151), to the same effect. apply mutatis mutandis to the bonds in
question, and the tax upon them must, therefore. be Invalid."
(d) Effect of Pollock L-From this discussion, it can be seen that the
Court, while not unanimous in Its conclusion that a tax on the income from real
and personal property was a direct tax and subject to the rule of apportionment
was unanimous In Its conclusion that the Congress was without power to levy a
tax on the Income from State or municipal bonds.
158 U. 8. 601.
On the questions upon which the Court had rendered no decision in the first
case, It held In the second case-
REVENUE REVISION OF 1942
3004
REVENUE REVISION OF 1942
from these decisions that regardless of whether the income tax on
It appears property is regarded as a direct or indirect tax, It is void as applied
purposely and directly to tax State obligations by refusing to their owners
personal the Income of State and local bonds because it constitutes an interference with with
deductions allowed to others."
cision the of the Supreme power Court in Collector V. Day and Springer V. United States."
from State securities:
The following example will show how this system results In taxing the Interest
should be noted that in the Springer case rendered under the Civil War Acts,
the It Court upheld the Civil War income tax as applied to the professional earn-
of Day. a State judicial officer because It Interfered with the essential functions neces-
sary to the existence of the State.
The conclusion to be drawn from the cases up to this point is that the Income
from State or local bonds could not be taxed, because to do so would interfere
with the borrowing power of the State
(e) The National Life Insurance Co. case. The Revenue Act of 1913. exfrom the Federal Income tax. Interest upon the obligations of States or
their empted political subdivisions. This exemption was continued In the Revenue Act
of 1921 and subsequent revenue acts, except with respect to the special method
provided for the taxation of life insurance companies under the Revenue Acts of
1921, 1924, 1926, and 1928. Prior to the ennetment of the Revenue Act of 1921
life-Insurance companies were taxable like ordinary corporations Up to that
time. gross income included premium receipts and capital gains. The companies
were allowed to deduct the amount paid on policies (except as dividends), and
the amount required by law to be added to their reserves At the annual meeting
of life Insurance presidents in December 1920, It was stated that the law was
unsatisfactory both the companies and to the Government. After much consid.
eration, Congress, upon consultation with the life-insurance companies and with
the approval of at least most of them, substituted a new plan for computing their
taxes. The new plan defined gross income as the gross amount of Income received
during the taxable year from Interest, dividends, and rents. This definition auto
matically excluded from taxation any portion of the premiums paid by the policy.
holders to the company. as well as capital gains. Included within such definition
gross
of gross income was Interest derived from tax-exempt securities From the
Income thus arrived at. there were allowed certain deductions:
(1) Interest derived from tax-exempt securities, If any.
(2) A sum equal to 4 percent of the mean of the company's legal reserves
diminished by the amount of the tax-exempt interest, and
(3) Other Items not important here.
Under this plan a life-insurance company which had an income from State
and municipal bonds was not entitled to the full amount of the deduction of
4 percent of the mean of the reserve funds, but was required to reduce this amount
by the interest derived from tax-exempt securities The reason for allowing the
deduction of 4 percent of the reserve is that a portion of the Interest, dividends
and rents received have to be used each year in maintaining the reserve: that is.
added to It on the basis of a certain interest rate varying from 8 percent to 4
percent, according to the statutes of the several States.
There were two contentions in this case:
First, that the life-insurance companies were discriminated against and
made to exact payment on account of their tax-exempt securities, and
Second, that the diminution of the ordinary deduction of 4 percent of the
mean of the reserves because of interest received in effect, defeated the
exemption guaranteed to the owner.
The Court held that to directly tax the income from the securities amounted to
a taxation of the securities themselves and that the United States may not tax
State or municipal obligations. It then concluded that "Congress has no power
Income from taxable sources. $100,000 Income from taxable sources. $100,000
Income from tax-exempt
interest
20,000
Income from tax-exempt
Interest
Gross Income
Deductions
Miscellaneous
sources
Tax-exempt In-
120,000
$10,000
terest
sources
Tax-exempt in-
20,000
100,000
$10,000
terest
4 percent of the
4 percent of the
mean of the re-
mean of the re-
serves less tax-
serve
exempt interest
Gross income
Deductions:
Miscellaneous
50,000
60,000
30,000
60,000 Net Income subject to tax
Net income subject to tax
40,000
60,000
It will be seen that under this system a life-Insurance company with tax-exempt
securities is forced to pay a higher tax by reason of the ownership of such
securities. It has been claimed that the National Life decision must be confined
to Its discriminatory features However, the absence of discrimination was
relled upon by the dissenting Justices in this case to sustain It. A subsequent
decision will show that the dental by the full deduction of 4 percent of the mean
of the reserve to companies receiving Income from tax-exempt securities was
because It, in effect, taxed the income from such securities. This plan of taxing
life-insurance companies gave them an advantage of tax exemption in the case
of premium receipts and capital gains. This distinction is forcibly brought out
in the case of Helvering V. Independent Life Insurance Company." That case
also concerned the plan for taxing life-Insurance companies, inaugurated in the
Revenue Act of 1921. It was pointed out that the Revenue Act of 1921 defines
gross income as that received from interests, dividends, and rents. Premiums
and capital gains were excluded and the net income was ascertained by making
specified deductions from gross Income. These deductions included (1) 4 percent
of the company's reserve already discussed In the National Life case: (2) taxes
and other expenses paid during the taxable year exclusively upon or with respect
to the real estate owned by the company. and (3) a reasonable allowance for the
exhaustion, wear. and tear of property, including a reasonable allowance for
obsolescence. This law then provided that the deductions under (2) and (3)
should not be allowed on account of any real estate owned and occupied in part
by a life-insurance company unless there was included In Its return of gross
Income the rental value of the space so occupled. Such rental value under
the law could not be less than a sum which in addition to any rents received
from other tenants should provide a net Income (after deducting taxes, depreclation. and other expenses) at the rate of 4 percent per annum of the book
value at the end of the taxable year of the real estate NO owned or occupied.
It was claimed that this limitation on the deductions was unconstitutional
because the rental value of the space occupied by the Insurance company owning
the building was not income. and that the exaction was therefore. a direct tax
on the land Itself and void for Inck of apportionment. The Court in its opinion
specifically held that the rental value of the building used by the owner does not
constitute income within the meaning of the sixteenth amendment, but then went
on to state:
Earlier acts taxed life-Insurance companies' Incomes substantially the same as
those of other corporations. Because of the character of the business, that
method proved unsatisfactory to the Government and to the companies The
11 Wall 118 (1870).
102 U.8 586 (1880).
11 Wall. 113.
277 U. 8. 508.
COMPANY B
0
of Springer, an attorney at law. as an indirect tax. The tax on such earn
Ings was recognized as an Indirect tax. not only in the Springer case, but also In
Ings Pollock cases, Mr. Justice Fuller stating that an income tax on gains or
the from business privileges, employments, and vocations could be sustained
profits excise tax. In spite of the fact that It has always been recognized that a
as tax an earnings is not a direct tax, but an indirect tax, the Court, in Collector V.
on held that the Civil War net Income tax was not applicable to the income
COMPANY A
0
to borrowing of the States. This conclusion is in harmony the de
3005
the
292 U. 8. 371 (1934).
3006
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
3007
under consideration were enacted upon the recommendation of representatives provisions of the latter. As reuts received for buildings were required to be
included in gross and expenses chargeable to them were allowed to be deducted,
It is to be inferred that Congress found- as concededly the fact that the
annual net yields from Investments in such buildings ordinarily amounted to at
least 4 percent of book value. Where an insurance company owns and occupies
the whole of a building, It receives no rents therefor and is not allowed to deduct
the expenses chargeable to the buildings. Where part is used by the company and
part let, the rents are required to be Included in the gross, but expenses may not
be deducted unless, If It be necessary. there is added to the rents received an
amount to make the total sufficient, after deduction of expenses, to leave 4 percent
of book value. All calculations contemplated by section 245 (b) are made subject
to that limitation. Congress intended that the rule should apply only where rents
exceed such 4 percent. Where they are less than that, addition of the prescribed
rental value and deduction of expenses operate to increase taxable income. The
classification is not without foundation
"The company is not required to include in gross any amount to cover rental
value of space used by it. but In order that, subject to the specified limitation, it
may have the advantage of deducting a part of the expenses chargeable to the
building, it is permitted to make calculations by means of such an addition. The
statute does not prescribe any basis for the apportionment of expenses between
space used by the company and that for which It receives rents. The calculation
Indicated operates as such an apportionment where the rents received are more
than 4 percent of book value, but less than that amount plus expenses. In such
cases the addition, called rental value of space occupied by the company, is
employed to permit a deduction on account of expenses. That, as is clearly
shown in the dissenting opinion, supra, page 473 of 67 F. (2d), is the arithmetical
equivalent of lessening the deduction by the amount of the so-called rental values.
The National Life Insurance Company case was distinguished on the ground
that the effect of the statutory deduction invalidated in that case was to impose
a direct tax on the income of exempt securities, whereas the limitation on the
deductions discussed in the rental value case was in substance a diminution or
apportionment of expenses to be deducted from gross Income. and that Congress
had the power to condition. limit, or deny deductions. Of course, If the disallow.
ance of the deduction had been regarded as a discrimination against companies
owning their own buildings, a different conclusion would have been reached.
In other words, In this case, ife-insurance companies owning office building and
occupying part of them were singled out for special treatment to the same extent
that life-insurance companies owning tax-exempt bonds were singled out for epecial treatment. However, this singling out did not result in discrimination and
the provision singling out those with tax-exempt bonds for special treatment was
held invalid. not on that account, but on the ground that this special treatment
amounted to taxing the income from tax-exempt securities
(f) Conclusion from both Pollock cases and National Life Insurance Company
lose.-Unless the Pollock cases and the National Life case have been modified by
subsequent decisions, they stand as authority for holding that the Congress has
no power to subject the income from State or local securities to a general income
tax.
(3) Analysis of Pollock cases by subsequent decisions
It is contended that the Pollock cases were decided on the theory that a tax on
the income of municipal bonds was the equivalent of a tax on the bonds themselves. This contention does not appear to be correct. In the first Pollock case
the Court did not decide the question as to whether or not the Income tax on personal property was a direct tax Despite this, the Court held that the income tax
as applied to municipal bond= was Invalid because "the tax In question is a tax on
the power of the States and their instrumentalities to borrow money, and constantly repugnant to the Constitution."
In the second Pollock case Chief Justice Fuller stated in regard to the first
Pollock case:
"We have unanimously held In this case that, so far as this law operates on
the receipts from municipal bonds, It cannot be sustained because It is a tax on
157 U. 8. 429.
158 U. 601
the power of the States and on their instrumentalities to borrow money, and
consequently repugnant to the Constitution.
Clearly, the decision was not unanimous on the theory that a tax on the Income
from municipal bonds was a tax on the bonds themselves, for at least four of
the judges were unable to conclude, even in the second case, that a tax on the
Income from personal property was a tax on the property itself.
In Cohn v. Graces, Mr. Justice Stone, who rendered the majority opinion,
pointed out that the decision in the Pollock case, 80 far as It related to a tax on
the rents of land, did not rest upon the ground that the tax was a tax on the land
or that It was subject to every limitation which the Constitution imposes on
property taxes It determined "only that for purposes of apportionment there
was similarities in the operation of the two kinds of tax which made it appropriate to classify both as direct and within the constitutional command. So
far as
the Pollock
Mr.
Justice
Stonecases
said concerned the taxation of Income from municipal bonds,
'It is by a parity of reasoning that the immunity of Income-producing Instrumentalities.ef one government, State or National, from taxation by the other,
has been extended to the Income. It was thought that the tax. whether on the
instrumentality or on the income produced by It, would equally burden the
operations of government."
To the same effect was the conclusion of Mr. Justice Cardozo in rendering the
decision
decision: in Hale V. State Board." He stated in referring to the Cohn v. Graces
"Pollock V. Farmers' Loan & Trust Co. (157 U. 8. 429: 158 U. S. 601), was
considered and distinguished Two rulings emerge as a result of the analysis
By the teaching of the Pollock case an income tax on the rents of land (157 U.
429) or even on the fruits of other investments (158 S. 601) is an impost upon
property within the section of the Constitution (art. I. sec. 2, cl. 8) governing
the apportionment of direct taxes among the States (300 U. 8. at p. 315). By
teaching of the same case an income tax. If made to cover the interest on Govern-
ment bonds, is a clog upon the borrowing power such as was condemned in Mo
Culloch v. Maryland (4 Wheat. 316). and Collector v. Day (11 Wall 113, 124:
300 U. at pp. 315, 316). There was no holding that the tax is a property one
for every purpose or in every context. We look to all the facts.
"In line with that conception of the Pollack case is Brushaber v. Union Pacific
R. Co., supra, where the court pointed out (240 U. 8. at pp. 16,17) that 'the conclusion reached in the Pollock case did not in any degree Involve holding that
income taxes generically and necessarily came within the class of direct taxes
on property, but that to the contrary such taxes were enforcible as excises except
to the extent that violence might thus be done to the spirit and intent of the
rule governing apportionment.'
By this analysis, it seems clear that a tax on the income from property was
treated as a tax on the property only for the purposes of applying the rule of
apportionment and that a tax on the interest on municipal bonds was condemned
08 elog upon the borrowing power of the State,
(4) Effect of subsequent decisions on modifying the Pollock cases
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
from State or local bonds. The decisions relled upon as distinguishing the Pollock
cases are summarized as follows:
(a) Bonaparte v. Tax Court."- the Bonaparte case, the Supreme Court up-
held the right of Maryland to levy a property tax on bonds issued by New York.
Pennsylvania, and Ohio to one of its own citizens. This case was distinguished
in the Pollock case Itself, as follows
"The question In Bonaparte Tax Court (104 U. 592) was whether the reglatered public debt of one State, exempt from taxation by that State or actually
taxed there, was taxable by another State when owned by a citizen of the latter.
and It was held that there was no provision of the Constitution of the United
States which prohibited such taxation. The States had not covenanted that this
could not be done, whereas, under the fundamental law, as to the power to borrow
money. neither the United States, on the one hand, nor the States, on the other,
200 8. 815 (1937).
202
1937
101 592 (1881).
3008
REVENUE REVISION OF 1942
can
interfere with that power as possessed by each and an essential element of
the sovereignty of each
V.
This conclusion is in harmony with the view expressed by the Court in Burnet
Brooks pointing out that the Constitution, through the due-process clause, pre-
vented the States from transcending the limits of their authority. and thus destroying the rights of other States, for It is impossible for State to reach out
and tax property in another State without violating the Constitution, for where
the power of one ends. the authority of the other begins. If. therefore, the State
of domietle of the owner of the bond could not tax the bond or the income there
from, no tax could be levied at all. not even by the State which issued the bond,
for the reason that It had no jurisdiction over the owner of the bond who resided
beyond its borders. Thus the relationship existing between the States themselves
and the States and the Federal Government, is not subject to the same constitu-
tional limitations or restrictions.
(b) Flint v. Stone Tracy Co."-Flint Stone Tracy Company does not conflict
with the Pollock cases. That case construed the corporation excise tax of 1909,
which taxed the privilege of carrying on or doing business by corporations. The
tax was measured by the net income of the corporation from all sources. Since
the subject of the tax was the exercise of a franchise or privilege, the Supreme
Court held that Congress had the power to include In the measure of the tax the
Income from tax-exempt securities, although such Income could not be directly
taxed. It is claimed that the Pollock case apparently rests upon weak founda.
tions If a distinction so refined as that between the subject and the measure of
a tax is sufficient to escape its ruling. However, long before the Pollock decisions,
the Court recognized the distinction between a property tax and a tax on franchises and privileges. The Court has uniformly held a tax upon the capital or
the assets of corporations invalid unless the value of Government bonds held by
the corporation were deducted. But this ruling is not applied to franchises or
privilege taxes where the bonds were not taxed directly. but were used as a
measure of the tax For example, in 1867, long before the Pollock cases, the
Court upheld a franchise tax measured by deposits, even though some of the
deposits were Invested in tax-exempt securities (Society for Savings V. Coite
A like decision was rendered In Provident Institution V. Masaachusetts," where
the tax was measured by average deposits
In referring to these cases In the Stone Tracy Company case," the Court said:
"It Is therefore well settled by the decisions of this court that when the sover-
eign authority has exercised the right to tax a legitimate subject of taxation as
an exercise of a franchise or privilege, It is no objection that the measure of
taxation is found in the income produced In part from property which of Itself
considered is nontaxable."
There is, therefore, no more basis for holding that the Stone Tracy Co. case
permits the Income from State or local securities to be taxed directly than for
holding that the Society for Savings and Provident Institution cases (as well as
other cases), permitting nontaxable property to be used as a measure of the tax,
authorize the direct taxation of the nontaxable property itself.
The distinction between taxing tax-exempt securities directly or including
them
as a measure
and estate-tax
cases of a privilege tax has also been recognized in inheritance
In Plummer v. Coler," the Court permitted New York to collect an Inheritance
tax upon a bequest of United States bonds The Court also upheld the Federal
estate. tax as applied to municipal bonds. But It has never seriously contended
that these decisions would permit the taxation of the bonds themselves
(c) Peck of Co. V. Lowe." In this case a domestic corporation was engaged
in buying and selling goods. Its income from shipping goods abroad and selling
them amounted to approximately $30,000 and its income from local sources
amounted to approximately $12,000. Its total net income was held taxable
under the Federal Revenue Act of 1913. The Court held It was not a tax on
exportation and, at the most, affected exportation Indirectly and remotely. It
distinguished this case from a case where a taxpayer might have tax-exempt
income by stating that a net income tax. although a general tax. cannot be
" 288
8. 378
(1933)
220
107
(1911)
6 Wall 594 (1867)
Wall 611 1867)
220
107
178 115 (1900)
247 165 (1918)
REVENUE REVISION OF 1942
3009
applied to any Income which Congress has no power to tax. It then concluded
that If articles manufactured and Intended for export are subject to taxation
under general laws up to the time they are put in the course of exportation,
the conclusion is, therefore, that the net income from the venture when applied,
after exportation and sale, is exercised subject to taxation under the general
laws and that the status of Income is not different from that of the exported
article prior to exportation It will be noted that the facts in this case show
that the
income
of the
taxpayer was not derived exclusively from the shipment
andnet
sales
of articles
abroad.
(d) United States Glue v. Oak Creek."-) this case the Supreme Court upheld a State net income tax on a corporation organized under the laws of the
State of Wisconsin, having its principal office and place of business in the town
of Oak Creek, where It conducted an extensive manufacturing plant. selling Its
products throughout the State, in other States, and In foreign countries Its
net business income for the particular year amounted to about $124,000. Its
business Income for the taxable year was derived from sales within the State
and some from sales without the State, and some form foreign countries
The Court upheld the Wisconsin tax as applied to this case, stating that the
net Income tax was applied to the net proceeds of the plaintiff's business from
interstate commerce together with a like tax imposed upon Its Income derived
from other sources, and in the same way that other corporations doing business
within the State were taxed upon that proportion of their income derived from
business transacted on property located within the State, whatever the nature
of their business This case, like the Peek & Co. case, did not Involve a situation where the Income of the taxpayer was derived solely from Interstate commerce. However, in the case of Curlee Clothing Co. v. Oklahoma* It was held
a foreign
corporation
doing a purely Interstate business was not subjet to
athat
State
net income
tax.
In commenting upon the U. 8. Glue Co. case, Mr. Justice McReynolds, in
the majority opinion in Northwestern Insurance Company v. Wisconsin,
stated
writing
It is Important to observe that although a State statute may properly Impose
a charge which materially affects Interstate commerce, without so unreasonably
burdening it as to become a regulation within the meaning of the Constitution,
no State can lay any charge on bonds of the United States."
Specifically, the holding of the Court in the United States Glue Company case
was that the net income tax imposed by Wisconsin was not deemed to so directly burden
thetheplaintiff's
commerce
among
States. Interstate business as to amount to a regulation of
(e) Willcutta V. Bunn."-In this case, the Supreme Court upheld the right of
the Federal Government to subject to the Federal Income tax gains from the sale
of county
and municipal bonds The Pollock case was cited with approval, the
Court
stated:
"In the case of the obligations of a State or of its political subdivisions, the
subject held to be exempt from Federal taxation is the principal and Interest of
the obligations. These obligations constitute the contract made by the State, or
by its political agency pursuant to its authority, and a tax upon the amounts
payable by the terms of the contract has therefore been regarded as bearing
directly upon the exercise of the borrowing power of the Government."
The Court distinguished a tax upon the interest from a bond from a tax upon
the profits derived from the sale of a bond, in the following language:
"The tax upon interest is levied upon the return which comes to the owner of
the security according to the provisions of the obligation and without any further transaction on his part. The tax falls upon the owner by virtue of the
mere fact of ownership. regardless of use or disposition of the security. The
tax upon profits made upon purchases and sales is an excise upon the result of
the combination of several factors, including capital Investment and quite generally, some
measure
of sagacity: the gain may be regarded as the creation of
capital,
Industry,
and skill.
In other words, the capital gain arone from a transaction separate and distinct
from the transaction with the Government and was created by the taxpayer
247 U. R. 321 (1918)
275 U. N. 136.
(1937).
- 282 U. 8. 216 (1931).
REVENUE REVISION OF 1942
3010
REVENUE REVISION OF 1942
and apart from his contract with the Government.
himself. The Court separate concluded that the burden upon the States' borrowing power by tax.
has been extended to the income It was thought that the tax, whether on the
instrumentality or on the income produced by it. would equally burden the
operations of Government. See Collector v. Day (11 Wall 113, 124) : Pollock
v. Farmers Loan of Trust Co., supra, 583; Gillespie v. Oklahoma (257 501).
ing such capital gain was not real or substantial.
Denman v. Slayton. this case, the Supreme Court upheld a provision
(f) Revenue Act of 1921 defining a deduction for interest paid or accrued or in-
of the incurred or continued to purchase or carry tax-exempt securities
But as we have seen, It does not follow that a tax on land and a tax on income
derived from It are identical in their incidence or rest upon the same basis of
taxing power,
which are controlling factors in determining whether either tax
infringes
due process.
debtedness was upheld as necessary to prevent the escape from taxation of
The income provision properly subject thereto by purchase of exempt securities with borrowed
money. other words, the taxpayer was not permitted to reduce his taxable income
(1) Hole v. State Board."-Nothing in the bove-mentioned case is in conflict
In interest on money borrowed to acquire tax-exempt securities. The Court
with the Pollock case. In that case, Iowa enacted a law exempting its municipal
by that this did not amount to the taxation of the interest from the
and State bonds from taxation. Subsequently, It passed for the first time a tax
pointed out securities. The National Life case was distinguished as follows:
tax-exempt The circumstances disclosed in National Life Ins. Co. V. United
radically different from those now presented, and the doctrine upon
on the net income of residents In the State, and the interest derived from such
bonds was included in an assessment made against the bondholders. The State
court Interpreted the exemption from taxation as only applying to taxes laid on
property in proportion to its value, and not as touching taxes in the nature of
an Mr.
excise
upon
net income
of the
the tax.
owner.
The Supreme Court in an opinion
by
Justice
Cardozo,
upheld
stating:
which States that were cause turned does not control the present one. The respondent here
not in effect required to pay more upon his taxable receipts than was de-
manded was of others who enjoyed like Incomes solely because he was the recipient
- Pollock V. Farmers' Loan & Trust Co. (157 U. S. 429: 158 U. .601),
of Interest from tax-free securities a result which we found would have followed enforcement of the literal provisions of section 245 (a). Revenue Act
was considered and distinguished Two rulings emerge as a result of the analysis.
42 Stat. 227, 261. While guaranteed exemptions must be strletly observed,
1921, this obligation is not inconsistent with reasonable classification designed to subject
all to the payment of their just share of a burden fairly imposed.
The manifest purpose of the exception in paragraph 2, section 214 (a). was to
prevent the escape from taxation of income properly subject thereto by the
purchase of exempt securities with borrowed money
Under the theory of the respondent, 'A.' with an income of $10,000 arising
from nonexempt securities, by the simple expedient of purchasing exempt ones
with borrowed funds and paying $10,000 interest thereon, would escape
all
taxation receipts from both sources. It was proper to make provision to
prevent such upon a possibility The classification complained of is not arbitrary,
makes no improper discrimination does not result in defeating any guaranteed
exemption, and was within the power of Congress The fact that respondent
engaged in the business of buying and selling is not important. See Willcutta
V. Bunn. ante, page 216."
(g) Helvering v. Independent Life Insurance 7o."-This case has been discussed and distinguished In connection with the National Life Insurance Company case."
(h) Cohn v. Graces."- reasons of the Pollock case has not been rejected
in the above cited case. In that case, the Court held that the State of New
York may tax her citizen upon income he received from land situated in another
State and from interest on bonds secured by a mortgage on land situated in
another State. It was stated that the Incidence of a tax on income differs from
a tax on property. Neither tax being dependent upon the possession by the
taxpayer of the subject of the other.
The Pollock case was distinguished from this situation as follows:
"Nothing which was said or decided in Pollock v. Farmers Loan & Trust Co.
(157 U. 8. 429), calls for a different conclusion. There the question for decision
was whether a Federal tax on income derived from rents of land is B direct tax
requiring apportionment under article I. section 2, clause 3 of the Constitution
In holding that the tax was 'direct,' the Court did not rest Its decision upon the
ground that the tax was a tax on the land, or that It was subject to every
limitation which the Constitution imposes on property taxes. It determined only of
that for purposes of apportionment there were similarities in the operation
the two kinds of tax which made it appropriate to classify both as direct, and
within the constitutional command. See Pollock v. Farmers Loan & Trust Co.,
supra, pp. 580. 581: Brushaber V. Union Pacific R. Co. (240 U. 16). And
Union Transit Refrigerator Co. V. Kentucky (199 U. 8. 194, 204). decided 10
in
years after the Pollock case, the present question was thought not to be foreclosed.
"It is by a parity of reasoning that the immunity of Income-producing Instrumentalities of one government, State or National, from taxation by the other,
- 282 514 (1931).
871.
- 300 308 (193T).
3011
By the teaching of the Pollock case an income tax on the rents of land (157
U. 8. 429) or even on the fruits of other investments (158 U. S. 601) is an
impost upon property within the section of the Constitution (art. I, see. 3)
governing the apportionment of direct taxes among the States (300 U. S., at
p. 815). By the teaching of the same case an income tax, If made to cover
the interest on Government bonds, Is a clog upon the borrowing power such as
was condemned in McCulloch v. Maryland, 4 Whent. 316, and Collector v. Day.
11 Wall 113, 124 (300 U. S., at pp. 315, 316). There was no holding that the
taxfacts.
is a property one for every purpose or in every context. We look to all
the
"In line with that conception of the Pollock case is Brushaber v. Union Pacific
R. Co., supra, where the Court pointed out (240 U. S., at pp. 16, 17) that "the
conclusion reached in the Pollock case did not in any degree Involve holding
that Income taxes generically and necessarily came within the class of direct
taxes on property, but that to the contrary. such taxes were enforceable as
excises
except
the extent
that violence might thus be done to the spirit and
intent
of the
rule to
governing
apportionment.
Nothing in this opinion is at war with Weston Charleston (2 Pet.
449), or other cases declaring the immunities of governmental agencies. In the
case cited and its congeners the problem for decision was whether a tax upon
income, even though not a property tax in strictness or for every purpose, was
one in such a sense or in such a measure as to hamper the freedom of the
Central Government through the interference of the States or the freedom of
the States through the interference of the Central Government. The limitations declared in those decisions were gathered by implication from the strueture of our Federal system and were accommodated as the court believed. to
the public policy at stake. What the Court is now concerned with. however, is
not the preservation or protection of any governmental function. Iowa cannot
be held to cripple in an unconstitutional way her own privileges and powers
when she levies an income or even a property tax upon bonds issued by herself.
The Court is now concerned with the meaning and effect of particular contracts
of exemption to be read narrowly and strictly. There is no room at such a
time for the freer and broader methods that have been thought to be appropriate in the development of the doctrine of implied restraints.
"*
(f) James V. Dravo Contracting Company case upheld percent gross
receipts tax imposed by the State of West Virginia upon gross receipts received
by an Independent contractor for work performed for the Federal Government
in West Virginia This case was clearly distinguished from the bondholder
case, Mr. Chief Justice Hughes In the majority opinion. stating
There is no Ineluctable logic which makes the doctrine of Immunity with
respect to Government bonds applicable to the earnings of an Independent
contractor rendering services to the Government That doctrine recognizes
the direct effect of a tax which 'would operate on the power to borrow before
It is exercised" (Pollock v. Farmers Loan & Trust Co., supra) and which
would directly affect the Government's obligation as a continuing security.
95 (1937).
134 (1938).
REVENUE REVISION OF 1942
3012
REVENUE REVISION OF 1942
Vital considerations are there Involved respecting the permanent relations of
the Government to investors in its securities and its ability to maintain its
Predit-considerations which are not found in connection with contracts made
from time to time for the services of independent contractors."
There are also other features involved in the Dravo case which distinguish
It from a Federal tax on State bonds or employees. In this case, the Federal
Government, although not a party to the proceeding, Interceded and Informed
the Court that the Federal Government did not regard the collection of such
a tax as an interference with its governmental functions.
In this connection, the Court said:
spondent's right is at best a derivative one. He asserts an immunity which
local taxation and the mere fact that the tax in question burdens respondent
15 S. Ct. 673, 39 L. Ed. 759), the sale of the bonds by their owners after
they have been issued by the State or municipality is regarded as a transaction distinct from the contracts made by the Government in the bonds them-
selves and the profits of such sales are subject to the Federal Income tax.'
In other words, the income in this case, arose from transactions separate and
distinct from contracts made with the Government. Therefore, they are clearly
distinguishable
the above case where the interest is received as a part of
the contract withfrom
the Government.
(1) Helvering v. Gerhardt."-T case held that the Federal income tax as
applied to the salaries of employees of the Port Authority, a bl-State corporation
created by compact between New York and New Jersey, was valid on the theory
that the tax neither precluded nor threatened unreasonably to obstruct any fune
tion essential to the continued existence of the State government. In that case,
the Court distinguished this situation from taxing the Income from State bonds,
stating that the immunity doctrine was applied where the function involved was
thought to be essential to the maintenance of a State government, as where the
intent was "to tax income received by a private Investor from State bonds, and
is no defense. The defense Is that tax burdens the Government and respondent's right is at best a derivative one. He asserts an immunity which
If it exists, pertains to the Government and which the Government disclaims
Of course, in the case of an action by the Federal Government to collect an
income tax from a State bondholder, we cannot rely upon the proposition that
the State will disclaim that the levying of such a tax interferes with its bor.
rowing powers.
thus threaten impairment of the borrowing power of the State, Pollock v.
(465,466). Loan & Trust Company (157 U. 8. 429: et.): Weston Charleston, supre
Farmers'
Another point which distinguished the two classes of cases Is brought out
in the following quotation from the majority opinion
"There is the further suggestion that If the present tax of 2 percent is upheld,
the State may lay a tax of 25 percent or 50 percent or even more, and make It
difficult or Impossible for the Government to obtain the service It needs. The
argument ignores the power of Congress to protect the performance of the
functions of the National Government and to prevent interference therewith
through any attempted State action. In Thomson V. Pacific Railroad, supre
such
the Court pointedly referred to the authority of Congress to prevent
interference through the use of the taxing power of the State.'
This indicates that the Court was of the opinion that If a State should lay
tax, even though nondiscriminatory, which would make It difficult or imposa sible for the Federal Government to obtain the service It needed, the Federal
Government still had a remedy. This remedy from the Court's reference to the
case of Thomson v. Pacific Railroad Company appears to be by means of legis
lation preventing the State tax from applying. But the States would have no
corresponding remedy to prevent a nondiscriminatory Federal tax from burdening their functions to obtain services or borrow money. for the Federal
law. being the supreme law of the land, would override any State law exempting
such activities from the Federal tax. The sole protection of the States in a
matter of this kind, is the Constitution.
(m) Allen V. Regents of the University System of Georgia (May 23, 1938).-
This case upheld the right of the Federal Government to collect an admissions
tax on admissions charged by the University of Georgia to its athletic contests
The Court pointed out that, although the university was an Instrumentality of
the State of Georgia. If the State embarks on a business which would normally
be taxable, the fact that in so doing It is exercising a governmental power, does
the
not Court
itself stated
render the activity immune from Federal taxation In this connection,
an
"Under the test laid down in Helvering V. Gerhardt, ante (p. 405). however,
essential a system of public education to the existence of the State, the conduct of exhibition for admissions paid by the public is not such a function of
State government as to be free from the burden of a nondiscriminatory tax
laid on all admissions to public exhibitions for which an admission fee is
charged."
Mr. Justice Black concurred in the opinion "except Insofar as It approves the
reasoning of the Court on the question of State immunity from interference by
Federal taxation. It will be noted that the reasoning of the Court recognizes
that there are certain functions of State government which are free from the
burden of a nondiscriminatory tax, and In the Gerhardt case pointed out that
one of these functions was the power of the State to borrow money and that the
taxation
of Income
impairment
of suchreceived
function.by a private Investor from State bonds threatened
(k) Helvering v. Mountain Producers Corporation."- the above cited case, of it
was held that the income received from a State lease by a lessee from the saleoverhis share of oil produced was subject to the Federal income tax. The Court
ruled certain former cases in reaching this conclusion, stating:
SUBPART R. POWER AB AFFECTED BY THE SIXTEENTH AMENDMENT
These decisions in a variety of applications enforce what we deem
to be the controlling view that immunity from nondiscriminatory taxation
sought by a private person for his property or gains because he is engaged
in operations under a Government contract or lease cannot be supported by
merely theoretical conceptions of interference with the functions of government.
Regard must be had to substance and direct effects, And, where it merely
appears that one operating under a Government contract or lease is subject
to a tax with respect to his profits on the same basis as others who are engaged
in similar businesses, there is no sufficient ground for holding that the effect
upon the Government is other than indirect and remote. We are convinced
that the rulings in Gillespic V. Oklahoma, supra. and Burnet v. Coronado Oil
& Gas Company. supra, are out of harmony with correct principle and accordingly they should be, and they now are overruled.
But, in reaching this conclusion, the Court distinguished this situation from
the Pollock cases, as follows
- While a tax on the interest payable on State and municipal bonds
has been held to be invalid as a tax bearing directly upon the exercise of the
borrowing power of the Government (Weston V. Charleston, 2 Pet. 449, 586, 468,
469, L. Ed. 481: Pollock V. Farmers' Loan & Trust Co., 157 U. S. 429,
Wall 579
- 303 U. 376.
3013
(1) Legislative history
sixteenth
amendment
25,The
1913,
provides
as follows:to the Constitution, which became effective February
The Congress shall have power to lay and collect taxes on income, from what
ever
source
derived,
apportionment among the several States, and without
regard
to any
censuswithout
or enumeration.
The Supreme Court has held that this language does not extend the Federal
taxing power to new objects and does not give the Congress authority to tax
income which before the ratification of the amendment was beyond its powers.
It was decided that the purpose of the amendment was to remove the necessity
of apportioning such Income taxes as are direct and further, that the amendment
is
not to be extended beyond the meaning clearly Indicated by the language used.
Nevertheless the meaning of the phrase "from whatever source derived" has
furnished grounds for continued controversy and debate. It must be admitted by
the most persevering protagonists that there is a possible basis for two interpre-
tations of this language: the first, that It was intended by those proposing and
ratifying the amendment that these words would bring within the Federal taxing
*304
(May 10. 1938)
(May 23. 1938)
all incomes from every source, including Interest on State and local the securi-
power and the second, that the language was Intended simply to remove appordionment ties, requirement with respect to Income arising from property, a tax upon
which a "direct" tax under the decision In the Pollock case.
A study was of the history of the amendment discloses numerous arguments up-
each position-fro the time the amendment was first proposed eminent
holding and brilliant legal minds have differed as to the proper Interpretation of
lawyers the debated phrase. It is extremely diffi ult to weigh even the approximate effect
these pro and con arguments had upon the minds of those proposing and ratifying
the amendment.
The outstanding events in the legislative history of the amendment may be
related. By 1909, the popularity of the Income tax had grown to the point
briefly It could no longer be denied. The attempt made in the act of 1894 to levy
such where tax had met with general approval and the Pollock decision, rendering
act a Ineffective, created widespread resentment. After the Pollock case there this
arose that demand that the necessary steps be taken to overcome the effect of
decision, a which clearly meant the adoption of a constitutional amendment.
In the Pollock case income had been divided into three general classes: The
composed of income from property: the second, of Interest upon bonds of
first, State and local governments; and the third. of income from all other sources
the question of salaries of State and local officers and employees was not before
the Court).
With regard to income of the first class, the Court found that a tax thereon
a "direct" tax for the purposes of the constitutional requirement that
was direct taxes must be apportioned In accordance with the census or enumeration.
Upon this point the Court was divided. the majority being five Justices, while
four dissented. Upon the question of the power of the Federal Government to
tax the interest from State and local securities the Court found that this was
"a tax upon the power of the States and their Instrumentalities to borrow money.
and consequently repugnant to the Constitution." As to this point the decision
of the Court was unanimous.
The date of the Pollock decision was April 8, 1895. From that date to 1909
there was an ever-increasing growth of public opinion favorable to the income
tax. Agitation became acute and the demands were so insistent that when a
special session of the Congress was called in 1909 to consider the subject of
tariff revision it soon developed that the question of an effective income tax
and a constitutional amendment was uppermost in the legislative mind. Proposed amendments in several forms were presented. On April 27. 1909, Senator
Brown, of Nebraska. Introduced one providing that "The Congress shall have
to lay and collect taxes on Incomes and inheritances." He apparently
power became contineed that this language added nothing to the Federal taxing
power. as on July 17 be introduced a second proposal as follows: "The Congress
shall have power to lay and collect direct taxes on incomes without apportionment among the several States according to population."
During this time the tariff bill of 1909 was under consideration by the ConSeveral amendments were offered to this bill to provide an income tax
gress. Senator Daniel, of Virginia, proposed a special excise tax on corporations to be
measured by their gross Income. Senator Balley, of Texas introduced a genoral Income tax which, with the exception of the State and local bond interest
issue. fully challenged the Pollork case. The Balley proposal provided for a flat
rate and applied to both individuals and corporations. Senator Cummins submitted a MII providing for a graduated Income tax upon individuals, but containing provisions exempting salaries of State and local officers and employees
and the interest uron State and local securities
Of perticular Interest are two bills which were submitted by Mr. Cordell
H.P. of Tonnessee. In the House The first provided for a general Income tax
w^-leh would apply to income from property but which exempted State and local
hand interest The second Instructed the Treasury Department and the Department of Justice to proceed upon the collection of taxes under the 1894 act (except in
as than annl'ed to State and local bond Interest), regardless of the decision
the Pollock ence.
It will he noted that there ran through these proposals a general disregard of
the Pollock case insofar as It related to income from property. From statements
the Members. and from the debates on the floor, It will appear that among a
considerable element In both Houses there existed a strong resentment toward
that portion of the Pollock decision, and a belief that, considering the importance
of the decision and the majority of only 1 vote, that a reversal might be had
by
REVENUE REVISION OF 1942
3015
upon another case Involving the same point. However, with regard to the portion of the decision relating to State and local bond Interest, upon which point
the Court was unanimous, there was evidenced a general acquiencence and
desire to make all proposed legislation conform to that part of the decision
On June 16, President Taft in a message to the Congress, submitted two proposals: The first of which recommended that the Congress submit to the States
a constitutional amendment "conferring the power to levy an Income tax upon
the National Government without apportionment among the States in proportion
to population." The second recommended the adoption of a corporation excise
tax based upon net Income It was generally conceded that this move on the part
of the President and the party leaders was made In an effort to placate the
insurgents" and bring about a compromise reasonably acceptable to all of the
conflicting elements in the Congress, and, above all, to remove the hindrances
the passage of the tariff bill.
Senator Brown then offered his second proposal for a constitutional amendment already referred to, e., The Congress shall have power to lay and collect
direct taxes on incomes without apportionment among the several States according to population. This proposal had the serious fault, from the point of view
of a great number of the Members who so strongly resented the Pollock decision,
of seeming to admit. by the use of the word "direct." the full Implication of the
majority's position with respect to a tax on income from property.
Senator Brown's proposal was referred to the Committee on Finance where 10
days later It emerged in the form finally adopted, namely
The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived, without apportionment among the several States and
without regard to any census or enumeration."
Thus the Brown proposal was amended by eliminating the despised word
"direct" and by adding the phrase "from whatever source derived."
While the Brown proposal was under the consideration of the Finance Committee, Senator McLaurin made the suggestion on the floor that Senator Brown
could have secured the same result by simply striking out the words "and direct
taxes" in clause 3. section 2 of the Constitution. which provides
"Representatives and direct taxes shall be apportioned among the several
States, etc..' and the words "or other direct" in clause 4. section 9. which pro-
a
REVENUE REVISION OF 1942
3014
to
vides:
"No capitation, or other direct tax shall be laid, unless In proportion to the
census or enumeration, etc.'
This suggestion, however, did not take into account the fact that Senator
Brown's proposal removed the apportionment requirement only with respect to
income taxes, while the elimination of these two pbrases would have nullified this
requirement with regard to all other direct taxes with the exception of capitation
taxes. There was no desire to go this far.
There seems little doubt but that the genesis of the debated phrase lies completely In the word "direct" as used In the Brown proposal. This conclusion seems
particularly likely when viewed in the light of the following facts: First, there
was a substantial group of Members of Congress who were greatly incensed over
the portion of the Pollock decision relating to taxes on incomes from property.
As is demonstrated by the bills they introduced and the speeches on the floor. they
were anxious to fully challenge this part of that decision. There was another
group who favored an income tax but were willing to conform to the decision and
wanted to pass an income-tax act that would be acceptable to the Court until an
amendment could be secured that would allow a broadened tax. Then, there were,
of course, those who were not agreeable to an Income tax and did not desire an
amendment.
These facts throw light on the compromise language eventually agreed upon.
Second, the stimuli for action on the income tax came from the insurgent group.
The conservative element was anxions for the passage of the tariff bill The
Income-tax Issue was a popular one and the agitation and pressure for definite
petion was acute. It cannot be doubted that almost all Members were sensible
to these demands Thus, when the second proporal for a constitutional amendment was submitted by Senator Brown. who certainly did not come from the most
conservative group, the necessity for a compromise upon some generally acceptable language became apparent.
The membership of the Finance Committee at this time WAR as follows: Senntors Aldrich (chairman). Burrows. Penrose. Hale. Cullom, Lodge. McCumber,
Smoot. and Flint were 00 the Republican side: the Democrats were Senators
Daniel, Money, Bailey, Taliaferro, and Simmons From these names a majority
3016
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could be obtained made up of Senators as conservative as any then in office. It
is inconceivable that the Finance Committee so constituted would have taken
Senator Brown's proposal and extended It to fields clearly not contemplated In
Its language.
It seems much more reasonable to assume that the word "direct" was stricken
out and the phrase "from whatever source derived' inserted, purely to remove
the necessity for distinguishing between "indirect" Income taxes which were constitutional. and such taxes as were "direct' and thus barred by the Pollock
decision. The changed language was undoubtedly a concillatory gesture on the
part of the Finance Committee toward the insurgent element to whom, in their
indignation over the Pollock case the word "direct" was an affront. Further
evidence of the compromise nature of the committee's change in wording is contained In Senator Aldrich's request, upon reporting the bill to the Senate, that
the amendment be disposed of without debate
Senator Brown, in April 1910, in the Editorial Review. made the following
commend with regard to the words "from whatever source derived"
"The sole question, therefore, presented by the amendment, and the sole consideration involved in its ratification or rejection is whether or not the United
States, the foremost Nation of the world. shall be clothed with this prerogative
of national sovereignty- power to tax Incomes according to their value and
without regard to apportionment among the several States according to population."
And further-
"Recently the question has been raised by those who are opposed to the ratiftcation of the amendment that with the amendment ratified the powers of the
States will in some way be impaired and their strength and vitality, in some way
not specified, destroyed.
"The objection is not sound. The amendment in no way changes the existing
relation between the State and the Federal Government. Whether the amendment Is ratified or not, the rights of the State as a State and those of the
Federal Government in their relation to each other will remain the same. Each
sovereignty is now wholly independent of the other in the exercise of certain
governmental functions and the proposed amendment neither adds to nor takes
away from the independence now enjoyed by each. But it is the argument of
some who oppose its adoption that the amendment will alter that relation by
conferring upon the Federal Government the power to tax the incomes arising
from investments in State and municipal securities I do not agree with that
argument because the language of the amendment and the occasion for its submission by Congress and the Constitution Itself do not warrant that interpretation. Under the existing Constitution, the Federal Government is without
the power to tax State or municipal securities And the State is wihout the
power to tax Federal securities Each may tax Its own securities but neither
is subject to the jurisdiction of the other in taxation matters. The proposed
amendment In not the remotest degree suggests any change in that regard. Each
sovereignty is left to the independent and exclusive privilege of taxing its own
securities without interference by the other.'
While there were a number of references made by Members on the floors of
both House and the Senate to the desirability of taxing the Interest from State
and local bonds, there is nothing In the legislative history of the sixteenth amendment from which It could be concluded that it was the intention of the Congress
to frame the amendment so as to provide for the taxability of State and local
bond interest. The language "from whatever source derived seems more properly
to have been used to eliminate the use of the word "direct."
Thus the Senator Introducing the amendment and Chairman Aldrich, who was
in charge of the bill on the floor, gave no Intimation that the momentous step of
subjecting State and local bond interest to the Federal income tax, was contemplated. In fact. they denied this to be the Intention of the Congress and de
clared that the only purpose of the language was to remove the necessity for appor-
tionment with regard to such income taxes as might be direct.
Mr. Harry Hubbard, In an article published in the Journal of the American Bar
Association, quotes from a letter written to him by Senator Knute Nelson, of Minnesota, In 1920. Senator Nelson was a member of the Committee on the Judiciary
He wrote Mr. Hubbard that "the words 'from whatever source derived' were
Inserted In an amendment in the Senate at my Instance and on my insistence.
Later he wrote Mr. Hubbard that "the record may not show It but I introduced
the amendment and the facts are that at that time Mr. Aldrich was chairman
of the Finance Committee and I discussed the matter with him and insisted on the
REVENUE REVISION OF 1942
3017
amendment being Inserted and he concurred with me and reported the bill with the
phrase
'from whatever source derived.' With regard to the decision in Evans v.
Gore," Senator Nelson said, in this letter:
"I have been very sorry to see that the Supreme Court in Its decision has utterly
ignored the phrese; in fact, treated the amendment as though this phrase were
not a part of it."
The Record discloses that Senator Nelson was present in the Senate at the
time the debates on the amendment were taking place. It also discloses that in
1910 when Senator Borah made his often-quoted speech with regard to the inter
pretation onf the amendment, that Senator Nelson was also present. It seems
very strange that he should sit through these debates In which the contrary
view was se definitely and forcibly stated. without arising to make his own position
clear with regard to the disputed phrase.
When the amendment came before the States for ratification, a number of
people, including eminent legal authorities, governors, and others In positions
of influence, expressed grave doubts as to the proper construction of the disputed
phrase. Governor Hughes, of New York, in a message to his General Assembly,
pointed out that the phrase could be construed as to Include not only Incomes from
property, but also Interest from State and local securities, His message was
given wide circulation, and his popularity coupled with a very general respect
for his clarity of mind and legal ability. undoubtedly made his views of considerable weight in the minds of State legislators. Senator Borah and the able
and learned Ellhu Root, took Issue with the Governor and, In a clear and very
forceful manner, pointed out that there was no substantial ground upon which
anyone could conclude that the Congress Intended to do any more than to remove
the apportionment requirement with respect to income taxes.
Senator Borah pointed out further, that from the beginning the Federal taxing power had been plenary and complete except for the express restraints im-
posed by the provisions requiring apportionment of direct taxes and the uniformity of all taxes, and the implied restraint, under Court decisions, against
diminution of the salaries of judges the burdening or infringement of State
powers, the impairment of contracts, dental of due process, and the like by use
of the taxing power. In other words, that except for the requirement for the
apportionment of direct taxes and the uniformity of taxation that the Federal
taxing power was just as broad and as all Inclusive as any other express power
granted to the Congress by the Constitution: but, just as were all of the other
powers, the taxing power was subject to the general limitations and restraints
provided in the Constitution
Others joined in the general debate and a number of very forceful opinions
were expressed and circulated among the State legislatures However, no one
can say just what effect these statements had in determining the choice of the
State legislators.
Whatever was intended. the coice of language was unfortunate Considering
the atmosphere of doubt that surrounded the amendment during the time of its
ratification, there is little reason to assume that such an important step as the
removing of the ban on a Federal tax of State bonds would have been undertaken or completed in such ambiguous and uncertain terms and in the absence
of a general agreement as to just what the language really meant. This seems
doubly certain when It is considered that, had the intention been definitely and
ascertainably to Include State bond interest, the States would have been giving
up a valuable immunity without receiving in return any comparable compensation
This point has been ably summed up by Mr. William Anderson in an article on
tax exempt securities in the Minnesota Law Review for March 1934, as follows:
"Can It be assumed that Congress, without discussion of the question, by the
clumsy use of four words In the middle of an amendment, intend to Introduce a
change of so tremendous significance? New and fundamental powers are not
usually conferred by a single phrase found in a provision having a different purpose. If the broad construction would be applied to the amendment. It might be
even construed broad enough to tax the incomes or revenues of the State or
municipal government themselves. Furthermore, this broad construction, If taken
literally, would authorize the impairment of the obligations of contracts.
"It Is entirely improper to take out a single provision of the Constitution and
construe it without reference to other parts of the document. It is equally unjustifiable to take the bare words and construe them with an uncompromising
253 8. 245,
69663 42 pt.
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3018
REVENUE REVISION OF 1942
literality. When the letter is the law, the people become victims of the unskilled
draftsman and the careless copyist. The official or strict construction of the
Constitution is preferable, first, because It considers the Constitution as a whole;
second, it is not misled into disregarding the form of the amendment for Its subthird. it does not open the door to such results as impairment of
stance, and of contracts, It preserves the fundamental rule that the Federal
It is stated that the purpose of the sixteenth amendment was to overcome
the decision of the Supreme Court in the Pollock case." However, It should
remembered that It was only the majority opinion of the Pollock case which was
criticized, not the minority. Both the majority and minority opinions were
unanimous in holding that the Congress was without power to apply a nondiscriminatory Federal income tax to the income from State or municipal bonds.
Moreover, that case did not involve the taxation of State officers or employees
for the reason that their salaries were specifically exempted by Congress in the
act before the Court in the Pollock case. Mr. Justice Fuller, in referring to the
income from State and municipal bonds in the rehearing on the Pollock case,
said:
obligations Government may not tax the governmental Instrumentalities of the State."
connection, the decision in the case of Fairbank V. United States is of
interest. In this The validity of a Federal stamp tax on foreign bills of lading was
before the Court. In fixing the scope to be allotted to the provision limiting down the the
by prohibiting taxes on articles exported, the Court laid
following taxing power, general rule with regard to powers and restrictions thereon
the receipts from municipal bonds, It cannot be sustained, because It is a tax on
the power of the
States,toand
their Instrumentalities to borrow money, and
consequently
repugnant
theon
Constitution."
He then went on to state:
and Congress It seems to us clear that the same rule and spirit of construction must also
be recognized. If powers granted are to be taken as broadly granted and as
with them authority to pass those acts which may be reasonably necescarrying to carry them into full execution in other words, If the Constitution
"But if. as contended, the interest when received has become merely money in
the recipient's pocket and taxable as such without reference to the source from
which it came, the question is immaterial whether It could have been originally
essary in Its grant of powers is to be so construed that Congress shall be able to carry
full effect the powers granted, It is equally imperative that where prohi-
taxed at all or not. This was admitted by the Attorney General with char-
bition into or limitation is placed upon the power of Congress that prohibition or
acteristic candor and It follows that, if the revenue derived from municipal bonds
cannot be taxed because the source cannot be, the same rule applies to revenue
limitation should be enforced in its spirit and to its entirety It would be a
strange rule of construction that language granting powers is to be liberally
construed and that language of restriction is to be narrowly and technically
from any other source not subject to the tax: and the lack of power to levy
any but therefrom."
an apportion tax on real and personal property equally exists as to the
revenue
construed." With regard to the power of Congress to tax the interest on State and local
In
that:
securities, the limitation was no less exacting, because It was implied rather than
expressed as in the above ease.
and then continues:
to
Fourth, that It is extremely unlikely that the conservatively constituted Committee on Finance had in mind extending the scope of the Brown proposal to
include tax-exempt interest when It struck out the word "direct" and Inserted
the phrase "from whatever source derived.
Fifth. that it is clear from the statements of Senators Brown, Borah, and
Aldrich that there was no intention on the part of the Congress to include State
bond interest by the use of the disputed phrase.
Sixth, that in spite of Senator Nelson's statement (made In a letter in 1920)
that the change of words was made at his insistence and that be understood them
to include State bond interest, It seems strange that he should sit silent through
the debates without making his position clear.
Seventh, that the origin of the phrase undoubtedly arose in the use of the
word "direct" by Senator Brown in his proposal, and It was used to avoid the
necessity for using this unpopular word.
Eighth, that even If there were doubt as to the proper construction of the
phrase and the intention of its framers, an ambiguous amendment should not
have been construed so as to Infringe the powers of the State unless such a step
was unquestionably and incontrovertibly authorized
(2) Judicial interpretation
The second question to be considered is whether the Federal Government has
the power to tax the income from State bonds by reason of the sixteenth amend-
ment. This amendment provides that
"The Congress shall have power to lay and collect taxes on incomes, from
whatever source derived. without apportionment among the several States, and
without regard to any census or enumeration."
181 U. S. 283.
construing this opinion, the study of the Department of Justice holds
"The majority view was that the Court either looks to source for all purposes
or
must
accept the income concept for all purposes" (Department of Justice
Study,
p. 118).
Looking back over the history of the amendment, the following points stand out:
nothing more was contemplated or possibly to be inferred from the language used.
be
"We have unanimously held in this case that, so far as this law operates on
"We are not here confronted with a question of the extent of the powers of
but one of the limitations imposed by the Constitution on its action,
First, that with regard to the portion of the Pollock decision dealing with of
incomes from property, the Court's majority was 5 to 4: but, as to the power
the Federal Government to tax State and local bond Interest, It was unanimous
Second, that in order to levy an effective income tax. it was necessary
remove the constitutional requirement for apportionment of direct taxes,
Third, that Senator Brown's second proposal sought to do just that, and that
3019
"The sixteenth amendment was written into the Constitution because of the
effect of this decision upon the power of the Congress. It is believed that the
amendment, in giving to the Congress the power to tax incomes "from whatever
source derived' without apportionment, abolishes the governing principle in the
Pollock case, 1. e., that a tax on income is equivalent to a tax on the several
sources from whence such income is derived. This makes an Income tax a tax
on income without regard to the sources from whence derived. As the Chief
Justice pointed out in the opinion on rehearing, If an Income tax Is not considered as the legal equivalent of a tax on the source, then the interest on State
and
tax.'
municipal obligations would be subject to a general, nondiscriminatory income
The Chief Justice in this case was showing the result which would follow
if the source of the income was disregarded for all purposes. Under such a
theory, the Congress would be unable to classify income. that is, It would be
unable to tax capital gains at one rate and earned Income at another rate or
to determine a distribution was capital or an ordinary dividend in the hands
of the shareholder. It would also be unable to levy an Income tax on wages,
which tax has recently been upheld by the Supreme Court in connection with the
Social Security Act. If the only income tax authorized by the sixteenth amendment is "a tax on income without regard to the source from whence derived."
all of our income-tax laws, beginning with the Revenue Act of 1913, would be
unconstitutional That this was not the view of the Supreme Court as to the
purpose of the sixteenth amendment is made evident by the first decision arising
under the sixteenth amendment, construing the Revenue Act of 1913. This was
the case of Brushaber V. Union Pacific Railroad Co.," decided January 24, 1916.
In the Revenue Act of 1913 Congress classified Incomes and allowed certain
exemptions. Proceeds from life-insurance policies or from life-Insurance endowments or annuity contracts were not included in income. The interest upon the
bonds of State or political subdivisions, the compensation of the President of the
United States, the judges of the Supreme and inferior courts, and the compensation of officers or employees of a State or political subdivision were exempt.
157 U. 8. 429 158 U. 8. 601.
240 U. 1.
3020
REVENUE REVISION OF 1942
Individuals were entitled to deduct from their gross income dividends received
from corporations To determine whether or not the amounts in the hands of
the individual were exempt or deductible under the law. it was necessary
REVENUE REVISION OF 1942
requirement of apportionment as to one of the great classes and of uniformity
as to the other class were not so much a limitation upon the complete and allembracing authority to tax. but in their essence were simply regulations coneerning the mode in which the plenary power was to be exerted. In the whole
history of the Government down to the time of the adoption of the sixteenth
amendment, leaving aside some conjectures expressed of the possibility of a tax
lying Intermediate between the two great classes and embraced by neither, no
question has been anywhere made as to the correctness of these propositions
At the very beginning. however, there arose differences of opinion concerning the
criteria
to be applied In determining in which of the two great subdivisions a tax
would fall
look into the source from which such income was derived
The first point raised in the Brushaber case was that the effect of the sixteenth
amendment was merely to waive the requirement of apportionment among the
States in its application to a general and uniform tax upon incomes from whatever source derived and that the income-tax law of 1913, except Insofar as the
tax thereby imposed was in reality such a general and uniform tax on Incomes, that
It derived no support from the sixteenth amendment. It was contended in
that"Discriminations, inequalities. exemptions, and artificial rules of computation
excluded from any Income-tax law which purports to derive its authority
are from the sixteenth amendment. because they necessarily involve the taxing of
Upon the lapsing of a considerable period after the repeal of the
something other than income."
income-tax laws referred to, in 1894 an act was passed laying a tax on Incomes
from all classes of property and other sources of revenue which was not apportioned. and which therefore was of course assumed to come within the classification of excises, duties, and imposts which were subject to the rule of uniformity
It was also contended that, under the sixteenth amendment, a tax could not
imposed on particular kinds of income, such as the tax on income from gold
be mines or upon rates received from leasehold estates. It was further contended
that the tax to be imposed under the sixteenth amendment must be a general tax
upon incomes from whatever source derived. merely because they were incomes
and not because of their size or their source or any other quality or incident
but not to the rule of apportionment The constitutional validity of this law
was challenged on the ground that It did not fall within the class of excises,
duties, and Imposts, but was direct in the constitutional sense and was therefore
void for want of apportionment, and that question came to this court and was
passed upon in Pollock v. Farmers' Loan & Trust Co. (157 U. 429: 158
601). The Court, fully recognizing in the passage which we have previously
quoted the all-embracing character of the two great classifications, Including
whatsoever. The Court summed up the contentions as to the Invalidity of the act on these
points as follows:
"(a) The amendment authorizes only a particular character of direct tax
without apportionment, and therefore If a tax is levied under Its assumed
authority which does not partake of the characteristics exacted by the amendment, It is outside of the amendment and is void as a direct tax in the general
on the one hand, direct taxes subject to apportionment, and on the other, excises,
constitutional sense because not apportioned
"(b) As the amendment authorizes a tax only upon incomes 'from whatever
source derived. the exclusion from taxation of some income of designated per-
sons and classes Is not authorized and hence the constitutionality of the law and
must be tested by the general provisions of the Constitution as to taxation,
thus again the tax is vold for want of apportionment.
It is clear. therefore, that the Supreme Court had before It in the Brushaber
case the question as to whether or not the income tax authorized by the sixteenth amendment was "a tax on income without regard to the source from
whence derived.
The Court. before taking up the text of the amendment made a brief statement
of the legislative and judicial history of the subject with which the amendment
was
concerned. The following is quoted from the opinion of the Court as to
these matters:
-
That the authority conferred upon Congress by section 8 of article
I "to lay and collect taxes, duties, imposts, and excises is exhaustive and
embraces every conceivable power of taxation has never been questioned. or.
has been so often authoritatively declared as to render it necessary
only
if it has, to state the doctrine. And It has also never been questioned from the
foundation, without stopping presently to determine under which of the separate headings the power was properly to be classed. that there was authority
given, as the part was included in the whole, to lay and collect income taxes
Again. It has never moreover been questioned that the conceded complete and
all-embracing taxing power was subject, so far as they were respectively
applicable, to limitations resulting from the requirements of article I. section
8, clause 1. that 'all duties, imposts, and excises shall be uniform throughout
the United States,' and to the limitations of article I. section 2. clause 3.
that 'direct taxes shall be apportioned among the several States, and
article I. section 9, clause 4. that 'no capitation, or other direct, tax shall
be laid. unless in proportion to the census or enumeration hereinbefore directed
3021
to
of
to be taken. In fact, the two great subdivisions embracing the complete and
perfect delegation of the power to tax and the two correlated limitations as to
such power were thus aptly stated by Mr. Chief Justice Fuller in Pollock v.
Farmers Loan & Trust Company, supra, at page 557: 'In the matter of taxation. the Constitution recognizes the two great classes of direct and indirect
faxes, and lays down two rules by which their imposition must be governed,
namely: The rule of apportionment as to direct taxes, and the rule of uniformity as to duties, Imposts, and excises," It is to be observed. however, the
as long ago pointed out In Veazie Bank V. Fenno (8 Wall. 533, 541). that
duties, and imposts subject to uniformity, held the law to be unconstitutional
in substance for these reasons: Concluding that the classification of direct was
adopted for the purpose of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionment, It was held that the duty existed to fix what was a direct tax in the
constitutional sense so as to accomplish this purpose contemplated by the Constitution (157 U. S. 581). Coming to consider the validity of the tax from this
point of view, while not questioning at all that in common understanding It
was direct merely on income and only indirect on property, It was held that
considering the substance of things It was direct on property in a constitutional
sense, since to burden an income by a tax was from the point of substance to
burden the property from which the income was derived and thus accomplish
the very thing which the provision as to apportionment of direct taxes was
adopted to prevent. As this conclusion but enforced a regulation as to the mode
of exercising power under particular circumstances, It did not in any way dispute
the all-embracing authority possessed by Congress including necessarily therein
the power to impose income taxes if only they conformed to the constitutional
regulations which were applicable to them.
Then the Court, after quoting the amendment, went on to state
is clear on the face of this text that It does not purport to confer power to levy
income taxes In a generic sense-a authority already possessed and never
questioned-or to limit and distinguish between one kind of income taxes and
another, but that the whole purpose of the amendment was to relieve all Income
taxes when imposed from apportionment from a consideration of the source
whenee the income was derived. Indeed, in the light of the history which we
have given and of the decision in the Pollock case, and the ground upon which
the ruling In that case was based, there is no escape from the conclusion that
the amendment was drawn for the purpose of doing away for the future with
the principle upon which the Pollock case was decided: that 18, of determining
whether a tax on Income was direct not by a consideration of the burden placed
on the taxed income upon which it directly operated, but by taking into view the
burden which resulted on the property from which the income was derived,
since in express terms the amendment provides that Income taxes, from whatever source the Income may be derived, shall not be subject to the regulation of
apportionment. From this in substance It Indisputably arises, first, that all
the contentions which we have previously noticed concerning the assumed limita-
tions to be implied from the language of the amendment as to the nature and
character of the income taxes which It authorizes find no support in the text
and are In Irreconcilable conflict with the very purpose which the amendment
was adopted to accomplish.
And then the Court concluded
the amendment contains nothing repudiating or challenging the
ruling In the Pollock case that the word "direct" had a broader significance since
It
REVENUE REVISION OF 1942
3022
REVENUE REVISION OF 1942
It embraced also taxes levied directly on personal property because of its owner-
on
andinmunicipal
obligations, but this provision falled of passage. This
bill State
included
gross income"the Interest from obligations of States, Territories, political subdivisions
thereof, or the District of Columbia, issued after the passage of this act.
unless authorized by law prior to the passage of this act or unless Issued for
the purpose of funding or refunding Interest-bearing indebtedness outstanding
at the time of the passage of this act or for the performance of a contract
ship, and therefore the amendment at least impliedly makes such wider significance a part of the Constitution- condition which clearly demonstrates that
the purpose was not to change the existing interpretation except to the extent
necessary to accomplish the result intended that is, the prevention of the resort
to the sources from which a taxed Income was derived in order to cause a direct
tax on the income to be a direct tax on the source itself and thereby to take an
entered into prior to the passage of the act."
income tax out of the class of excises, duties, and imposts and place It in the class
of direct taxes."
The reason for taxing this interest, which had been free of tax under the prior
acts, was according to the committee report. that"the committee was of the opinion that. although there is doubt as to the constitutionality of including the interest on these obligations, justice requires that at
The same contentions were raised in the case of Stanton v. Baltic Mining
Company." In that case, the appellant in its brief pointed out that Income
derived from the exercise of essential governmental functions of States or
their political subdivisions were among the exemptions granted by the 1913 act.
This case also raised the point that the tax on mining companies was a tax
the gross production and not on the net production of the working of the
on mine by the corporation and that, for that reason, the tax was not within the
purview of the sixteenth amendment. In answering this question, the Court
said:
"But aside from the obvious error of the proposition intrinsically considered
It manifestly disregards the fact that by the previous ruling It was settled
that the provisions of the sixteenth amendment conferred no new power of
tozation but simply prohibited the previous complete and plenary power of
income taxation possessed by Congress from the beginning from being taken
out of the category of indirect taxation to which it inherently belonged and
being placed in the category of direct taxation subject to apportionment by a
consideration of the sources from which the income was derived: that is, by
testing the tax not by what It was a tax on income- but by a mistaken theory
deduced from the origin or source of the income taxed. Mark, of course,
saying this we are not here considering a tax not within the provisions of the
sixteenth amendment; that is. one in which the regulation of apportionment
or the rule of uniformity is wholly negligible because the tax is one entirely
in
beyond the scope of the tazing power of Congress and schere consequently no
authority to impose a burden direct or indirect exists. In other words, we are
here dealing solely with the restriction imposed by the sixteenth amendment on
the right to resort to the source whence an income is derived in a case where
there is power to tax for the purpose of taking the income tax out of the
class of indirect, to which It generically belongs, and putting it in the class
of direct, to which It would not otherwise belong. in order to subject It to the
regulation of apportionment."
It will be noted that this case held that the right to disregard the source
existed In a case where there was a power to tax only for the purpose of not
applying the rule of apportionment. Of course, in the case of Income from State
or municipal bonds, there was no power to tax.
The next case involving the sixteenth amendment in connection with the
Revenue Act of 1913 was that of the Tyce Realty Co. V. Anderson." Since
all of the contentions In this case had already been decided by the Brushaber
case, the Court held that case to dispose of the issues here involved.
The conclusion from the cases construing the Revenue Act of 1913 seems
Inescapable that the Court did not accept the interpretation that an income
tax. to meet the requirements of the sixteenth amendment, must be a tax on
Incomes without regard to the source from whence derived. It concluded that
the source was to be disregarded by that amendment only where there was a
power to tax. and then only for the purpose of preventing the application of
the rule of apportionment. The provisions of the Revenue Act of 1913 exemptIng the Interest upon obligations of State or political subdivisions were inserted
according to Mr. Cordell Hull, who was in charge of the bill in the House,
to prevent the Injection of any more constitutional questions or controversies
the bill. On the Senate side, It was stated that these exemptions were
on Inserted to foreclose the doubt which was regarded as improbable that decl- such
revenues might subject to Federal taxation. Of course, at that time, the These
sions in the Brushaber case and related cases had not been rendered.
exemptions were continued through the Revenue Acts of 1916 and 1917. The
Revenue bill of 1918, as introduced in the House, attempted to tax the interest
least in time of war the holders of these securities should share the burdens
equally with the holders of Liberty bonds."
In regard to the provision subjecting the interest on new Issues of State and
municipal bonds to taxation, the Senate Finance Committee struck out the House
provision specifically taxing them, the report stating that"Apart from the constitutional question, it seems unwise for Congress to attempt
to impose this tax upon obligations of States and municipalities so long as these
States are not free to tax in a similar manner the obligations of the United
States.'
The conference committee agreed to the Senate amendment and restored the
exemption. However, there was a provision inserted In the Revenue Act of 1918
which specifically taxed the salaries of the President and judges of the United
States Supreme Court and the Inferior courts of the United States, This was the
situation existing until 1920, when the case of Evans v. Gore was decided This
case involved the taxation of the salary of a Federal judge for the western district
of Kentucky, who was appointed by the President with the advice and consent of
the Senate in 1899. The Government taxed his salary under the Revenue Act of
1918, which specifically included as income the salary of such a judge. There
were two questions presented to the Supreme Court for decision (1) Whether in
subjecting the salary of a Federal judge to a net income tax amounted to a diming-
tion of his compensation under article III, section 1. of the Constitution and (2)
If the levying of a net Income tax does amount to a diminution of n judge's salary,
does the sixteenth amendment modify this express provision of the Constitution
so as to render such salary subject to the Income tax? The Court concluded that
the levying of an income tax would diminish the compensation of a Federal judge
within the meaning of the Constitution, and then went on to state
Does the sixteenth amendment authorize and support this tax and the attendant diminution that is to say, does it bring within the taxing powers sub-
jects theretofore excepted? The Court below answered in the negative; and counsel for the Government say:
'It is not, in view of recent recisions, contended that this amendment rendered
taxable as income anything that was not so taxable before.
"We might rest the matter here. but it seems better that our view and the
reasons therefor be stated in this opinion. even If there be some repetition of
what recently has been said in other cases.
After reviewing the Pollock case, the Brushaber case, and other cases, and the
legislative history of the sixteenth amendment, the Court concluded that the sixteenth amendment did not extend the taxing power to new or excepted subjects
but merely removed all occasion otherwise existing for an apportionment among
the States of taxes laid on income derived from one source or another. In other
words, this question was reconsidered, and the view in the Baltio Mining Company case and other cases was adhered to, which, in effect, meant that the six.
teenth amendment would not authorize such a tax.
In Peck & Company v. Lowe," relating to the application of the income tax
imposed by the Revenue Act of 1913 to exports, the argument was made that the
sixteenth amendment had not enlarged the taxing power of Congress so that it
could levy a net income tax on exports. Mr. Justice Van Devanter, in delivering
the opinion of the Court, held that the sixteenth amendment had no real bearing
on the case, but stated-
"that this amendment does not extend the taxing power to new and expected
subjects, but merely removes all occasion, which otherwise might exist, for an
42
240 U. 8. 103.
240 U. 115
3023
253
8.
245.
247 U. 8. 165 (1918).
REVENUE REVISION OF 1942
3024
apportionment among the States of taxes laid on income, whether It be derived
from one source or another.
In the case of Eianer v. McComber, the Court in determining whether or not a
stock dividend was income within the meaning of the sixteenth amendment, said:
The sixteenth amendment must be construed in connection with the taxing
clauses of the original Constitution and the effect attributable to them before the
amendment was adopted.
And then restated the conclusions referred to in the former opinions that the
amendment did not extent the taxing power to new subjects but merely removed
the necessity which otherwise might exist for an apportionment among the States
of taxes laid on income Also, in Metcalf & Eddy v. Mitchell,* Mr. Justice Stone
in writing the majority opinion referred to the cases holding that the sixteenth
amendment did not extend the taxing power to any new classes of subjects
The only case directly involving the taxation of the Income from State and
local bonds after the passage of the sixteenth amendment was that of the National
Life Insurance Co. case," already discussed in the first part of the report. held In
that case the Court did not consider the sixteenth amendment directly but
that Congress was without power to impose such a tax.
It is reasonably clear, therefore, that the Court, both by dieta and decisions,
has come to the conclusion that Items of income which were not taxable before
the adoption of the sixteenth amendment are not taxable after such adoption
The CHAIRMAN. I have here a short supplementary statement made
by Mr. Williamson, who appeared here yesterday, on the tobacco situation. It is just one short page. That will be inserted here in connection
with his statement.
(The document referred to appears on p. 2778 of these hearings.)
The CHAIRMAN. The next witness on the calendar is Mr. Ray Murphy, assistant general manager, Association of Casualty and Surety
Executives, 60 John Street. New York. Is Mr. Murphy here?
Mr. MURPHY. Yes, Mr. Chairman.
The CHAIRMAN. Come forward and identify yourself.
STATEMENT OF RAY MURPHY, ASSISTANT GENERAL MANAGER,
ASSOCIATION OF CASUALTY AND SURETY EXECUTIVES, NEW
YORK, N. Y.
Mr. MURPHY. I am Ray Murphy, assistant general manager of the
Association of Casualty and Surety Executives, on behalf of which I
appear. This association is composed of 61 principal stock casualty
insurance and surety companies doing business in the United States.
The principles expressed herein apply to all mutual insurance companies other than life.
On March 3, 1942, Mr. Randolph Paul, special tax adviser to the
Secretary of the Treasury, in his appearance before this committee
made the following statement:
Mutual insurance companies other than life.-Many of the mutual casualty
Insurance companies, large as well as small, are given an outright exemption
from taxation under section 101 (11). although that section was originally
designed to exempt only small and local mutual companies Other mutual companies, while nominally subject to tax. ordinarily pay no tax under the present
method of computing their income. This has resulted in a serious disparity in
tax treatment between such mutual companies and the stock casualty companies
It is suggested that the exemption in section 101 (11) be confined to those
mutual casualty companies whose net taxable income does not exceed $25,000
and which do not write Insurance on any property having a value of more than
252 8 189 (1920).
2P9 514 (1926)
277 U. 8. 508,
REVENUE REVISION OF 1942
3025
$50,000, regardless of whether reinsured. It is further suggested that the remaining mutual companies be taxed on the sum of their Investment Income and the
additions to their surplus which are free from claims of policyholders.
Such statement was made by Mr. Paul as a part of the Treasury's
recommendations for removal of special privileges. We concur in Mr.
Paul's statement that there is serious disparity in tax treatment between stock and mutual insurance companies other than life. Such
disparity can be explained in these simple terms:
Mutuals are permitted exactly the same deductions as stock companies. In addition they enjoy the following deductions which are not
permitted to stock companies:
They are permitted to deduct dividends paid to policyholders.
They are permitted to deduct amounts of premiums which are retained and added to surplus. Therefore, the mutuals have never paid
any tax either on their investment profits or their underwriting profits.
This despite the declared intent of the Congress to impose a tax upon
both stock and mutual companies.
Applying to actual figures these special deductions allowed to mutuals we find a mutual company with $46,000,000 of net premium writings in 1940, showing $11,000,000 underwriting and investment profits,
paying nothing into the Federal Treasury for income taxes. From
1940 business, this same company added $2,300,000 to its surplus. By
this same process 23 leading mutuals earned $42,000,000 in 1939 and
paid nothing or nearly nothing as Federal income taxes,
During the continuation of these special privileges the mutuals have
accumulated over the years not less than $150,000,000 in surpluses
which belong to the companies free from claims of policyholders.
We wish now to clarify one extremely important point, concerning
which the large commercial mutuals for many years have successfully
confused the issues and the facts. That point is the claim repeatedly
made by mutuals' spokesmen that there is no distinction between a
small farmers' mutual and the largest commercial mutual in the
United States, and that both therefore should be exempt from taxation. We will summarize briefly the character of income and the
methods of operation of these wholly different types of mutual companies, believing this will dispose of the claim upon which the large
commercial mutuals have consistently based their plea for tax ex-
emption.
Classified according to character of income and methods of operation, the two principal types of mutual casualty companies are:
In the first group, those operating on the assessment or premiumdeposit basis and, in the second group, those which collect a fixed cash
premium equivalent to that charged by other companies generally.
Usually the income of companies in the first group consists almost
entirely of assessment or premium deposits collected from members
either in advance or after occurrence of the loss. No dividends are
paid to members; amounts refunded to members, if any, represent a
return of the unused portion of the assessment or premium deposit.
These mutuals do not, with a few notable exceptions, maintain extensive organizations nor employ commercial methods of conducting their
operations, such as widespread advertising and other forms of soliciting business from the general public. It is doubtful whether the entire
number of mutuals operating on this basis have any profits of consequence. In this group fall the several hundred true farmers' mutuals
3026
REVENUE REVISION OF 1942
which the Congress has heretofore exempted as a matter of tax policy.
Under the recommendations of the Treasury made to this committee
on March 3, 1942, by Mr. Paul, every small farmers' mutual would
continue to be exempt.
In contrast are the commercial mutuals in the second group, many
of which operate on a national and, in some cases, international scale.
Their policies provide the same coverage as those issued by the stock
companies. A flat, final, fixed premium is charged as distinguished
from collection of an assessment or a premium deposit. Mutuals have
sought and secured authority in every State to issue nonassessable
policies; the issuance of such policies is now their common practice.
This constitutes an abandonment of the fundamental concept of mutuality.
The wholly commercial nature of these companies is emphasized by
the methods and vigor with which they seek their business.
Like many other large commercial enterprises, they spend hundreds
of thousands of dollars annually in advertising. Their national advertising is directed not to individuals alone but to industry and commerce
as well. Their advertisements are carried in the largest periodicals
and newspapers in the country, such as Fortune, Time, Newsweek, Saturday Evening Post, Nation's Business, Colliers, New York Times, and
Wall Street Journal.
The policyholders of commercial mutuals now include many of the
largest industries in the United States. One mutual advertises that
it is the leading writer of compensation insurance in America. Another advertises that it is the largest exclusive writer of automobile
insurance in the world.
The commercial mutuals employ conventional methods of solicitation-some through agents, others through branch-office employees,
and still others through both agents and branch offices. The larger
companies have offices in the principal cities throughout this country;
some maintain offices in foreign countries.
Many of these companies maintain large home office buildings
staffed by hundreds of employees.
In 1940, the 203 mutual casualty companies doing business in the
United States had premium and investment income of more than a
quarter of a billion dollars; 43 of these companies, each with an annual premium income of more than a half million dollars, wrote 92
percent of the total business. Those 43 companies, therefore, wrote
more than 10 times the volume of business written by the other 160
companies; 6 of these 43 wrote 59 percent of the total mutual casualty
business; each of these 6 companies in 1940 had premium income ranging from $11,000,000 up to $46,000,000. These 6 biggest companies, as
I am told, are members of the American Mutual Alliance for which a
spokesman appeared before your committee last Thursday.
It should be transparently clear that the true farmers and local
mutuals are not the real parties in interest represented by the spokesman appearing last Thursday before this committee. The true farmers and local mutuals have either no profits, or profits of no importance
from a tax standpoint. Furthermore, undes the Treasury's proposal,
those mutuals having net income not in excess of $25,000 and not
insuring risks in excess of $50,000 would be exempt. The real parties
in interest represented by the mutual spokesmen are the small number
REVENUE REVISION OF 1942
3027
of large mutuals whose methods of business we have herein described,
wholly commercial in nature, parallel in operation in all respects with
the operations of the stock companies.
A principal contention made by the mutual spokesmen is that their
accumulations of surplus are held in trust for their policyholders
This cannot be demonstrated. At this time the largest mutual casualty
company is resisting in court the claim of a former policyholder to a
pro rata share of the company's surplus which was accumulated dur-
ing the long period that it was a policyholder. Very probably all
mutuals would resist similar claims by policy.
other commercial
holders.
With no constancy of policyholders, with policyholders coming and
going and ever changing with intermingling of funds, with no records
of proportionate accumulations from the premiums of individual policyholders, with a fixed practice of resistance to policyholders' claims
thereon, the commercial mutuals cannot in good faith contend that
their accumulations of surplus are in fact held in trust. They are
in fact the property of the company, free from any claim of the policyholder for participation therein. The hoary myth of trusteeship has
long been a favorite device of the commercial mutuals in their successful resistance to Federal income taxation.
Now a few words concerning the Federal tax history of stock casualty and surety companies. Since 1909, the date of the original Corporate Excise Tax Act, which taxed corporations on their net income,
they have remained subject to tax on their net income at approximately
the same rate applied to corporations generally. The rates on stock
casualty and surety companies are now identical with those of other
corporations. Under successive revenue acts since 1909 the stock companies have paid millions of dollars of Federal taxes based on net
income. Under the rate increases proposed for 1942 their Federal
taxes will be drastically increased.
What is the tax history of the mutual casualty companies According to the testimony of their own spokesmen here last week, they
have paid nothing, or nearly nothing, into the Federal Treasury by
way of income taxes. They will continue to pay nothing, regardless
of rate increases, so long as the present situation maintains.
Neither the time allotted, nor your patience, will permit a detailed
verbal reply to the various points raised by the five mutual spokesmen
in support of their plea for tax exemption. I shall, therefore, cover
as quickly as I possibly can the principal points advanced by them,
and I ask leave to file with the committee additional data, statistics,
and other information touching upon these points, as well as other
pertinent matter.
The CHAIRMAN. Without objection, they may be filed.
(The statement referred to is on file with the clerk of the committee.)
Mr. MURPHY. Four points were listed at the committee hearing of
April 9, by the spokesman for the American Mutual Alliance, in
opposition to the Treasury recommendations presented by Mr. Paul.
We shall summarize here the answers to these points, requesting that
the committee, if it desires, consult such additional exhibits, as we
are permitted to file, for more complete information.
The first point alleged was that no disparity exists in tax treatment between stock and mutual casualty companies, and that the
present difference in tax treatment between the stock companies and
3028
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
the mutual companies, two wholly different types of companies, is
fair and reasonable.
In one breath the spokesman stated that no disparity existed and
in the next breath stated, in effect, that the disparity which does
exist is justified.
When one set of corporations, the stock companies, pays several
million dollars a year in Federal taxes and another set conducting
exactly the same kind of business, the mutual companies, pays nothing, disparity cannot be doubted.
As to the pretended justification for this disparity, we believe that
our previous statements herein made, showing the methods and practice of the commercial mutuals, constitute a wholly sufficient answer.
Such statements are supported by the matter filed.
The second point alleged by a mutual spokesman was that the stock
companies are not in a serious competitive difficulty because of the
tax law, as the record of their earnings will show.
We are confident that this committee has no interest in any competitive issue, as such, between the stock and mutual companies. We
are equally confident that this committee will not knowingly continue any serious tax disparity, nor permit the Federal tax laws to
be employed as a competitive weapon. We believe the existing dis-
parity was never intended. Now that it has become serious by reason
of increased tax rates, and can become more serious as such rates
increase, we trust that the Congress will implement by appropriate
legislation the proposals for elimination of such disparity.
Our view finds support in the statement of the Treasury made to
this committee by Mr. Paul on March 3, 1942. pertaining to taxexempt corporations which engage in trade or business not related
to their exempt activities. On this subject he commented
In this way sources of considerable tax revenue are withdrawn from the
scope of the tax. At the same time privately owned businesses are forced to
compete with other businesses not subject to an income tax.
We submit that the exemption of the commercial mutuals from
Federal taxation withdraws a considerable revenue from the scope of
the Federal income tax. At the same time the stock companies are
forced to compete with companies conducting the same type of business but not subject to income taxes.
In attempting to minimize the importance of Federal income taxes
as a competitive factor, a mutual spokesman quoted to the committee
a newspaper statement purporting to deal with the differential in
expense ratios of stock and mutual companies. The illustration is ir-
3029
any published average may be wholly meaningless, indicative of
nothing.
The important fact is that if the recommendations of the Treasury
Department are enacted into law the stock companies will, for 1942
and doubtless future years be subject to income and surtaxes totaling
55 percent and to excess profits taxes as high as 75 percent, and that
unless existing law and practice are changed with respect to mutuals,
the
mutuals will continue free from any Federal taxes based on net
income.
It is estimated that if the proposed rate increases are enacted into
law the stock companies will be required to pay in Federal income
and excess profits taxes of at least 60 cents out of each dollar of taxable net income. By reason of their heavy investment in Federal
obligations, the incidence of the corporate surtax is far heavier on
the stock companies than on ordinary business corporations,
The third point alleged by a mutual spokesman was that the capital stock insurance companies have enjoyed and are now enjoying
special tax privileges not available to other profit-making concerns;
and that consequently their profits are greater and taxes less,
This statement is false in its implications. We have hereinbefore
outlined the past and present tax status of stock casualty companies,
under the successive revenue acts since 1909. The records of the
Treasury Department are the best source from which to determine
whether
the stock companies have enjoyed or are now enjoying special
tax
privileges.
Inasmuch as such records are not available to us, we respectfully in-
vite the attention of the committee to them, that they may satisfy
themselves on this point. We are completely convinced that such
records will effectively refute the mutuals' point, and that they and
other Government records will establish definitely that stock companies are not only given no favored treatment, but, as, heretofore
herein
stated, it is the commercial mutuals that are given favored
treatment.
Important facts are that the stock casualty and surety companies
are required to compute their net income on a basis comparable to that
of other corporations generally: the rates of normal tax and surtax
are the same as imposed on corporations generally; they are subject
to the same provisions of the excess profits tax as are other corporations
generally.
The fourth point alleged by a mutual spokesman is that the Government 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 expense ratios. Second, the spokesman artfully selected for his example
a line of insurance, workmen's compensation, on which few companies
are fortunate enough to make a profit. Obviously, any ratio of taxes
paid on extremely low-profit business, in relation to expense ratios, or
any other element of the premium dollar, will not accurately reflect
the general and the true over-all situation. Incidentally, there is no
compulsory or uniform accounting method prescribed as respects the
treatment of Federal income taxes in various published statistical exhibits. This is immaterial since there is no allowance in insurance
rates established by rate-making authorities, for such taxes. Hence,
The point is fallacious. On the one hand their spokesman extolled
the mutuals as the benefactors of the farmers. On the other hand
the mutuals' spokesman frankly claimed, for the purposes of one of
their points, that from 75 to 100 percent of the mutuals' dividends are
paid to policyholders engaged in corporate business.
It must be assumed that the dividend recipients to which the mutual
spokesmen referred are not only corporations, but are sizable corporations, since the 24 percent rate was used by such spokesman, and such
rate applied, I believe, only to those corporations having taxable net
income in excess of $38,000. We believe the mutual spokesmen in
this regard are guilty of a 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.
3030
REVENUE REVISION OF 1942
Moreover, the Report of the Commissioner of Internal Revenue for
the fiscal year ended June 30, 1941, page 18, reveals that in 540,935
corporations filed Federal income-tax returns, of which 340,220, or
64 percent of all corporations, paid no tax. In 1941 535,525 corporations filed returns, of which 328,342, or about 65 percent, paid no tax.
It is fair to assume that an unknown, but possibly substantial,
number of corporate policyholders to whom the commercial mutual
companies returned dividends were included in the great majority of
non-tax-paying corporations. If so, the mutual spokesman's estimate
of Federal income taxes paid by recipients upon dividends from the
commercial mutuals becomes even more fantastic.
In laboring their point the mutual spokesmen have chosen to disregard the fact that Federal income taxes, undoubtedly substantial in
the aggregate, are paid the many thousands of stock company com-
REVENUE REVISION OF 1942
3031
In response to questions from a member of this committee this witness frankly stated:
I believe all life-Insurance companies expect to pay more income tax The
question, as I stated, is to determine what the fair amount would be and to
determine a basis for equitably distributing the tax among the different lifeInsurance companies.
Parenthetically it may be stated that the tax basis for stock life
insurance companies and mutual life insurance companies under present law is identical. No reason exists why the same parity should not
exist between stock and mutual companies other than life. No reason
exists why life insurance companies, stock and mutual, should be
taxed while the commercial mutuals go tax free.
missioned producers.
We, too, expect to pay additional taxes. The Nation has never
needed
them so much as now. And all we ask are only parity and
equality and justice.
We believe it to be the desire of the Treasury Department and of the
Congress that loopholes be closed so that all unwarranted tax exemp-
The CHAIRMAN. Mr. Murphy, if I understand your position, it is
that under existing law there is an unfair competitive condition be-
making this statement.
tween the mutual companies and what might be called the standard or
profit-earning companies, and also that there is under the present law
a loophole through which certain insurance companies are escaping
tions shall be eliminated. We trust that whatever legislation is enacted, it will effectively close the loopholes concerning which I am
However, great anxiety was expressed by the spokesmen for the
mutuals over the possibility that the Treasury's recommendations
would result in a tax upon mutuals substantially higher than the tax
paid by stock companies-"two and one-half to four times more than
a similar profit-making stock company"-to quote the spokesman verbatim. Please note the spokesman's perhaps inadvertent use of the
word "similar," for at the outset of his statement to this committee he
alleged that the stock and mutual companies are "two wholly different
types of companies."
We are sure that no one will take seriously this pretense of anxiety.
In the light of past and present tax history, the spokesman's tears are
reminiscent of the crocodile.
We do not feel that we are presumptuous in saying we are certain
that the Treasury will not advocate, nor the Congress permit, the
mutuals to be taxed at a greater rate than the rate applied to stock
companies. Certainly we have not asked it. We ask equality only.
We are frankly astounded at the attitude of the mutual spokesmen
appearing before this committee. One has attempted to prove that
the taxes paid by the stock companies are not a competitive handicap.
If this were true, it would necessarily follow that similar taxes upon
the commercial mutuals would not be a competitive handicap.
One mutual spokesman, out of step for the moment, told you that
the statement submitted by the Treasury does not "appear to be urged
as a means of raising any substantial revenue." Why, then, are the
mutual spokesmen opposing the Treasury's proposal so vigorously
In refreshing and encouraging contrast, may I say in conclusion,
is the attitude of a witness who appeared before this committee last
Thursday on behalf of Acacia Mutual Life Insurance Co. He said:
Our company appreciates the nature of the situation confronting our Government and fully recognizes the necessity for greatly Increased revenues. We
appreciate the fact that life-insurance companies, along with all other corporations and citizens, must pay additional taxes. We have no fixed Ideas as to what
tax formula should be adopted by Congress this year to apply to the life-insurance
industry.
or avoiding making their proper contribution to the support of the
Government. Do I get your point?
Mr. MURPHY. That is correct, sir.
The CHAIRMAN. Are there any other points that you brought out
definitely
Mr. MURPHY. Those are the only points.
The CHAIRMAN. Those are the two principal points that I under-
stood you to emphasize.
Mr. MURPHY. The exhibits that I filed will amplify, of course, what
I have attempted to state.
Mr. DINGELL You do make a clear distinction between the small
noncommercial mutual company and the big profit-making mutual
or commercial company, do you not?
Mr. MURPHY. Yes, sir. do make a distinction.
Mr. DINGELL You make that in your discussion before the com-
mittee?
Mr. MURPHY. Yes.
Mr. DINGELL And you think that they should be treated differently
than they have been heretofore!
Mr. MURPHY. Yes.
Mr. DINGELL Are you concerned about applying this recommendation
State? of the Treasury to any company that is operated within a given
Mr. MURPHY. I do not think that there are any of the types of companies that I have referred to as the so-called commercial mutuals
which are operating within one State with. I think, one exception.
I do not know that you can determine the distinction by geographical lines, although I think that that is one very important consideration. In other words, the small local mutuals, which Congress has
always desired to exempt, are certainly not the large national and
international mutuals which do a business exactly comparable to the
stock company business.
Mr. DINGELL I have a certain company in mind that I am quite
confident is really a mutual company in the strictest sense. It has
3032
REVENUE REVISION OF 1942
grown up in our midst and has carried out everything that you would
expect of a mutual concern. By its own charter and power it is confined absolutely to people within the State of Michigan, and would
not seek anybody across the river, as some of the companies that we
have referred to will do. They may even go into Canada or Mexico,
But this company confines its activities, the insurability of risks, entirely to the State of Michigan.
It has grown to be quite a considerable concern. But it is not your
object to class those companies in the category of those that you would
care to try to tax as commercial mutual insurance companies. Am I
right about that
Mr. MURPHY. In a sense that is correct, I think, or a correct state.
ment of my point of view.
Of course, the innumerable ramifications and different classifications of mutual companies which have grown up have made it difficult
to draw an exact line of demarcation. The commercial mutuals have
adopted all of the money-making saving devices for a time of the
small mutual companies, but they have also adopted all the other
devices adopted by what might be called the free-enterprise companies.
Mr. DINGELL. Of course, to be perfectly candid about it, I think
that with most of these mutual companies in a large sense the mutuality can be treated as just a lot of bunk. I refer particularly to
some of the life-insurance companies.
Out of the million or more policyholders, when it comes time for
the stockholders, so-called, the policyholders referred to as stockholders to meet-out of the million stockholders there will be, if
there is a real fight on. probably about a thousand or fourteen hundred
at the very most of those living in New York, and New Jersey, and
Delaware, Is that about right
Mr. MURPHY. I do not want to get the life-insurance companies on
my neck. I have plenty of trouble now.
Mr. DINGELL. I will not expect you to answer that question.
Mr. MURPHY. But I will say that that applies to the commercial
mutuals.
Mr. DINGELL If that applies to the commercial mutuals, it applies
then to all of these people that are doing business in the casualty
field, and there is no difference one from the other. It is profits that
they are looking for.
Mr. MURPHY. That is right.
Mr. DINGELL They are in business the same as you are.
Mr. MURPHY. I agree with that.
Mr. DINGELL. The so-called stockholders and mutual policyholders
do not have a thing to say about the policy established by the company
or about anything else, or about the rates of pay to be paid those who
are on the inside. Is that right They do not have anything to say
about it, do they
Mr. MURPHY. I would say that the pretense that the policyholders
own the company is just purely a legal fiction.
Mr. DINGELL That is right.
Mr. MURPHY. And that they have no active participation in the
company.
Mr. DINGELL. That is right.
Mr. MURPHY. Except in a small local neighborhood company, where
they have sort of a town meeting.
REVENUE REVISION OF 1942
3033
Mr. DINGELL That is right. And that is what makes the distinction
between a mutual company and a commercial company. There are
bunch of farmers who get together and decide how much to pay in
and how much to pay out. But you do not have that with the big companies. The stockholder or policyholder pays his premium. He does
not have anything to say in the so-called mutual company on a large
scale any more than he has in the & G. or any other insurance
company, that is, liability insurance company.
My contention is that a lot of that sort of thing here is the bunk;
that if they are in it for business, if they are in it for profit, I think
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
or for profit, we need the money and we are going to get it so far as I
am concerned.
Mr. MURPHY. I think that that is the real distinction-whether they
make profits or whether they do not.
Mr. DINGELL. What about that? Have you any idea about some of
the salaries that are being paid in these magnanimous mutual concerns,
Mr. Murphy Can you give us any information for the committee on
that point If you do not have it available now, you might put it in
the record. I think it would be interesting to the committee.
Mr. MURPHY. I do not have it available. So far as I know, it is
not a matter of public record except in the individual tax returns,
which, of course, at times in the past have been subject to public
scrutiny, but which I understand are not now.
Mr. DINGELL. You are quite right there.
Mr. MURPHY. So far as I know, the State insurance departments do
not require that information. But I have run across one or two very
interesting things.
Mr. DINGELL If it is worth while and you are permitted to tell us,
you might do so.
Mr. MURPHY. It would be worth while to me.
Mr. DINGELL Go ahead.
Mr. MURPHY. One spokesman who appeared before your committee
last Thursday, according to this statement, which purports to be from
an official insurance record, stated as follows:
At a board of directors meeting held October 21. 1931, a contract was entered
into between the company and Ekern & Meyers, of Chicago, III., a law partnership.
This contract provides for payment to Ekern & Meyers, for the retention of their
reviee in connection with general legal counsel and advice, a compensation
based on three-fourths of 1 percent of all gross Income received by the company
from all sources during the period from June 1. 1931, to June 30. 1937. provided
that moneys advanced to the company on surplus notes, interest income salvage
recovered, and premium deposits returned to members on account of cancelations
during
such period are to be deducted from and not considered as a part of the
gross income
According to the statement which I read, it says thatAssuming that the above contract was carried out, and insofar as we know
It was, the amount collected thereunder by the firm of Ekern & Myers from 1931
through June 1937, estimated on the basis of the premiums written by that
company would amount to roughly $375,000.
Mr. DINGELL. For 1 year
Mr. MURPHY. For 6 years. I believe that if that contract is still
effective, the compensation last year would have been about $125,000.
00663-42-pt.30-12
a
3034
REVENUE REVISION OF 1942
As a matter of fact, many of the people connected with the large
commercial mutuals have management contracts with the company,
and that is where they make the real money, and it is through that
method that they build up real financial and insurance empires, which
threaten to be very, very much larger in the very near future.
Mr. DINGELL But can you give the committee any information regarding some of the individual large salaries paid, for example, to the
president and two or three or five of the vice presidents and the treasurer and secretary and the managers, and so forth and so on Doubtless a mutual, so-called, that is writing from $10,000,000 to $44,000,000
I believe that that was one of the figures cited-in premiums annually,
certainly must be paying some pretty substantial salaries; and I think
it would be interesting for the committee to know something about
how generous these mutual concerns really are with the premiums of
the so-called mutual stockholders, because, obviously, if the money
is going into salaries, it is not going back to the stockholders.
Mr. MURPHY. Mr. Dingell, I am afraid that we could not provide
that information. I assume that the Treasury Department or the
Internal Revenue Bureau could.
Mr. DINGELL We may be able to get some of that as we begin to
delve into this.
Mr. MURPHY. We could, of course, provide you with names, which
would assist you, perhaps. But we cannot give you actual amounts,
because, so far as I know, they are not of public record.
Mr. DINGELL. If you give us a few of those names, I will see if I
can find out something about them.
Mr. MURPHY. I will be very glad to do that.
Mr. DINGELL Because when anybody comes before the committee.
I like to know whether he is imbued with this spirit of mutuality and
helpfulness toward his fellow human beings to the extent that he is
not in it for profit purposes.
I am not opposed to the profit motives, but I do not want to be
mistaken about it, I want him to come over here and tell us that
this is a business and not a charitable institution. I want to treat
them all alike, with no pro bono publico work, as my lawyer friend
tells me, whatever that is.
Mr. COOPER (presiding). Mr. Boland will inquire.
Mr. BOLAND. Mr. Murphy, in my community there is a small farmers' company with maybe nine or ten hundred stockholders in it.
991/3 percent of the people in it are farmers. They have a paid secretary. They might do some of these things that Mr. Dingell was talking about, but they could not afford to pay very large salaries. Do
you agree with that
Mr. MURPHY. I agree with that, sir. And not only that, but as I
have attempted to point out in my statement, the proposals made by
the Treasury Department would exempt all of those small groups.
Mr. BOLAND. I see. That is what I wanted to get. I did not know
enough about it, and that is why I asked the question.
Mr. MURPHY. If we can be of any help to you in providing information at any time, we will be glad to give it to you as practically as
possible.
Mr. DISNEY. In your statement you referred to the fact that 43 companies wrote more than 10 times the volume of business written by the
REVENUE REVISION OF 1942
3035
other 160 companies. In the main those 43 companies were the large
commercial mutuals, were they noti
Mr. MURPHY. In the main; yes.
Mr. DISNEY. And the 130 were chiefly farmers' mutuals and smaller
ones!
Mr. MURPHY. Those other companies which write less than $500,000
of premiums in any year.
Mr. COOPER. Mr. Robertson of Virginia will inquire.
Mr. ROBERTSON. I received a communication from a small Virginia
mutual fire-insurance company, not in my section, but it does operate
in three or four Virginia counties. It does not reinsure, and I understand that the operating expenses are possibly more than this $15,000
limit. Is that the limit
Mr. MURPHY. $25,000. That was the net, I believe. That is the
net income.
Mr. ROBERTSON. $25,000 net income
Mr. MURPHY. Yes. That would be the net income after the pay-
ment of all expenses and losses.
Mr. ROBERTSON. What was the amount of insurance that they could
write on any one property
Mr. MURPHY. $50,000 in one risk.
Mr. ROBERTSON. Is that a necessary test, do you think, of a local
company-that does not reinsure and does not go beyond two or three
counties?
Mr. MURPHY. I do not know, Mr. Robertson, whether I could say
that it is. I know this: that in appearing before the Senate Finance
Committee upon this same point we suggested an exemption of
$100,000 net income. That would certainly take care of some pretty
good-sized companies.
Mr. ROBERTSON. And if they do not reinsure, there would not be
any point in limiting them to $50,000, would there I mean the local
mutuals.
Mr. MURPHY. I think the point was that it would be a limitation if
they did reinsure.
Mr. ROBERTSON. But I mean, if the company does not reinsure,
there would not be any point in holding them down to a $50,000
policy
Mr. MURPHY. I do not think that that is particularly vital.
Mr. ROBERTSON. As far as you are concerned, you would not bother
them if they have a net income of less than $100,0001
Mr. MURPHY. I would not say that, quite. I would say that I
would be willing to compromise on that basis if it were within my
power.
Mr. COOPER. We thank you, Mr. Murphy, for your appearance and
the information that you have given the committee,
The CHAIRMAN. The next witness is Mr. T. E. Swigart, Houston,
Tex., representing petroleum pipe lines. Is Mr. Swigart here?
Mr. SWIGART. Yes, sir.
The CHAIRMAN. Come forward and identify yourself for the record.
STATEMENT OF T. E. SWIGART, HOUSTON, TEX., REPRESENTING
PETROLEUM PIPE LINES CO.
Mr. SWIGART. I am Mr. T. E. Swigart, of Houston, Tex.; I represent
the Petroleum Pipe Lines Co.
3036
REVENUE REVISION OF 1942
Please allow me to express my appreciation for the privilege of
appearing here today as spokesman for a typical cross-section of the
country's operators of petroleum pipe lines.
We fully appreciate the great responsibility with which you are confronted, and we can appreciate to some small extent at least, the perplexity of your problem of devising ways and means of financing the
war effort. Our problem, on the other hand, is to operate our pipe
lines with the greatest possible economy and efficiency 80 as to speed
the flow of petroleum and its products to war industries at home and
to the far-flung battle fronts abroad.
Operators of pipe lines are ready and willing to bear their proportionate share of the cost of the war but they feel that certain aspects
of the special levy upon transportation by pipe line merit your consideration at this time.
As you know, the present act imposing this tax became effective in
1932, at which time a rate of 4 percent of gross transportation revenue
was set. In 1940 it was increased to 41/2 percent, and now the Treasury
is proposing that it be further increased to 10 percent, which is the
reason for my appearance here today.
First, I should like to sketch briefly the background of pipe lines
in this country. From a historical standpoint pipe lines trace back
to the earliest days of the discovery of oil. At first, oil was hauled
in barrels on wagons and flatboats. To facilitate speedier and more
economical movement, producers in the oil fields of Pennsylvania,
with typical American ingenuity, developed an altogether new and
novel means of transportation, namely, the pipe line. The first
lines were crudely built of cast iron pipe, and by modern comparison
were operated at very low pressure. Out of such origins developed
the high-pressure steel lines of today.
From a most modest beginning the pipe line has developed to the
point that it is the chief method in use in this country for transporting crude petroleum, and has now become an important method for
transporting refined products as well. In recent years approximately
three-fourths of all the crude oil which has been produced in the
United States has arrived at refineries by pipe lines, and an appreciable part of the remaining 25 percent also moved some of the distance by pipe line. Gasoline pipe lines now serve areas containing
60 percent of the country's population.
In short, the pipe line is the dominant method of overland transportation of petroleum. Its economy is only exceeded by the oil
tankers, but they can only operate along the Atlantic and Pacific
coasts and on the Great Lakes, and thus cannot connect the oil fields
of
with the large consuming centers in the interior. Moreover, most
the oil carried by tankers actually reaches them by pipe line and a
large amount of the finished products refined from the crude originally transported by tanker is transshipped inland by pipeline. It is
clear, therefore, that the pipe line does and always has played a leading role in the transportation of petroleum and its products.
At the moment, however, we are witnessing serious disturbances and
difficulties in the transportation of petroleum and its products,
brought about by attacks on our shipping and by the transfer of
tankers to supply the rapidly increasing needs of our own armed
forces and those of our allies throughout the world.
REVENUE REVISION OF 1942
3037
Under normal circumstances a large part of the supply of oil destined for the Atlantic seaboard, flows through a great network of
pipe lines from oil fields of the Southwest to Gulf ports. There some
oil is refined for East Coast consumption and the remainder is
shipped as crude to eastern refineries. Normally, both of these movements are by tankers. This traffic amounted to about 1,600,000 barrels
per day before our entry into the war. but the sinking of tankers and
the need for tankers in other parts of the world has directed attention forcefully to overland transportation which is beyond reach of
the enemy.
The phenomenal increase in railroad tank car shipments from the
Southwest and Middle West to the East, from a negligible amount
to almost 600,000 barrels per day is most noteworthy. It is conceivable that these shipments still may be increased by another 100,000
barrels per day. Even so, the remainder of the petroleum required on
the Atlantic seaboard for the Army, Navy, Air Force, and essential
industrial and civilian uses, is estimated at an additional 600,000 barrels per day, and it now appears that this petroleum must be moved
chiefly by pipe line.
Existing pipe line facilities are so located and constructed that it
is impossible for them to supply wartime needs on the Eastern seaboard without the assistance of tankers. Therefore, as a result of
the tanker shortage, it becomes necessary to lay new pipe lines in
order to cope with the present difficulty.
It now appears that a partial solution of this problem is for pipeline companies to dig up certain lines and relay them in more stra.
tegic directions. This will be a very expensive procedure in all cases
and in many instances will practically double the carrier's investment
without increasing the mileage of the line involved
The pipe lines are fully aware of the importance of complete mobilization of our natural resources, and steps already have been taken
to bridge the gap in transportation. The 100,000-mile network of
existing pipe lines is now supplying refining and consuming centers
of foremost military and naval importance.
Even before our involvement in the war pipe-line operators had
numerous projects under way which have increased their ability to
move oil from the great reserves of the Southwest to Northern and
Eastern States. These new pipe-line projects have released numbers
of tankers for use across the Atlantic and in the Far East. A committee of pipe-line executives is now considering plans devised by
engineers for digging up and relaying existing pipe lines so as best
to fit them into a strategic plan for uninterrupted movement of petroleum. Such plans are being formulated without serious consideration
of the dislocations which the changes will bring to the owners of the
relocated lines. Every thought is being given to over-all war effort
regardless of individual hardship, capital costs, and the probability
that the relayed lines will not be economically useful after the war.
In summary, transportation is generally recognized as being the
number one problem confronting the petroleum industry today. Considering the possibilities of further need for diverting tankers which
are now engaged in coastwise runs to war service in the Atlantic and
Pacific, the practical limits of tank-car shipments, and the relatively
limited capacity of barge and towboat equipment available on inland
waterways in comparison with the tremendous quantities of oil to be
3038
REVENUE REVISION OF 1942
moved, it is fair to state that the pipe lines occupy the key position
in petroleum transportation today.
It is the pipe lines' plea that the hardships, the serious dislocations,
and the expenses caused by the need of digging up existing lines and
relaying them, as well as the required expenditures for new lines
which, incidentally, will be very, very high and which will run into
many millions of dollars, not be aggravated by higher taxation of
their gross revenues.
This transportation is not levied on the transportation of oil or
petroleum products by railroad tank cars. It is not levied on the
REVENUE REVISION OF 1942
3039
that form must give way to substance, than they now pay as net
income taxes. Surely no such result was contemplated by the Congress
when
it passed
sixteenth amendment in 1913, authorizing
the
taxing
of net
incomethe
only.
To show the effect of increasing this transportation tax upon the
pipe-line industry, the following table has been compiled from the
most recent record of the Bureau of Statistics, Interstate Commerce
Commission, to compare the amount of transportation taxes at 10
percent, of four representative pipe-line companies with their Fed-
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
of oil or its products by the ships and tankers that sail our coastal
[All figures for the year 1940)
waters. This tax is levied on pipe lines alone.
H 18 Mifficult to understand why one industry should be compelled
to pay a Federal tax on exactly the same business that is being transacted by other industries without taxation. We are sure that no one
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-
Gross open-
sting reveDOE (Includes
nontaxable
exports)
$22,785,571
13,788,274
14,784,595
1,561,413
tank cars are taxed, and now the Treasury is proposing that they be
taxed more heavily, namely 122 percent more. That is from 41/2 to
Such discriminatory taxation certainly cannot be justified on the
grounds that pipe lines have benefited from public subsidies or similar aids from the Treasury. Over a period of years Joseph B. Eastman, the present director in the Office of Defense Transportation who
long has been a member of the Interstate Commerce Commission and
other public agencies identified with defense transportation, has been
making extensive studies of this subject. To quote Mr. Eastman
directly:
Public aids to pipe lines have been altogether negligible
pipe-line
transportation of petroleum, petroleum products, and natural gas appeared to
be the one branch of transportation which has not received public aid.
In other words, the pipe-line industry, alone of all our means of
public transportation, has never been and is not now a burden upon
the Public Treasury. The taxpayers of the Nation have never been
called upon to bear any part of the cost of construction or opera-
tion of the network of pipe lines that serve every section of our
country. The pipe-line industry is not one of those public utilities
that has to be supported at the people's expense, merely because it
happens to perform an indispensable public service. I want to speak
for a few minutes upon the effects of this tax.
While this tax is ostensibly levied upon the transportation of crude
petroleum and liquid products by pipe line, in all practical effect it
is not an excise tax in any true sense of the term but is a second
or duplicate tax on the income of the pipe-line companies. Moreover,
the tax is especially burdensome because it is based upon the taxpayer's gross income, instead of upon his net income, as is the case of
other income taxpayers.
Now, being imposed upon the gross income of the taxpayer, the
effect of the tax, if it is increased to 10 percent, undoubtedly will be
to require pipe-line companies to pay larger gross income taxes, in
the form of transportation taxes, and it is today the rule of taxation
10 percent
on taxable
shipments
(exports non
Federal income and
M-profits
taxes actu
ually paid
taxable)
tained seriously. But the pipe lines which feed both tankers and
10 percent.
Transports
tion tax at
$2,199,518
$2,061,611
1.299.883
1.357.298
1,455,550
1,821,000
66,075
These four companies are truly representative. There are some big
ones and some small ones.
It is quite apparent from the foregoing table that if the transportation tax in 1940 had been 10 percent, as now proposed by the Treasury
Department, the transportation taxes of these companies would have
exceeded the Federal income and excess-profits taxes which they actually paid, by a substantial amount. The comparison would be even
more striking if the net income and excess-profits taxes quoted above
were adjusted for the reduction in net income by the increased transportation tax.
Or, again, if we look at the pipe-line industry as a whole we find
that it had gross operating revenue subject to transportation tax of
approximately $172,000,000 in 1940, upon which the transportation
tax computed at 10 percent would have been $17,200,000. This figure
closely approximates, if it does not exceed, the total income taxes paid
by the industry to the Federal Government in the year 1940. The
exact figure is not published in the report of the Bureau of Statistics,
but since the total income taxes paid to both Federal and State Governments by the pipe-line industry for 1940 was $20,000,000, the above
comparison appears to be reasonable
The proposed drastic increases in Federal taxes would impose a very
serious burden on many members of the pipe-line industry. To more
than double the amount of transportation taxes now being imposed
would, in the case of certain pipe-line companies, change their operations from a profit to a deficit or substantially increase their present
deficit.
Whether or not any deficit results, of course, depends upon each
particular company, the volume of oil transported, the operating cost
of the particular carrier, the amount of transportation taxes levied at
10 percent of gross receipts, and finally the amount of Federal income
taxes assessible on net earnings.
3040
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
I.C.C. reports show that more than 32 percent of all pipe-line
age in the United States is located in Texas, so a study of Texas con-
Sun Pipe Line Co. also operates almost exclusively in Texas. During
1941 that company delivered 15,971,495 barrels of crude oil, It estimates that for 1942 deliveries will not exceed 10,762,819 barrels, a
decrease of about 33 percent. The estimated net income of Sun Pipe
ditions is illuminating in determining the effect of this proposed tax
increase. Practically all of these Texas lines terminate on the Gulf
coast, and they are built to carry crude from inland points to the Gulf
Line Co. for 1942, based on the present transportation tax rate of
coast where the crude is either received by tankers and transported to
the eastern seaboard, or refined into products, most of which are transported by tankers to the eastern seaboard. It is obvious that the present tanker shortage must necessarily result in drastic curtailment of
pipe-line transportation in Texas. While the exact number of tankers
sunk or transferred from this service is a military secret, the fact that
tanker loadings on the Gulf coast have already dropped more than 50
percent is well-known. Of course, pipe-line transportation to the Gulf
coast is suffering a proportionate loss and, as all of these lines depend
41/2 percent, will result in a deficit of $8,120. If the proposed 10-percent transportation tax is imposed by Congress, Sun Pipe Line Co. will
experience a net loss of $85,172.
As already pointed out, the tanker shortage has caused a tremendous
decrease in pipe-line tonnage in the Southwest. A further reduction
looms because of the closing of refineries in that area. The Texas Co.
has recently suspended operations at a refinery which has a capacity
of 25,000 barrels daily, and it now appears that several other large
refineries soon will have to shut down.
In view of the dependence of our military and naval forces upon our
largely upon tankers for an outlet, there is no relief in prospect for
them. It should be observed that the recently increased rail shipments
of crude do not benefit pipe lines serving the Gulf-coast area because
such shipments originate largely in producing fields and not at Gulfcoast pipe-line termini.
To illustrate the probable adverse effect of the proposed increase
in this tax, based on accurate forecasts for the year 1942, the following
analysis of three companies is submitted.
Humble Pipe Line Co. is a good example, since it serves all of the
principal producing areas in Texas, and for several years has trans-
present method of transporting and distributing petroleum and its
products by pipe line to every section of our country, it seems obvious
that the Congress should carefully consider the adverse effects of imposing this additional tax burden upon the pipe-line industry. It has
already been pointed out that the effect of this transportation tax
would be to increase an already discriminatory tax by 122 percent. It
has also been shown that this tax increase would throw a number of
the pipe-line companies into serious operating deficits. The question
and the problem before this honorable committee is whether or not
it is wise thus unduly to burden an industry which is performing such
ported approximately 20 percent of all of the oil produced in that
State. During 1941, this company delivered 139,798,030 barrels of
crude. During 1942, this company estimates that its total deliveries
will be 110,507,584. Humble's actual net earnings during 1941 were
$6,662,940. Due to the decrease in volume, and certain reductions in
rates, this company's estimated net earnings for 1942 are $2,211,253,
which is less than one-third of the earnings for the previous year.
an essential function in our war effort, simply to obtain additional
transportation taxes estimated by the Treasury Department at $18,700.
000 and which sum is but one-quarter of 1 percent of the total revenue
sought to be raised.
Mr. DISNEY. Do you make a deduction of your excise tax against
your excess-profits calculation or your income
Mr. SWIGART. This is after the transportation tax. That is de-
This figure is based on the present transportation tax If the tax
is raised to 10 percent, this company will earn only $1,578,616 during
1942, or less than one-fourth of the 1941 earnings. The I.C.C. has appraised the value of this company's properties as of December 31, 1939,
at approximately $60,000,000. and this value should be enhanced con-
ducted before calculating the income. It goes in the statement as an
expense item.
siderably today. Thus, on its valuation, Humble Pipe Line Co.
will only earn 21/2 percent for 1942, if this tax be increased to 10 per-
cent, and this is a dangerously low rate of return in this hazardous
business.
Atlantic Pipe Line Co. is similarly situated. Its lines run from
New Mexico and interior Texas to the Gulf coast. In 1941 this company delivered 36,755,000 barrels of crude. Under present conditions
the company estimates that it will not deliver more than 23,523,000
barrels, a decrease of approximately 30 percent. Net income, after
Federal income taxes for 1941, was $2,068,766. Even if the tax
not increased, net income for 1942 will be only $75,128, a decrease of
more than 96 percent. If this tax is increased to 10 percent, Atlantic
will show a loss of $40,240 for 1942. Furthermore, Atlantic Refining
Co. has advised that it is faced with the necessity of shutting down
its Atreco refinery in Texas. If this is done, Atlantic Pipe Line Co.
estimates that it will operate in 1942 at a net loss of $503,639. If this
tax is raised to 10 percent, this net loss will be increased to $612,428.
3041
Mr. DINGELL This proposal, of course, would give a great benefit
to a competitive transportation line and a competitive fuel, would it
not, at the expense of oil!
Mr. SWIGART. We feel that it is of benefit to our competitive means
of transportation, Mr. Dingell.
Mr. DINGELL As it is!
Mr. SWIGART. As it is now. And of course, this only exaggerates
the benefit to those people.
Mr. DINGELL. It will widen the differential between them
is
Mr. SWIGART. That is true.
Mr. DISNEY. Has there ever been any discussion with the I.
about this tax when the transportation of tankers and cars is not taxed
similarly Has there been any discussion of that
Mr. SWIGART. I cannot answer that. I do not know.
The CHAIRMAN. We thank you for your statement.
Mr. SWIGART. I wish to submit four exhibits in connection with my
statement.
REVENUE REVISION OF 1942
3042
REVENUE REVISION OF 1942
(The exhibits are as follows:)
3043
The CHAIRMAN. The next witness is Mr. Henry B. Fernald, chairman, tax committee, American Mining Congress. Come forward and
identify yourself.
APPENDIX A
Tank-car shipments
Barrels
1941 Average daily tank-car shipments
40,000
STATEMENT OF HENRY B. FERNALD, CHAIRMAN, TAX COMMITTEE, AMERICAN MINING CONGRESS
1942:
Jan. 1 to 15 daily tank-car shipments
Jan. 15 to 31 daily tank-ear shipments
Feb. 1 to 14 daily tank-ear shipments
68,062
137,087
239,850
325,205
437,143
to
to
440,000
Mar. 22 to 28 daily
506,025
525,000
Mar. Mar. Feb. 15 15 1 to 15 28 22 daily daily daily tank-car tank-ear tank-car tank-car shipments shipments shipments shipments
Mar. 28 to Apr. 4 daily tank-car shipments
APPENDIX B
New major pipe lines
Portland-Montreal line-Portland, Maine, to Montreal, Canada, capacity 30,000
from operating costs. But I say to you, out of the fullness of long
barrels per day.
Southeastern Pipe Line Co.-products line-from Port St. Joe to Chattanooga,
capacity 30,000 barrels per day.
Plantation Pipe Line Co. from Baton Rouge, La., to Greensboro, N. C., capacity
60,000 barrels per day.
APPENDIX C
Amount of
the Increase
Operating
révenues
Company
In transpor-
tation tax to
Net Income
Net Income
after Increase
1940
In transpor-
tation iss
10 percent
$152,527
$8,388
1,038,434
57,114
53,258
2,929
1,986
1,226,582
1,242,149
7,424
561,413
124,788
$30
58,569
109
8,816
30,402
61,168
50.500
70,876
96,518
408
to
166
37,958
$1.445
116,863
1,111,858
Mr. FERNALD. I am Mr. Henry B. Fernald, chairman of the tax committee of the American Mining Congress.
I am not an oilman. I do not know the oil situation. But for mines
we find nothing in Mr. Paul's statement which answers the showing as
to the occasion and justification of the present percentage depletion.
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 development costs with an option regarding them; but different rules are prescribed for mines, and mines have no option under those rules. This
distinction at other points in his statement seems not clearly made.
He feels that mine-development expenditures are easily segregated
59,200
1.888
Italio figures denote defleit
accounting experience, that it is wholly impracticable to do this, which
is a basic reason for the present regulations.
In appearing before you as a representative of the mining industry
I first wish to state briefly the fundamental principles in accordance
with which our recommendations are made. I believe our thought as
to these principles is entirely in accord with that of your committee.
First: The first and foremost objective of industry and of Government today is and must be to furnish production for war needs. This
is the paramount problem and duty. It involves not merely the production for this month or this year but for future months and future
years, because much as we may hope to win this war quickly, we must
prepare for a war of years rather than of months. Immediacy of production is of tremendous importance, but we cannot overlook the need
of the continuous, vast production for several years. We must plan
and work with this in mind.
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
restoration and reconstruction which will be required. This will be
needed to yield the revenues which our Government will then require
for its current needs and to pay for the war costs not met by the taxes
APPENDIX D
of war years. Industry must be able not merely to continue but to
Percentage of crude-oil production transported to refineries by different
expand, to give employment and livelihood to those who return from
means
the war and to those who look for normal occupations when their
Calendar
year
1934
Pipe
lines
Tanker
Percent
Percent
71.2
25.9
Calendar
Tank
truck
Rail
tank
Percent
2.9
year
Percent
0.7
Pipe
lines
Tanker
Percent
Percent
1938
73.2
24.1
23.8
tank our
truck
Percent
Percent
71.2
26.2
2.6
1939
72.9
1936
71.3
26.6
2.1
1940
72.3
24.7
2.4
1937
7L.1
25.8
3.1
1941
74.2
22.2
130
8
1935
war-production jobs are over. This second objective does not conflict
with the first, because efficient, solvent industry at the conclusion of the
Tank
Rall
war will be the efficient industry to serve effectively for a long war.
There is necessary emergency diversion of industry from peace to war
production, but this should be done without crippling the ability of
1.4
I Partially estimated
Sources of basic material: Crude Petroleum Reports by Refineries Table 3. Total Domestic Deliveries
and Total Receipts of Crude Oil by Method of Transportation monthly, U. 8. Bureau of Mines: and
Freight Commodity Statistics of Class Steam Railways in the U. 8., Interstate Commerce Commission,
annual and quarterly
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 Government's need for revenues during the war period is important, but
subordinate to the primary objectives. We need vast revenues not
merely for this year, but for the post-war period. We must not
recklessly and unwisely let desire for immediate revenues obstruct
3044
REVENUE REVISION OF 1942
or interfere with the production of war needs or wreck our industrial
system so it cannot serve through a long war or meet the post-war
needs.
In planning for several years of war production, we are necessarily
planning for years of war taxation. We must strive earnestly to keep
industry strong, active, and efficient to yield production as well as
to yield revenues. If we can do that for several years of war, we
should come from the war with industry in shape for its post-war
work.
We should make clear in our tax laws that we adhere to these principles. We should not include in new laws, we should eliminate from
old laws features which would block, discourage, or impede full war
production. We should not penalize those working for production of
essential war needs by placing them in a worse position than those
who are not so engaged. We can rightly impose heavy taxation on
those who are making excessive profits, whether directly or indirectly,
from our war activities or from civilian activities. We can hardly
hope for the fullest possible participation in the war effort if we discriminate against those who produce goods for or furnish goods to the
Government. Throughout our tax plans we must strive to have them
apply fairly and equitably. The higher the tax rates, the more
careful we must be to see that the bases to which or upon which those
rates apply are fair and equitable. Points which were of minor importance at low rates may become grievous injustices when rates are
higher.
In this spirit we urge on your attention some of the technical features of our tax laws which we feel interfere with these fundamental
objectives both from the production and from the long-term revenue
standpoint.
There are two special features particularly applicable to mines
which I would mention-depletion and unit-of-production credit in
computing excess-profits taxes.
The reasons for continuing the present percentage depletion provi-
sion have already been so fully submitted to your committee that I
simply record here our position that percentage depletion for the
mining industry should not be denied, abridged, or further limited.
Excess-profits credit based on profit per unit-of-mine production:
As recognized in depletion, mines realize profits only through dispos-
ing of their capital assets. For the ton of ore in the mine, as for
any other capital asset, the profit can be realized but once. Any part
of the capital assets realized upon in 1 year cannot be realized upon
in another. Whatever tonnage of ore is realized upon during the
emergency curtails the profits which can be obtained in future years.
In this, mines differ from the ordinary manufacturing or trading
business. The raw materials a manufacturer purchases this year and
the profits he makes upon them are not expected in any way to limit or
curtail the materials available to him for purchase and manufacture
in subsequent years nor to limit his future profits. The trading concern which purchases and sells goods does not expect that its purchase
and sale in this year will limit its purchase and sale of goods in future
years.
Ore in the mine is not thus replaceable, and what is removed this
year limits what is available in future years. This is recognized by
REVENUE REVISION OF 1942
3045
depletion so far as concerns the capital element. That capital allowance we rightly recognize is not to be considered as income and not to
be subjected to tax as income. Only after appropriate depletion allowance is there income to be subjected to income tax or to excessprofits tax. This, I believe, we are already agreed upon.
The excess-profits tax, however, raises a further point. The excessprofits tax naturally should apply only to net income, and then only to
so much of the net income as is in excess of normal earnings.
Our present law recognizes a credit for normal earnings determined
from a standard of case-period earnings or from a standard of a per-
centage of return on invested capital, with limited provision for special determination in meritorious cases where neither the base-period
earnings nor the percentage on invested capital fairly measure the
normal earnings for which the excess-profits credit should be given.
The present provisions for such credit of a fixed annual amount, regardless of volume of production, do not work out fairly in many cases
as an allowance for the normal profits of mines.
For example, using the profit per ton as the fair measure of profit
per unit, but recognizing that in some cases profit per pound or per
ounce of metal production would be the appropriate unit to use, if the
mine during the base period had produced an average of 100,000 tons
of ore a year at $1 per ton average profit, $100,000 net income per year,
this amount of $100,000 would be the basis for its excess-profits credit
determined on base-period earnings. If in the excess-profits year the
mine does not increase its production, it will have its allowance for $1
per ton of normal profit. If it produces only 100,000 tons and makes
not more than $1 per ton of profit, it will not be subject to excessprofits tax: or if it makes $1.40 a ton on 100,000 tons, it will pay excessprofits tax on the excess 40 cents a ton, or $40,000 of profits.
So far this seems a fair and appropriate rule. In such a case as this,
where production is not increased, the mine will have an excess-profits
credit equal to the normal profit on production.
If, however, the mine should increase its production-as it must do
if it possibly can to meet the demand for maximum production for
war needs-then it finds that not only the excess profit but also the
normal profit from the increased production will be subjected to the
excess-profits tax.
If in our example the mine produced 150,000 tons of ore and made
only the normal profit of $1 a ton, its credit under present law would
be limited to the normal profit on its normal production of 100,000
tons, but the $50,000 of normal profit on the additional tonnage would
be treated as all excess profits and subject to the excess-profits tax.
If on the 150,000 tons production it made $1.40 per ton, under present
law the excess-profits tax would be applied not merely to the additional 40 cents per ton profit, but also to the normal profit of $1 per
ton on the 50,000 tons increased production.
This is the situation intended to be remedied by the amendment
which Senator Johnson of Colorado proposed last year when the
1941 bill was before the Senate. No action was then taken, on the
assurance that this subject would receive particular consideration in
the next revenue measure. The proposal of the Johnson amendment
was simply to make available to mines an excess-profits credit equal
to the normal profit per unit.
3046
REVENUE REVISION OF 1942
Under such a provision, in the example cited, the mine with its basic
credit of $1 per ton might receive this credit on its total tonnage of
production, so that if it did produce 150,000 tons at $1 per ton profit, it
would have its full ess-profits credit of $150,000 and would not be
subject to excess-profits tax. If on its 150,000 tons production it made
$1.40 per ton, a total of $210,000 profit for the year, it would apply its
$150,000 credit, at $1 per ton on 150,000 tons, and its excess profits of
$60,000, at 40 cents per ton on 150,000 tons, would be subject to the
excess-profits tax.
We are confident that the present law's application in such a case
was entirely unintentional and is contrary to Congressional policy.
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
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
their mines in this year the ore which, on a normal scale of production, would be mined in a future year, and if thus normally mined
would not be subject to excess-profits tax, except to the extent that the
profit per unit were in excess of normal.
Some mines may not need this credit. Mines which cannot increase
production over that of the base period mines which have ample
base-period earnings credit; others which have ample invested capital
credit, may not be subject to this injustice. But many, particularly of
the smaller mines, do not have either a credit on base-period earnings
or a credit on invested capital which will be adequate to give a fair
allowance for normal profit on increased production.
There is also the problem of new mines or mines which were shut
down or operating at a greatly reduced capacity on a noncommercial
basis in the base period. The Government is making every endeavor
to get new mines opened or old mines into maximum production.
For mines which do not have an already established normal profit
per unit, it will be necessary for the tax authorities to make a fair
determination of what would be the reasonable normal unit profit
as a basis for such an allowance.
There are also mines which during the base period were not being
operated on a profit basis as separate entities; for which also there
should be the determination of a fair normal profit per unit as independent mines.
Such profit determinations will naturally involve the engineering
judgment which mining engineers are quite capable of making and
do regularly make. This will be far simpler than some of the present
adjustment provisions in the law much simpler than many of the
legal and factual determinations which the law may otherwise require.
In any event, these are determinations which the Commissioner would
make and which, if made by him on anything like a fair and reasonable basis, would undoubtedly be conclusive upon the taxpayer. The
taxpayer would be largely at the mercy of the Commissioner as to the
amount of any such constructive allowances, but the Commissioner
should be given authority to make such appropriate allowances where
necessary in applying the unit-of-production credit.
I submit for the record a copy of the Johnson amendment and respectfully refer you to Senator Johnson's discussion of it which appears on pages 7483-4 of the Congressional Record of September 4.
1941.
REVENUE REVISION OF 1942
3047
We urge that the principle of this amendment be incorporated in
the law and that it be given retroactive effect.
The mines which have heretofore gone ahead with increased
duction to meet the demands of the defense and the war situation, pro- as
many of them have in 1940 and 1941, are no less entitled for those
years
to the correction of an injustice which the law quite unintentionally did them.
The entire net income of mines would in any event be subject to
normal and surtax. Actual profits would be subject to excess-profits
tax, but such an amendment as this, in addition to present provisions,
is needed to insure that the excess-profits tax shall in no event be
imposed
upon what are merely the normal mining profits per unit of
production.
This is not a question of subsidy, but of removing a penalty which
otherwise might be unintentionally imposed upon those who best do
what
the Government wants them to do in increasing production for
war
needs.
As to matters of general application which also affect mines, We
commend the Treasury recommendations with respect to the follow.
ing points:
As stated for the Treasury by Mr. Paul, "wartime rates make is
imperative to eliminate as far as possible existing inequities which
distort the tax burden of certain taxpayers." We commend the spirit
of this statement and the following recommendations which the Treasury made:
1. The capital-stock tax and the related declared value excess-
profits tax should be repealed.
2. Consolidated returns should be permitted for income as well as
excess-profits tax. But we urge there should be no differential in tax
rate applied.
3. Recoveries of bad debts and taxes should only be considered as
income
if and
to the
duced
a tax
benefit.
extent that their deduction in a prior year pro-
4. Statute of limitations on bad debts and worthless stock losses
should be extended to allow for refunds where there is question of the
proper year for the deduction; and the present charge-of requirement
as to bad debts should be eliminated.
5. Use of the "last-in, first-out" inventory method should not be
contingent upon the particular form of interim or other reports issued by the taxpayer.
6. Further relief should be afforded where the earnings of the base
period were abnormally depressed.
Supplementing these particular recommendations, which the Treasury has stated "do not exhaust all the changes which we believe should
be presented to the committee," we urge the following as also falling
under the classification of hardships and inequities which should be
remedied under these high tax rates:
As to invested capital, the taxpayer should not be denied the cost
basis for property as invested capital merely because the property was
acquired in some particular form of exchange or reorganization when
there was no thought or consideration of a possible future invested
capital determination.
3048
REVENUE REVISION OF 1942
The basis for computing gain, rather than the basis for computing
loss, should be used as the basis for property under section 718 and
section 720.
Depreciation or depletion adjustments should be those appropriate
to the unadjusted basis which is used.
The deduction under section 718 (b) (1) should be for the distributions which are not out of "earnings and profits" instead of those not
out of "accumulated earnings and profits" to clarify the law and avoid
possible question
Daily computations should not be required, or the Commissioner
should be given broad authority to waive the requirement.
Borrowed capital should be fully included in invested capital
Special relief Special relief should be granted as to invested capital
as well as to income; to corporations formed after as well as before
or during the base period; without penalty tax where special relief
is granted; with limitations of tax initially payable where special
relief is bona fide claimed.
Revision of supplements A and B: Among the points for revision
in these supplements, we urge that the definition of "acquiring corporation" should be broadened; differences in fiscal years of corporations should be fairly adjusted the entire net income or constructive
net income for the taxpayer and its components for the entire base
period should be included: the transferee provisions of supplement B
should be revised.
Section 734 regarding inconsistencies should be repealed, since it
is unfair, unjust, and oppressive as it now stands; and in no event
does it have an appropriate place in determining the excess profits
which should be subject to excess-profits tax.
The exemption from excess-profits tax for strategic minerals should
be restored.
The amortization provision of section 124 should provide for allowance for necessary facilities which may not have been completed at
the termination of the emergency need for them. Also, it should
specify, as seems clearly its intent, that mine-development expenditures may be subject to amortization.
The income tax should be allowed as a deduction in determining
excess profits as was done under the 1940 act. The amount which
the taxpayer will be required to pay as income tax to the Government should not be included in the amount on which it must pay an
excess-profits tax.
The rate schedule should be stated by brackets based on percentages
of the excess-profits credit and not merely according to the dollar
amounts of the present law.
The net operating loss carry-over should be extended to at least 5
years.
Interest on deficiencies should be at a rate not to exceed 3 percent.
As to distributions out of March 1, 1913, surplus and increase in
value, we join with others who oppose the Treasury recommendation
to abolish the present provisions under which such distributions are
not deemed taxable income to the stockholder.
The long-established principle of recognizing pre-1913 earnings
or values as not constituting taxable income should be retained.
We further note that one of the reasons for writing into the law
the present provisions for determining which distributions by cor-
REVENUE REVISION OF 1942
3049
porations should be considered taxable and which should not be considered taxable to stockholders was to remedy the chaotic situation
with regard to this question which existed before these provisions were
written into the law. To repeal them now would introduce far greater
complexities in the situation than now exist,
We again urge, as we have heretofore urged, that there should be
the utmost economy in all Government expenditures which are not
absolutely essential for the war.
We commend what the chairman and members of your committee
have done toward this end and urge that those efforts be continued.
When pressed to raise revenues for the necessary war expenditures
and to make our immense borrowings for those purposes, we are not
justified in either taxing or borrowing for nonessentials. Further-
more, it is hard to ask our people to deny themselves to pay taxes and
to buy bonds if they see Government funds being expended unnecessarily and without regard to the war needs.
In conclusion, it seems necessary to mention proposals for profit
limitations which, although not pending before this committee, will
vitally affect the problems you are considering.
Through you we urge that Congress consider these proposals as
they bear on our fundamental principles: Will they help and hasten
war production or will they hurt and delay it! Inevitably, placing
on those who take Government contracts special limitations or penalties not applying to those who do not try to meet the special war need,
will tend
objective.
to hurt war production. This is contrary to our first
Furthermore, limiting profits to a percentage of cost of production
means that the higher the cost the greater the profits. This places a
penalty on economy and efficiency in production, encourages carelessness, extravagance, and delay, and generally introduces the vices of
the old type of cost-plus contracts which have been so strongly condemned. The administrative problems of accounting and auditing
and settlement of disputes will be interminable. Neither the producer
nor the Government will know what should be considered the contract
cost until standards are set up adequately to cover every possible
situation and until audits have been completed, with determinations
not merely of direct cost but of overhead allocations for each contract.
This will be bad enough in cases where the entire production goes on
Government contracts; far worse where part of the production will be
subject to and part not subject to Government contracts. Even the
limitation of profits on Government contracts to a percentage of selling
price is subject to many, if not all, of these objections.
Of course, procurement officials should endeavor earnestly to make
prudent, reasonable contracts for production or supplies, but prompt
and effective procurement and speedy and efficient production should
have precedence over debates regarding cost details and allocations.
We take this opportunity to add our testimony to that of the war
authorities, the Price Administration, and the Treasury, that proposals to fix by law arbitrary percentages to be allowable on Government
contracts will hurt rather than help the war effort: will, as the old
cost-plus contracts did, promote rather than curb inflation: and will
present a problem impossible of satisfactory administration if we are
to have the war effort which is essential.
pt.
3050
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
If profits are excessive, the excess-profits tax should recapture them
and the excess-profits tax should be framed so it will do this effec.
tively but fairly, whether profits come from Government contracts or
otherwise,
This concluding thought is entirely in accord with the rest I have
said as to the bases for a tax at high rates which shall equitably and
effectively reach or discourage any real excess profits whatever their
source.
(The Johnson amendment referred to is as follows:)
[From the Congressional Record, September 4, 1941, p. 7483)
AMENDMENT PROPOSED BY SENATOR JOHNSON OF COLORADO TO SECTION 713 OF THE
INTERNAL REVENUE CODE
(h) Corporations engaged in mining(1) A corporation engaged in the mining of natural deposits shall be entitled
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
during the taxable year, in addition to such other excess-profits credit as may be
allowable under this subchapter which is properly allocable to its operations other
than mining.
(A) In the event that the taxpayer was actually in existence at the beginning
of its base period and was, during all or a part of such base period, engaged
on a commercially profitable basis, in mining operations similar, except as to
the volume of production, to those carried on during the taxable year, then the
taxpayer's normal profit per unit of production during the base period (excluding
the year or years In which there was a deficit in excess-profits net income) shall
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
provided by section 711 (b). so far as applicable, shall be made.
(B) If the taxpayer was not In existence at the beginning of Its base period.
or if it was not, during all or a part of such base period, engaged, on a commercially profitable basis, in mining operations similar, except as to volume of pro-
duction. to those carried on during the taxable year, then the normal profit per
unit of production shall consist of the base period profit per unit of production
which the taxpayer would have realized if it had been so engaged during such
base period. Such normal profit per unit shall be computed by assuming that
the taxpayer had sold in each year of the base period the number of units which
it could have produced and sold. with due regard to the average prices and costs
of operation prevailing in each base period year, except that the number of units
assumed in such computation for any base period year shall not exceed the num-
ber of units sold in the taxable year.
(2) The term "base period" means, for the purposes of this subsection, the base
period as elsewhere defined in this subchapter, but If the base period of a tax-
payer Is not elsewhere NO defined. In such case the term "base period" means the
calendar years 1936 to 1939. inclusive
(3) This subsection shall not apply If the excess-profits credit computed under
section 713. without the application of this section, or under section 714, exceeds
the amount of the credit computed under this subsection.
The CHAIRMAN. The next witness is Mr. James A. Bentley, vice
president of the Carrier Corporation, Syracuse, N. Y., representing
the tax committee of the Air Conditioning and Refrigerating Machinery Association. Come forward, Mr. Bentley, and identify yourself for the record.
STATEMENT OF JAMES A. BENTLEY. VICE PRESIDENT, CARRIER
CORPORATION SYRACUSE, N. Y.
Mr. BENTLEY. I am James A. Bentley, vice president of the Carrier
Corporation, Syracuse, N. Y., appearing on behalf of the Air Conditioning and Refrigerating Machinery Association.
3051
I wish to make an offer of a fair bargain to the committee. I am
speaking
in connection
with section 3405 of the excise-tax legislation,
which applies
to our industry.
This fair bargain, if adopted, would result in the Government saving
substantial money and the diversion of time of Government personnel,
and
would result in the saving to our industry of a great many headaches.
The problem, briefly, is that section 3405 formerly taxed only the
self-contained types of refrigerating equipment. However, the 1941
amendment brought in self-contained air conditioners, as well as many
components of industrial and commercial refrigeration and air-conditioning equipment
The phraseology referring to industrial and commercial components
is ambiguous. On many questions, the Bureau of Internal Revenue
has been unable to give us clear rulings.
It would be difficult, and in some cases impossible, adequately to
define what are taxable components.
We are faced with endless questions from customers and from the
Bureau of Internal Revenue, with litigation, and with years of holding questionable amounts in abeyance.
The sale of the industrial and commercial equipment is now almost
solely for war effort, generally for use by the Army, the Navy, the
Maritime Commission, and other Government agencies.
There will be, therefore, little tax return during the war. The tax
return from industrial and commercial equipment has averaged only
$220,846 per month so far, even though civilian uses have been substantial until recently.
From now on, the tax return cannont conceivably equal the cost to
the Government represented by the vast amount of paper work required for exemption certificate procedure, and so forth, which must
be carried out by the many Government purchasing offices throughout
the country. This waste brings no profit to anyone.
We propose the following amendment of section 3405 (the words
in the present statute which are to be deleted are stricken through in
brackets, words which are to be added are stated in capitals)
SEC. 3405. TAX ON REFRIGERATORS REFRIGERATING APPARATUS, AND AIR COND.
TIONERS,
There shall be Imposed on the following articles (Including In each case parts
or accessories therefor sold on or In connection with the sale thereof) sold by the
manufacturer,
producer, or importer a tax equivalent to 10 percent of the price
for
which so sold.
(a) Refrigerators, etc.-Refrigerators, beverage coolers, ice cream cabineta,
water coolers, food and beverage display cases, food and beverage storage
cabinets. ice making machines CABINETS. and milk cooler cabinets, each
such article having or BEING OF THE SELF-CONTAINED TYPE
being primarily designed for use with . mechanical refrigerating unit operated by electricity, gas, kerosene, or gasoline.
(b) [Refrigerating Apparalus]- Compressore condensere, ON-
pansion unite, absorbere and controls for - suitable for time AR part of or
with a refrigerating plant, refrigerating system refrigerating equipment unit, or any of the articien enumerated in subsection (e).
(c) air-conditioning units.
(d) [Componente] Cabinete condensere, family blowers, heat-
ing colle, cooling colle, filters humidifiere, and controle, for or suitable for
use no part of or with any of the articles enumerated in subsection (e),
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
The above amendment would confine the tax to the self-contained
type of equipment. This would eliminate the industrial equipment
which is the portion involving the ambiguities, some of which are
impossible to clarify, but would not eliminate any revenue profitable
to the Government.
As the statute stands at present, the tax is impossible accurately
to determine, expensive to collect, and uneconomic in its net yield
to the Government.
Our proposals arise primarily as a result of our actual everyday
experience with the difficulties and expense of interpreting, applying,
and accounting for that part of the present tax which applies to
commercial and industrial refrigerating and air conditioning
equipment.
We have no means of determining the cost to the Bureau of Internal Revenue of administering this tax on commercial and industrial refrigerating and air conditioning equipment, but we know that
the cost will be high. Already it has been necessary for the Bureau
to exchange with this association 69 letters respecting rulings on the
application of the tax to different circumstances. At least 28 oral
conferences with the Bureau have been required as a part of such
inquiries. Some of these conferences have consumed an entire day.
These figures make no accounting for the many inquiries and contacts with the Bureau which have been required of the individual
members of this association or of the industry.
The resulting amounts of time and study required of the Bureau's
policy-making and administrative officers have been very great. The
difficulties and disputes which may be expected to arise from an audit
of the returns are calculated to be even more frequent and more consuming of time and thought.
The most serious cost in administration arises from the exemption
certificate which is required when the equipment sold is for the use
of a governmental agency. These certificates are made out by a
number of persons who have little or no knowledge of the requirements for the issuing of such certificates. Because such persons are
inexperienced in this type of paper work, protracted delays result
before the certificates are issued and the equipment can be delivered.
The difficulties, complications, and delays are particularly acute
where, as is most usually the case, the sale is not made directly to
the governmental agency but is made through an intermediate contractor or series of subcontractors. The time lost by suppliers, installers, and Government employees who should be devoting themselves to productive effort is substantial.
It should hardly be necessary to add that the time, effort, and attention required do not aid the war effort, nor produce revenue for
the Treasury. The endless detail and discussion are an economic
waste to the producer, the consumer, and the Government.
As examples of difficulties inherent in determining whether a tax
attaches to a given sale, we might mention the following:
Subsection (b) of section 8405 provides for a tax upon "evapora-
tors" "for, or suitable for use as part of, or with. a refrigerating
plant, refrigerating system, refrigerating equipment or unit, or any
of the articles enumerated in subsection (a)." The word "evaporator" is defined by the American Society of Refrigerating Engineers
3053
as "that part of a system in which refrigerant is expanded or vapor-
ized to produce refrigeration." A pipe coil, when used in cold
storage for direct expansion, may be an evaporator; but the identical
coil might be used on a brine or cold-water job. The identical pipe
coil, at the moment it is sold by the manufacturer, might be used
for heating purposes in nonrefrigerating work. Are we going to
say that all pipe coil, no matter what its intended use may be, is
to be taxed merely because it could be used as an evaporator Is
manufacturer to be denied the right to show that neither he nor anyone else intended his pipe coil to be used for an evaporator or any
other refrigeration purpose and that his pipe never was so used
Is he to be taxed for something which has nothing to do with re-
frigerating or air conditioning On the other hand, if one manu-
facturer is permitted to make such a demonstration on one article,
on what just ground can the same right be refused to all manufacturers on all articles? If such a right is conceded, who can measure
the size of the administrative task
The same types of questions which arise with respect to evaporators may be raised respecting other components mentioned in sub-
sections (b) and (d) of section 3405.
Take also, for example, the phrase "ice-making machine" used in
subsection (a) of section 3405. What is an ice-making machine? Is
it a compressor? Is it an ice-making cabinet Is it something selfcontained, or is it every item which may be used in a plant in which
artificial ice is produced If an "ice-making machine" does not
cover the entire plant, just what part does it cover How are these
questions to be decided without dispute, argument, and, where the
amount involved warrants, litigation The situation could not be
better illustrated than by the following sentence (from a letter to
our association's counsel sent November 28, 1941, by the Deputy
Commissioner of Internal Revenue) reading
The term "ice-making machines" is not susceptible of general definition. How-
ever, rulings will be issued with respect to the taxability of any Ice-making
machine upon receipt of a description of the article.
The Bureau is unable to escape the necessity of innumerable in-
dividual rulings.
Another difficulty is ascertaining what is taxable or how much the
tax should be when taxing an assembly of parts, as distinguished from
taxing a recognized unit or "package." In many cases only one item
in a large assembly of parts may be taxable. Inasmuch as the
entire assembly, however, is sold for a lump sum, it is necessary,
if the percentage tax is to be computed for the one item, to assign
to that item an arbitrary proportion of the sales price of the entire
assembly. In this process, differences of opinion may and do arise.
Disputes are to be expected and, where the amounts involved are
substantial, the disputes will be prolonged.
So long as this tax remains in its present form there is no escape
from the administrative problems which the examples I have mentioned illustrate.
Against the expense already demonstrated and the greater expense
to be expected in the future, for both Government and taxpayer, the
receipts from the tax (for the first 4 months) should be considered.
The receipts appear to be approximately as follows:
a
3052
3054
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
3055
November 1941,$1,460,569; December 1941, $1,606,145; January 1942,
conditions obtaining in the first 4 months of its application, were
running at the rate of only approximately $18,000,000 per year.
In the future, revenue to the Government from these sources can
be expected to become less and less each month, and almost stop, as
sales for non-war-effort uses are increasingly restricted. It is estimated that, at the present time, of the industry's output of commercial
and industrial refrigerating and air-conditioning equipment, more
than 95 percent, by dollar volume, is sold on a high-priority basis.
Much of this sales volume is represented by direct purchasing by the
Army. Navy, and Marine Corps, and by sales for the use of the Maritime Commission, Defense Plant Corporation, Lend-Lease Administration, and other Government agencies having primarily to do with
the prosecution of the war. The present tax revenues to the Government from the operation of section 3405 of the Internal Revenue Code
not only are diminishing but probably will virtually disappear.
However, the expense and diversion of personnel, by Government
and industry, in making returns, keeping records, and deciding upon
the taxability of given items will continue.
If the system of selective excise taxes is to be continued, then substantial changes should be made in the principles upon which the
present statute rests. In the first place, the system should be based
upon taxable units which are simple to ascertain and which permit of
ready agreement between administrator and taxpayer as to their tax.
ability. A self-contained unit, readily discernible and commonly sccepted as a unit, is the requisite element in any tax on the sale of articles. We have pointed out how difficult it is, even where it is agreed
that an article is taxable, to allocate a part of the sales price to that
article when the article is part of an assembly and not a "packaged"
unit in itself.
In the second place, the article to be taxed should be defined in
terms which avoid, so far as possible, a reference to the use which is
to be made of the article. As soon as the question of use enters into
the determination, if the article taxed has a variety of commercial
uses outside the field upon which the excise is to apply, administrative
difficulties and disputes are inevitable.
As we have indicated, the use of the phrase "for, or suitable for,
use as part of, or with," appearing in subsection (b) of section 3405,
frequently causes dispute with respect to a given article and results
in taxing an article which isn't intended for use and isn't used in the
field of industry to which the tax applies. If, for instance, Congress
intended to tax pipe coil when used in the refrigerating and air-conditioning industry, it seems grossly unfair to tax pipe coil which was
intended for and was actually used in a heating plant unrelated to
air conditioning or refrigeration. Disputes as to "suitable for use
are unavoidable. Quarrels arise among buyers and sellers as to which
articles are taxable and as to which sales require a tax to be collected,
deducted, or withheld. If the amounts involved warrant the contest,
litigation follows; sometimes between sellers and buyers, but more fre-
quently between the Government and the party to the sales transaction
which is believed to be responsible for payment of the tax. Funds
may have to be held in escrow for years. The economy, both public
and private, suffers.
In the past, attempts have been made to narrow the field of dispute
respecting "use" by putting the test on the design of the article in-
volved; that is, by taxing only that article which is primarily designed for a given use. Then the test as to the tax liability of an
article is whether it is designed for the single taxable use or whether
it also has a commonly accepted use in fields other than that upon
which the tax is levied. Heretofore the difficulty with such a standard
has been that, in many instances, the administrators have been loath
to admit that the article in question had a variety of commercial
uses beyond use in the field to which the tax applied. The consequence
has been litigation as to what the fact might be, Wherever the tax
rests ultimately upon the use for which an article is suitable, designed,
adapted,
or intended, administrative difficulties and "headaches" may
be expected.
The proposed amendment would cure the above-mentioned diffi-
culties.
It remains merely to be added that the elimination of excise tax on
commercial and industrial equipment involves, in the case of section
3405, only a relatively small amount of tax. Our survey indicates that
the tax receipts for the first 4 months may be divided as follows:
I
$1,503,134; and February 1942, $1,604,144. This makes an average
per month of $1,543,498. Only a small portion of this would be affected
by the proposed amendment.
It will be observed that the receipts from this tax. even under the
Month
From sales
of household
refrigerators
III
II
From sales
of self-con.
tained units
other than
household
November 1941
December 1941
January 1942
February 1942
$1,315,387
Average per month
962,396
$51,598
228,788
1,109,638
139,848
1,416,133
66,819
1,200,888
121,763
From sales
of commer
cial and
Industrial
refrigerating
and air-
conditioning
equipment
$98,584
414,961
253,645
121,192
220,846
Note-The proposed amendment would eliminate only column III.
A survey of the commercial and industrial refrigerating and airconditioning machinery industry indicates that in the 4 months'
period specified above the cost to the manufacturers, in keeping accounts and records and in making the required returns, has totaled
approximately 10 percent of the receipts from sales of commercial and
industrial refrigerating and air-conditioning equipment. This makes
no allowance for costs to the manufacturers which may be expected
when the Bureau of Internal Revenue makes its audits. We don't
know what the cost to the taxpayer is in keeping his records and in
making his returns of other kinds of taxes, but it seems to us that a
ratio of 10 percent is very high. If the cost to the Bureau of In-
ternal Revenue of inspection, audit, and discussion and the cost to
the Government agencies of furnishing exemption certificates are
added, the administrative load seems disproportionate to receipts.
REVENUE REVISION OF 1942
3056
REVENUE REVISION OF 1942
Industrial equipment of other types is not usually subject to excise
tax. Therefore, discrimination is also involved, although we are not
making a point of this fact.
Because of the principles just explained, there should be eliminated
from subsection (a) all reference to the use for which the articles
taxed are designed. Also, if "ice-making machine" were changed to
"ice-making cabinet," the term would refer to "packaged" entity, iden.
tifiable as such, and not to a mere machinery assembly or plant. We,
therefore, propose that subsection (a) be amended to read (the words
in the present statute which are to be deleted are stricken through in
brackets; words which are to be added are stated in capitals)
:
(a) Refrigerators, Etc.-Refrigerators, beverage coolers, Ice cream cabinets,
water coolers, food and beverage display cases, food and beverage storage cab
inets, Ice making [machinee] CABINETS, and milk cooler enbinets, each such
article [having or] BEING OF THE SELF-CONTAINED TYPE [being primarily designed for use with, . mechanical refrigerating unit] operated by
electricity. gas, kerosene, or gasoline.
Because virtually all of the equipment subjected to tax under subsections (b) and (d) of section 3405 has commonly accepted uses in
other mechanical fields, it would be exceedingly difficult to levy any
excise tax upon such equipment without resting that tax on a definition which involved the use to be made of the equipment. It is for
this reason that we have been unable to develop any satisfactory amend-
ment to these parts of section 3405 which will permit of the taxation
of such equipment without encountering the administrative difficulties existent under the present statute. We, therefore, propose that
these two sections of this statute be eliminated.
The articles taxed under subsection (b) of section 3405 are items
of refrigerating apparatus used largely in the processing and storage
of food, or for essential industrial uses such as the production of synthetic rubber, parachute cloth, vital chemicals, and so forth, as distinguished from luxury items. The nonnecessities are principally those
taxed in subsections (a) and (c), to which, if a selective tax is to
remain, we have no general objection, if amended as proposed.
We have no objection to subsection (c) of section 3405. The articles
described in that subsection are self-contained and there is no difficulty
in determining what is meant.
This amendment would result in no net loss of revenue to the Gov-
ernment, because the small reduction in taxes would be more than
offset by the over-all reduction in cost of administration throughout
the various departments, including Government purchasing depart-
ments.
So far as the refrigerating and air-conditioning machinery industry
is concerned, it can be said with the assurance of conviction that a gen-
eral tax on sales, gross or net, is clearly more economic and more
efficient than any excise tax which rests upon statutory definition of
articles to be taxed and administrative interpretation of such definition. The existing excise tax is fundamentally uneconomic and wasteful. In the interest both of the public revenues and of the welfare
of the taxpayers, this tax should be repealed and a general sales tax
substituted. However, the aforementioned amendment is offered as an
alternative to complete repeal.
Our industry does not seek to reduce the amount of taxes it pays.
We are not seeking to avoid our fair share of the tax which must be
3057
collected if this war is to be won. But we are concerned that there be
the greatest economic value from whatever tax we do pay.
The Internal Revenue Bureau has attempted faithfully to give us
rulings that would enable us to apply the tax, but unfortunately, with
little success. It is not the fault of the Internal Revenue Bureau. It
has been beyond their control.
We have exchanged 69 letters with the Bureau. We have had many
long conferences, some consuming an entire day. Despite that, we still
do not know what is taxable and what is not taxable.
Mr. DISNEY. We taxed little boxes and units around the houses and
last year we attempted to tax industrial units, and that created the diffi-
culty. Isn't that right
Mr. BENTLEY. That is right.
Mr. Dreney. Those used in processing in canneries and in meat
packing, the Sig boxes seed in the various big industries, and that is
what caused the difficulty. Is that a correct statement!
Mr. BENTLEY. Yes. And at the present time the tax applies to
components of every type of industrial system, such as used in the
synthetic rubber factory or the chemical factory.
Mr. DISNEY. And what do you propose
Mr. BENTLEY. We propose, briefly, that if the excise taxation is
continued on our industry, an amendment of section 3405 in phraseology which we have suggested. that would restrict the taxation to the
self-contained type of air-conditioning and refrigeration equipment,
the type of equipment that is easy to define, where there can be no
ambiguities involved, and which would bring in the maximum of
revenue.
An important point is that as a result of the first 4 months of
experience the rate of revenue to the Treasury has been about $18,000,000 per year. However, of that total only about $2,700,000 has
been represented by the commercial and industrial equipment. The tax
revenue would continue on the self-contained type of equipment, which
is the majority of the tax anyway.
Another point is that, now that we are in the war-and our industry,
by the way, is devoting almost its entire attention to the war effortthe industrial and commercial equipment is confined almost entirely to
war effort use, most of it being purchased directly by Government
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
would be diminished and would be almost negligible very soon.
Despite the fact that the tax revenue is becoming negligible on that
type of equipment, the cost of administration to the Government and
ourselves is continuing.
For example, take the exemption certificate procedure. One would
think that this is a simple means of eliminating the tax on Government purchases. But, believe me, from my own experience, gentlemen, it is not simple.
The requirement for the preparation of this form represents anywhere from 5 to 10 steps on the part of the various Government purchasing agencies and others, depending on the type of case. Where a
contractor or a subcontractor is involved, in the instance of one of
these large plants, such as Mr. Disney mentioned, say a synthetic rub-
ber plant or a black-out plant for bomber production, this must be
REVENUE REVISION OF 1942
REVENUE REVISION OF 1942
made up by the Government purchasing agencies, who are not too
familiar with the procedure, due to rarely having to use it, since it applies largely to industrial equipment. We have even had instances
where the Government agency refuses to give the certificate until after
delivery of the equipment.
The poor manufacturer cannot deliver the equipment in advance of
the exemption certificate without being vulnerable to the tax; and yet
the Government refuses to let us have it in advance. There have been
actual delays of delivery on that account.
Mr. BENTLEY. We prefer that section 3405 be repealed, and that
some
form
of taxation
example,
a general
salesmore
tax. easily applicable be applied, such as, for
3058
And finally there is no tax accruing to the Treasury. So it is all
wasted effort.
Mr. DISNEY. And in the meantime it might spoil the deal unless the
purchaser knows what he has to do!
Mr. BENTLEY. That is correct. And for that reason we maintain
that even the small revenue that might accrue to the Treasury from
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 for
Mr. BENTLEY. That is for the 4 months' period since October 1, when
the tax went into effect. It would be at the rate of $2,700,000 if that
had continued. However, it is now on a diminishing scale due to Government 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 production 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 conditioned. Plants working on close tolerances for the production of airplane 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 involves 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 a 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 1
Mr. BENTLEY. Yes.
Mr. DISNEY. What about oil refineries? Do they use it 1
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
3059
We have no objection to paying taxes. On the contrary, we feel
that
taxes
than are now being paid, because,
after there
all, weshould
have a be
warmore
on our
hands,
All that we are objecting to is an uneconomic method of attempting
to collect revenue. I say "attempting" advisedly, because it is not
even resulting in revenue as the attempt is being made today.
Of course, we do have a selfish motive of eliminating headaches for
ourselves. But if the constructive results can be obtained, we think
that we might also be entitled to avoid some headaches.
The CHAIRMAN. We will take an adjournment now until tomorrow
morning at 10 o'clock.
(Whereupon, at 4:55 p. m., an adjournment was taken until
tomorrow, Friday, April 17, 1942, at 10 a. m.)
x
April 16, 1942
12:45 p.m.
Operator: Mr. Paul.
HMJr:
Right.
Operator:
Go ahead.
HMJr:
Randolph.
=
Randoloh
Paul:
Yes.
HMJr:
John 18 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 got very good reports of it. I thought it
was 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 and
P:
Yeah.
HMJr:
Walter George, so I guess it's in the bag.
Now, this is 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 a more liberal limitation."
P:
HMJr:
Yeah.
"He says that the Speaker and the House
conferees themselves 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
and 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 that all provisions in the deficiency
bill now in Congress should be stricken out.
8
2
The conferees are meeting this afternoon.
Senator Barkley is 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 conferees
to have them recede and strike out any and all
provisions. " The President said for me to
handle it.
P:
That's a nice assignment.
HMJr:
What?
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?
HMJr:
He wants me to handle it.
P:
HMJr:
P:
HMJr:
P:
Yeah. Well, we'll have to do it then.
Well, now, what are we going to do? It's this
afternoon. I've got a call in for John McCormack.
I haven't been able to reach him.
Well, do we have to do - do you have to appear
this afternoon?
I suppose so. I don't know, but you're appearing at one-thirty, aren't you?
Yes, and I'll probably be through about two or
two-fifteen.
HMJr:
Well.....
P:
We've stated the reason for our opposition in
my statement before the Neval Affairs Committee.
HMJr:
Well, I tell you what I think I'm going to do.
As soon as I get John McCormack, I'11 see what
he's got. Then I think I'll call up Bob Patterson and say that the President asked me to
9
-3handle it and I'm going to handle it my way.
See?
Yeah.
P:
HMJr:
P:
And take full responsibility.
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
HMJr:
he sent to me; but we're not satisfied - sufficiently satisfied with it to make it public.
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
HMJr:
But you're not clear in your own mind?
P:
Not clear in my own mind about what?
HMJr:
How we should kill this.
P:
No, I don't see - I haven't got any white
clerk of the Ways and Means Committee.
rabbit except the one that you suggested.
HMJr:
P:
Yeah. That's all right.
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 profits
tax is the proper method, and we're perfectly
open-minded; and if that isn't stiff enough,
then we - if that doesn't accomplish the result
HMJr:
then we're for stiffening the tax.
Yeah. Well, that's what I said.
P:
Yeah.
HMJr:
Well, you've got nothing new.
P:
No, just this, except that I don't think we
10
4
have
anything new we can spring this afternoon.
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:
P:
Well, I've got - they haven't located John
McCormack. Until I've talked to him, I can't
tell. See?
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 up there.
HMJr:
All right.
P:
If they ask you about it.
HMJr:
Okay.
P:
That's the one before the Naval Affairs Committee.
HMJr:
Right.
P:
Okay.
11
April 16, 1942
12:40 p.m.
HMJr:
Operator:
HMJr:
Hello.
Congress McCormack's secretary will try to
reach him and have him call, and I told him
it was urgent.
Yeah. Thank you.
April 16, 1942
1:10 p.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?
Mc:
Yes.
HMJr:
God, what a pal you are!
Mc:
What's the matter?
HMJr:
God, you call up the President on this thing
Mc:
What's that?
HMJr:
Six per cent limitation - to kick it out.
and then he gives me this baby.
12
-2Mc:
Yeah.
HMJr:
And so like all these things, I said, "Sure,
Mc:
kicked out." Now, what do you want me to do?
Well, the thought was that that should be
taken up in the more - in the regular way
and where it could be legislated upon from
I'll take it, Mr. President, if you want it
a sound angle
HMJr:
Mc:
HMJr:
Yeah.
instead of in this hit and run way.
Well, I'm with you a hundred per cent. Now,
John, what's the timing on this?
HMJr:
Well, here's the story. I want to give you
the latest information, and I'm glad I didn't
call you - I tried to get you before, but I
Well, I was up on the Hill testifying.
Mc:
I know, but I mean Clarence Cannon just came
Mc:
HMJr:
Mc:
HMJr:
Mc:
in and told me that yesterday they had a
meeting, the House conferees, and they
unanimously agreed to strike it out.
Yeah.
But he said that apparently afterwards the
Republicans had a meeting with their leadership, and they came in this morning and changed
their minds, see.
Yeah.
So the situation has changed to that extent,
and confidentially I think that Clif might
go along with them, see.
HMJr:
Who?
Mc:
Woodrum.
HMJr:
Yeah.
13
-3Now, 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 is
that the Senate conferees recede it.
Mc:
HMJr:
=
Mc:
Well, now, are you meeting with the Senate
group?
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?
Mc:
Well, they meet this afternoon and tomorrow.
HMJr:
Mc:
Are you going to meet with the Senate group
this afternoon?
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 afternoon and tomorrow.
HMJr:
Are you a member of it?
Mc:
No.
HMJr:
Well, how can I get in on it so I can talk to
Mc:
Well, the only way you could do anything is if
the Democratic leaders?
you call up some of those Democratic members
of the - some of the Senate Democratic members
of the conference committee.
HMJr:
Mc:
Well, that's McKellar, isn't it?
Barkley is away. I tried to get Barkley yesterday.
HMJr:
It's McKellar, isn't it?
Mc:
Yes. Of course, the - so far as you talking
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 is
the acting Senate leader.
HMJr:
Well, could I make a suggestion?
Mc:
Surely.
HMJr:
Is Sam Rayburn in town?
Mc:
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?
Mc:
Well, he couldn't very well with the - he couldn't
very well with the Senators, I don't think.
HMJr:
Yes, he can.
Mc:
Well, I'd rather you'd talk with Sam yourself
on that, Mr. Secretary.
HMJr:
You would.
Mc:
Yes.
HMJr:
Mc:
All right.
I'd rather you'd talk with.
HMJr:
All right, I'll call him.
Mc:
Because it would look better if you were to
take that proposition up with him, don't you
see.
HMJr:
Well, can I say where - that the initiative
came from you fellows?
Mc:
Yes, oh, yes. You can tell him that - you
can 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
15
-5talked 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.
Mc:
So you can tell him that.
Mc:
All right.
All right.
HMJr:
Thank you.
Mc:
Good-bye
HMJr:
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 ahead.
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 Speaker's convenience,
W:
All right. I'11 tell you, Mr. Secretary. I'll
talk to him just as soon as I can. Hello.
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
W:
Well, he's in the chair now. If he can get
first.
out
HMJr:
No, but I mean whenever - would you simply
say to him when he can get out of the chair,
will he call me?
W:
I surely will. Are you at the office?
HMJr:
I'm at the Treasury.
W:
All right.
17
-2HMJr:
W:
HMJr:
W:
And as soon ae - at the Speaker's convenience,
I'd like to talk to him on the phone.
All right, Mr. Secretary. I'll put him on
there.
Will you get that message to him?
I surely will.
HMJr:
Thank you.
W:
Good-bye.
cc - Mr. Sullivan
CONFIDENTIAL
Mr. Paul
18
April 16, 1942
HMJr:
Hello.
Operator:
Go ahead.
HMJr:
Hello.
Speaker
Rayburn:
Yes, Henry.
HMJr:
How are you, Sam?
R:
2:00 p.m.
:
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 heart of Texas, huh?
R:
Sure. (Laughs)
HMJr:
What?
R:
HMJr:
(Laughs) Right from the heart of Texas.
I see. Sam, John McCormack called up the
President about this six per cent limitation
in this nineteen billion dollar War Department 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?
19
-2R:
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:
R:
No, no.
I thought, hell, if it's going to be handled
by a committee like Waye and Means, the com-
HMJr:
R:
mittee that works with him ought to handle it.
Well, that's the way the President and I feel.
Well, we're going to drop the whole thing out.
I told Cannon to drop the whole - both amendments out, and he said they'd do it.
HMJr:
Well, now
R:
It seems that the conferees are pretty well
that way on both sides.
HMJr:
Well
R:
I know the House conferees are all that way.
HMJr:
Well, John seeme worried, because he said
R:
HMJr:
R:
within the last half hour, the Republicans,
he thinks, are going to vote to keep it in.
Well, I hedn't heard a word about that.
He said Cannon told him that.
Well, I'11 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 ne ed - if
you think you need any help from this end of
20
3-
R:
HMJr:
the avenue, give me a ring and I'll come up.
Sure, I'11 do that, Henry.
Now, I haven't talked to McKellar, see.
R:
Uh huh.
HMJr:
I only talked to McCormack, and he said he'd
R:
Yeah.
HMJr:
R:
HMJr:
R:
rather that I'd deal with you direct.
So will you do a little checking?
Yes, I will, Henry.
And - because the President pinned this on
me, and I don't want to fall down.
No, no. Well, we're - I'm for throwing the
whole damn thing out.
HMJr:
R:
HMJr:
R:
Well, that's what he wants. Now unless - if
it's in the bag - I mean that the thing, the
whole thing goes out, I'won't hear from you.
That's right.
But according to
I'11 tell Cannon that if he needs any help,
that you're ready to come up and put in whatever oar you can.
HMJr:
Yes. And - hello.
R:
Yes.
HMJr:
And just so 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.
21
-4HMJr:
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 mass 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
HMJr:
here that night, could you?
Gosh, I don't know, Dick, but we can find out.
J:
Well, now, I tell you. My idea was this, that
HMJr:
J:
possibly we could get somebody from Los Angeles.
What's the date?
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:
Yeah.
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
us.
HMJr:
Well, Ted Gamble is here in charge - Harold
Graves is sick
J:
Yeah.
and I'll ask him right away.
HMJr:
J:
Well, Henry, it would be fine if you could,
because I think it would mean a lot to us.
We're putting 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?
23
-2J:
They've got a bar, yeah.
HMJr:
Yeah.
Will you be under it, or back of it,
or on top of it?
J:
What?
HMJr:
Where - what part of the bar will you be?
Well, I'm going to - I have a room there, and
I'm not going in the bars during this campaign.
I see. Well, they'11 simply say, "Dick Jenkins,
J:
HMJr:
The Bar, Pioneer Hotel."
J:
Yeah. That would get me all right. (Laughs)
HMJr:
(Laughs)
J:
But, Henry, if they would do that, and wire me
HMJr:
here, and I'll tell you what we'll do
Yeah.
to stand any expenses there is to a trip
J:
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 us much time.
J:
That isn't much time, is 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.
24
-3HMJr:
J:
HMJr:
Okay, Dick.
It'11 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.
Well, I'll tell Ted Gamble right away.
J:
That '11 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.
HMJr:
J:
I'll be right into your office.
All right. Good for you.
If you'd work on this, I certainly would
appreciate it.
HMJr:
All right, Dick.
J:
Good -bye.
HMJr:
Good-bye.
cc - 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 is kicked out of the bill and
putting it entirely on me, see.
P:
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-
tainly 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.
26
-2P:
"How soon?" I said, "As soon as we can get it.
We counted on it before this."
HMJr:
Yeah.
P:
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.
P:
And I said, "Yes, "it will. We need the money
urgently, and a controversial measure like this
is bound to be damaging to us to get the money."
HMJr:
P:
Yeah.
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:
P:
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.
Did they?
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, is 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
-3to go 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 up 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 conference. 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 it, and it being your appropriation.
P:
Yeah.
P:
But.....
That's all right. I'11 keep you posted.
HMJr:
And I'll do the same by you.
P:
You bet.
HMJr:
I thank you.
P:
Thank you, Henry.
HMJr:
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
-2will 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 thereabouts, 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 a 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 September 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 refunding 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
-3MR. 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?
talk. MR. BELL: I am perfectly willing to let anybody
MR. MURPHY: Can I do it myself?
words.
H.M.JR: Sure, if you don't use more than half-dollar
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-aquarter 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 calling it. We can borrow at a cheaper rate for that period
and we will save money for ourselves and for HOLC. Therefore, 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 taxexempt 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 a 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 certificates 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 committed, 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
-5MR. 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
-6MR. 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
FROM
Secretary Morgenthau
George Buffington QTSRE: 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 corporations 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.
slephens The
the
week
/weeel san
pery 4/22/42
35
THE NATIONAL COMMITTEE OF THE SECURITIES INDUSTRY
FOR WAR FINANCING
33 SOUTH CLARK STREET
CHICAGO
JAMES F. BURNS, Jr.
President, Association of Stock Exchange Firms
H. H. DEWAR
Washington Office
821 Fifteenth Street, N. W.
Washington, D. C.
Chairman, National Association of Securities Dealers, Inc.
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 Industry 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 corporations 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 Washington 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 Administrators 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.
36
In establishing this National Committee, the undersigned are acting to promote 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 receiving 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
37
UNITED STATES
BONDS
SERIES E.F.G.
The Safest Investment in the World
Application for
Series G *
UNITED STATES DEFENSE SAVINGS BONDS
The undersigned hereby applies for United States Defense Savings Bonds as
Series E
Maturity
Number
value
$25.00
$75.00
$500.00
$375.00
$1,000.00
$750.00
Motarity
Amount
price
Registered
Not
Dated first of month in which remittance is received by any Federal Reserve Bank
Maturity
or the Treasurer of the United States.
Matures 12 years from issue of date of bonds.
Issue
volue
ber
Year Current Income Bond Issued at Par
Denominations: $100, $500, $1,000, $5,000, and $10,000.
Series G
Num.
Issue
value
C
OF BOND
Transferable.
$37.50
$100.00
Series F
ber
Amount
$18.75
$50.00
Num.
follow
price
$25.00
$18.50
$100.00
$100.00
$100.00
$74.00
$500.00
$500.00
$500.00
$370.00
$1,000.00
81,000.00
$1,000.00
$740.00
$5,000.00
$5,000.00
$3,700.00
$5,000.00
$10,000.00
$10,000.00
$7,400.00
$10,000.00
INTEREST RATE
2.5 percent a year. Interest is paid semiannually by Treasury check. As this rate
is fixed for a 12-year period, if bond is redeemed before maturity a partial refund of
interest paid is required. (See "Redemption" below.)
Total remittance
REGISTER
Mr. BONDS IN THE NAME OF: (Please print all names)
NAME
Mrs.
Miss
FIRST
PRICE AND MATURITY
This bond is priced at par. It is payable at par if it is held by the owner for 12 years
from issue date.
MIDDLE NAME OR INITIAL
LAST NAME
ADDRESS
LIMITATION ON HOLDINGS
STREET
CITY
Owner 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
below of Co-owner or Beneficiary and check which:
Co-owner
Name of
Mr.
Co-owner or
Beneficiary
Miss
REGISTRATION
FIRST NAME
MIDDLE NAME OR INITIAL
LAST NAME
ADDRESS
CITY
PAYMENT:
STATE
Check
Money order
to the Treasurer of the United States
*Charge to my account with
SHIPMENT:
NAME OF CONCERN
As the interest rate of 2.5 percent is fixed for a 12-year period, if bond is redeemed in
whole or in part before maturity, an adjustment of interest, on the amount redeemed,
STATE
United
to:the Treasurer of the United States or Fiscal Agent of the
Direct States
mail by
*For account of Subscriber to:
NAME OF CONCERN
To subscriber at above address*
(To be held for account of subscriber*
OF PURCHASER
FIRST NAME
MIDDLE NAME OR INITIAL
LAST NAME
to . lower rate for the shorter period is required. and is accomplished through
partial refund of prior interest paid, the amount being deducted from the principal
amount redeemed. In every case, however, the total return of redemption value
plus the interest previously received exceeds the invested principal. In the case of
partial redemption, no interest will be lost by the owner on the unredeemed portion
of the bond which will be reissued with original issue date.
Series G bonds may be redeemed before maturity. at par without adjustment of prior
interest paid, upon death of owner (or co-owner). or, if held by a fiduciary, upon the
termination of the trust through death of any person. but notice of such intent
Receipt is hereby acknowledged of funds as designated above:
Representing
the United States for redemption before maturity. At option of owner, bonds may
this folder.
SHIPMENT TO BE MADE BY:
DATE
Bonds are payable at face value 12 years from issue date, and may not be called by
first day of any month, on at least one month's notice. Table of redemption values
appears on face of bond. Table of selected redemption dates is on reverse side of
STREET
"And by above named concern
EMPTION
be redeemed in whole or in part, before maturity, after 6 months from issue date, at
fixed redemption values (which are less than the face amount of the bond), on the
To subscriber at
CITY
Bonds can be registered in the same manner as Series F bonds. (See data on Series F
bonds in this folder.)
STREET
SIGNATURE
$5,000 (maturity value) of Series E bonds.
Beneficiary
Mrs.
Attached herewith is
of Series G and Series F combined. issued In each calendar year. All limitations
on Series G bonds and Series F bonds are in addition to the annual limitation of
must be received by a Federal Reserve Bank or by the Treasury Department within
4 months of death,
NAME OF REPRESENTATIVE
WHERE TO BUY (OR ORDER)
NAME OF CONCERN
ADDRESS
Transactions of this type made for the committee of the subscriber are entirely or his risk
At Federal Reserve Banks
Through banks and other designated sales agencies.
Direct
by mail from the Treasurer of the United States, or from any Federal Reserve
Bank
as indicated, the word "co-owner." In such cases, the only authorized con-
*
checking.
junction used in the joining of the two names registered is "or." For example, John A.
RESIDENTIAL AND GEOGRAPHIC LIMITATIONS
ON REGISTRY AND DELIVERY
Restricted to residents of the United States, its Territories and Insular
the Canal Zone, the Philippine Islands, or citizens of the United States
Jones
Mrs. Mary L. Jones: not John A. Jones and Mrs. Mary L. Jones: nor John A.
and/or Mrs. Mary L Jones. Either co-owner may redeem the bond without
nature of the other, including the survivor in case of the death of one co-owner.
Possession
Co-owners may redeem their bonds jointly, in which case the redemption check will be
issued to them jointly. A bond will not be reissued in order to add the name of
residing abroad. No deliveries of Defense Savings Bonds will be made temporaris
a
General Information
Defense Savings Bonds purchased by citizens temporarily residing abroad abras will
nowner. but will be reissued on the death of one co-owner in the name of the other
with or without a beneficiary. In the case of the death of the owner of a bond which
delivered
the United States or held in safekeeping as the purchaser may dim
Bonds are in
nontransferable
has no co-owner or beneficiary registered, the bond is payable to the owner's estate.
FORM OF NAME(S) IN REGISTRATION
TWO INDIVIDUALS (One Owner and One Beneficiary)
Individuals Series E. F. and G: Only one or two persons can be registered as the
owners of these series of Defense Savings Bonds. One given name and one initial it
any, are to be used as well as the last name. The name(s) may be preceded by
applicable title, such as Dr., Rev., etc. Married women should use their given name
any
example: Mrs. Mary A. Jones not Mrs. Frank B. Jones. Bonds are not to be registered
in the name of a person under disability for reasons other than minority, unless legal
representative of his estate has been appointed. This is to be indicated on the rega
tration by the appropriate words, for example, "Henry Jones, an incompetent under
You may name one individual as beneficiary on your bonds by inserting his or her
name and address on the proper lines on the order form. and by checking, as indicated,
the word "beneficiary." The beneficiary may redeem the bonds only if he or she surlives the owner. Bonds so registered may not be reissued while both the owner and
beneficiary are living. but may be reissued if the beneficiary predeceases the owner.
The named owner may. at any time, redeem the bond without the permission of the
beneficiary.
(In case of any doubt. Treasury Dept. Circular No. 530, current revision,
should be consulted. A bond is not authorized to be issued, without consultation with the Treasury Department, if there is any doubt of the legality of
legal
guardianship." Registration in the name of natural or voluntary guardians
not authorized
issuance or form of registration.)
(IMPORTANT: The above forms of registration are the only ones authorised
for Defense Savings Bonds, Series E.)
Associations, Partnerships, Trustees, or Corporations Series F and G:
(1) A private corporation. followed by the words "a corporation"; for example
Tables of Redemption Values at Selected Dates, for Defense Savings Bonds,
Series E. F. and G
"Smith Manufacturing Company, a corporation."
SERIES E
(2) An unincorporated association, such as a lodge. church, society, or sinie
Approximate
investment
yield
Period after issue date
Redemption value at end of period
purchase
price from
(
body, followed by the words "an unincorporated association"; for example, The Leta
Club, an unincorporated association." The term "an unincorporated association"
is not to be used to describe a trust fund, a partnership, or a trade name.
(3) A partnership. considered as an entity, followed by the words "a partner
for example, "Smith and Brown, a partnership."
(4) A fiduciary (trustee, guardian, etc.), for forms of registration consult Treasury
issue date
to end
period
Dept. Circular No. 530, current revision.
(5) States, counties, municipal corporations and the custodians or owners of public
funds. For
revision.
forms of registration consult Treasury Dept. Circular No. 530, current
as The the case full legal name of the corporation, unincorporated association. or partnership
may be, is to be given in the registration. No officer or member of de
organization may be named in the registration. The form of registration used DEF
Percent
ISSUE PRICE
37.75
$75.00
75.50
years
19.12
38.25
76.50
years
19.50
39.00
78.00
years
20.50
41.00
82.00
1.79
22.00
44.00
88.00
2.30
25.00
50.00
100.00
2.90
$18.75
18.87
year
years
Maturity value (10 years from issue date)
$37.50
0.67
1.31
express the actual ownership of, and interest in, the bond.
SERIES F
A MINOR CHILD
Percent
A Defense Savings Bond may be registered in the name of a minor child. and il
purchased not be with funds already belonging to the minor, a co-owner or beneficiary nit
legal included. but the bond will be registered in his (or her) name alone. If there
guardian appointed and acting. then the name should be followed by the words
minor under legal guardianship." If the bond represents a gift from some other per
son, or is purchased with funds not already belonging to the minor, a co-owner if
INC PRICE
year
$18.50
$74.00
18.55
74.20
742
760
.89
1.49
$740
0.27
years
19.00
76.00
years
19.92
79.70
797
21.20
84.80
848
1.96
23.22
92.90
929
2.29
25.00
100.00
1,000
$100.00
$1,000
$10,000
978
9,780
951
9,510
years
years
Maturity value (12 years from issue date)
beneficiary may be named with the minor child. A minor of sufficient competency and
2.53
SERIES G
of understanding which he who has no legal guardian may cash his (or her) own bond or any bood
ship, (or she) is a co-owner. If the Department is on notice of legal guardian
Percent
ISSUE PRICE
year
appointment payment will during be required. minority will be made only to the guardian. proof of whom
years
years
years
TWO INDIVIDUALS AS CO-OWNERS
At
years
Maturity value (12 years from issue date)
97.80
95.10
949
9,490
961
9,610
97.90
979
9,790
100.00
1,000
10.000
94.90
96.10
inserting the his time of purchase. you may name one individual as co-owner with you
or her name and address on the proper lines on the order form. and
PRINTING OFFICE 942-0-447109
0.30
LSI
1.98
2.31
2.50
Application for
UNITED STATES DEFENSE SAVINGS BONDS
The undersigned hereby applies for United States Defense Savings Bonds as follo
Series E
Issue price
Maturity value
$500.00
$375.00
$1,000.00
$750.00
$74.00
$370.00
$1,000.00
$740.00
$5,000.00
$3,700.00
$10,000.00 $7,400.00
$100.00
$500.00
$500.00
$1,000.00
.
.
$100.00
$500.00
-
price
$100.00
,
$18.50
$25.00
Issue
evalue
ber
$1,000.00
$5,000.00
$5,000.00
$10,000.00
$10,000.00
#
Amount
price
#
value
.
ber
Series G
Maturity
Num.
Issue
.
Moturity
.
$37.50
$75.00
#
$50.00
$100.00
Series F
Num
Amount
$18.75
$25.00
.
.
Number
Total remittance
.
REGISTER
BONDS IN THE NAME OF: (Please print all names)
Mr.
NAME
Mrs.
Miss
MIDDLE NAME OR INITIAL
FIRST NAME
LAST NAME
ADDRESS
STREET
CITY
STATE
If you wish to name a Co-owner or Beneficiary, please give name and address
below of Co-owner or Beneficiary and check which:
Name of
Co-owner or
Mr.
Mrs.
Beneficiary
Miss
Co-owner
Beneficiary
FIRST NAME
MIDDLE NAME OR INITIAL
LAST NAME
ADDRESS
STREET
CITY
PAYMENT
Attached herewith is
STATE
Check
Money order
to the Treasurer of the United States
*Charge to my account with
NAME OF CONCERN
SHIPMENT:
To subscriber at
STREET
CITY
STATE
SHIPMENT TO BE MADE BY:
Direct
mail byto:the Treasurer of the United States or Fiscal Agent of the
United States
*For account of Subscriber to:
NAME OF CONCERN
*And by above named concern
To subscriber at above address"
SIGNATURE
OF PURCHASER
To be held for account of subscriber'
FIRST NAME
DATE
MIDDLE NAME OR INITIAL
Receipt is hereby acknowledged of funds as designated above:
Representing
NAME OF REPRESENTATIVE
NAME OF CONCERN
ADDRESS
Transections of this type made for the consenience of the subscriber are entirely of his risk
LAST NAME
38
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 16, 1942
TO
FROM
Secretary Morgenthau
Mr. Hags off
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 a 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 indebtedness, 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 taxexempt securities, the 3-1/8's of 1946-49 and the 4'g 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 mil-
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.
39
Price and Yield Changes of United States Securities
March 19, 1942 to April 15, 1942
Prices
Security
March 19,
April 15,
1942
1942
Yields
Change
March 19,
1942
April 15,
1942
(Decimals are thirty-seconds)
Change
(Percent)
Bills
100.01
-
99.29
99.16
99.27
101.28
102.00
101.04
100.12
103.23
101.06
103.05
100.27
101.11
100.22
-
99.26
-.04
-.05
-.05
-.02
-
100.08
.20
.28
+.08
.45
.37
.48
.76
.83
-
-
100.12
99.31
99.21
-
Taxable Notes
3/46
3/15/43
9/15/44
12/15/45
3/15/46
-
Average rate last issue
Certificates
1/2% 11/1/42
+.11
+.07
.84
.89
1.02
1.04
+.05
+.02
1.67
1.64
1.83
-.03
1.80
-.03
-.04
Taxable Bonds
3/15/48-50
6/15/49-51
2-1/2
3/15/52-54
9/15/67-72
104.08
+.04
+.07
+.10
+.17
101.20
+.14
1.96
2.09
2.12
103.14
+.09
2.24
101.08
+.13
2.46
1.92
2.02
2.07
2.21
2.43
100.31
101.06
100.31
-.05
5/32*
2/32*
5/32*
1/32*
-.05
.22
.29
100.30
-.05
-.07
.26
+.07
+.07
.26
333
+.09
.34
.38
.37
.39
.42
+.04
+.05
101.12
-.04
-.04
-.04
.43
+.04
100.29
-.03
.41
.44
+.03
103.21
104.06
105.06
103.13
.41
.44
+.03
.57
.54
-.03
.72
.71
-.01
108.11
-.08
-.05
-.05
-.01
-.01
-.02
.91
.84
.91
.88
-.07
-.03
-.07
-.05
-.03
-.03
Wholly Tax-exempt Notes
9/15/42
12/15/42
9/15/43
1-1/8 12/15/43
3/15/44
6/15/44
9/15/44
3/15/45
101.04
101.11
101.04
101.03
101.16
101.10
100.27
101.16
101.00
101.09
101.06
100.23
-.05
0/32*
-1/32*
Tax-exempt Bonds
2-1/4
2-7/8
2-3/4
2-3/4
6/15/43-47
10/15/43-45
4/15/44-46
12/15/44-54
9/15/45-47
12/15/45
106.06
105.28
108.10
106.05
105.26
3/15/46-56
6/15/46-48
6/15/46-49
10/15/47-52
12/15/47
3/15/48-51
110.08
107.28
108.08
115.20
104.23
107.28
110.06
108.00
108.12
115.20
104.31
107.31
9/15/48
12/15/48-50
12/15/49-52
12/15/49-53
9/15/50-52
6/15/51-54
107.07
104.21
110.22
107.10
104.28
9/15/51-55
6/15/53-55
2-3/4 12/15/60-65
104.01
105.01
.90
+.04
1.11
1.09
+.04
1.13
-.02
1.08
-.03
1.03
1.06
1.30
-.06
-.07
-.03
-.06
-.04
.00
1.33
+.08
1.1
1.09
+.03
1.38
1.34
+.03
+.07
+.06
1.33
1.28
1.65
1.60
1.31
1.24
-.02
-.04
-.04
-.02
106.26
+.04
+.06
1.00
1.61
1.58
1.63
108.24
+.06
1.74
1.71
-.03
110.23
+.03
+.09
+.12
+.11
1.78
1.70
1.76
1.67
-.02
-.03
1.64
1.77
1.96
1.97
-.04
-.03
-.04
-.04
2.03
-.04
2.07
-.03
110.28
106.16
106.20
106.20
108.18
110.20
104.29
103.10
104.28
110.00
109.10
109.12
110.00
105.06
103.22
105.07
110.14
109.22
109.26
110.14
Treasury Department, Division of Research and Statistics.
Excess of price over zero yield.
-.02
.94
+.14
1.68
1.80
2.00
+.12
2.01
+.14
+.14
2.07
2.10
-.03
April 15, 1942.
EXECUTIVE ORDER
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
invests not only in the success of the Nation's common 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 facilitated; and
WHEREAS employers and employees in many busi-
ness and industrial enterprises, as well as some Governmental activities, have developed, and are maintaining, 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
41
-2for voluntary participation in such systematic purchase 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 Interdepartmental 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 Chairman, 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:
42
-3a. Formulate and present to the several departments, establishments, and agencies in the executive branch of the Government a uniform plan whereby
all civilian officers and employees may systematically
purchase War Savings Bonds through voluntary pay allotments.
b. Assist the several departments, establishments, 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.
C. 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 advantageous.
d. Recommend to the several departments, establishments, 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
43
-4modifications 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.
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 filed v/N
I wish in each case you would send a telegram
dated
to our State Administrator and find out why each partic- filed
ular firm has not got the payroll deduction plan and the
4/20,
Administrator should use his best efforts to get them to
put in one immediately.
Please keep Mr. Tickton informed.
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 fled 4115
I wish you would take this up with our State
Administrators, by telegram, and find out why they don't - dated
filed
and have them take immediate steps to see that payroll
4/20
deduction plans are put into these companies.
Please keep Mr. Tickton informed.
46
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
April 20, 1942.
TO Mrs. MacHugh
Mr. Gamble's Office 200
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.
copy in diary- - 4/20/72
I
FROM
47
mr. C. E. Wilson
Pres of general moths plation
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 your
for victory
in our survival war is most encouraging I am
members
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.
1mm.
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.
PHONED
49
TG
12
0
II
TIME
WAS DET 205
by
HENRY MORGENTHAU JR
105
RR
COPY MDS
SECRETARY OF THE TREASURY
10
/
buc.
APR 16 1942
2
9
3
N
8
4
765
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
GM
50
M 1942
CHINGTON
WASHINGTON, D. C.
TREASURY DEPARTMENT
MR HENREY MORGENTHAU JR
17th & H STREETS, N.W.
RE 3551 WASHINGTON D. c.
TRANSPORTATION BUILDING
GENERAL MOTORS COMMUNICATIONS
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 so 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
Mr. Houghteling revised this over the 52
telephone. Mr. Kuhn has approved.
Language in last two lines is to take
Ore of goal set by U.A.W.,C.I.O.
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
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
I
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. Houghteling revised this over the
telephone. Mr. Kuhn has approved.
54
Language in last two lines is to take
de of fact that this Union has not yet
set a goal.
55
OFFICIAL
MR.
JAMES J. MATLES
DIRECTOR OF ORGANIZATION
UNITED ELECTRICAL, RADIO AND MACHINE WORKERS APRIL UNION 16,1942
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
OFMORGENTHAU
THIS DRIVE WILL
HENRY
JR. BE ATTAINED.
1K
mp
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 a 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 a time
lag in the distribution of ordinary newsreels, and it
is this time lag which we are trying to overcome.
F.K.
57
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 16, 1942
TO
FROM
Secretary Morgenthau
Mr. Hans
the
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. Agente, 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 qualified to issue Series E
Savings Bonds, May 7, 1941
to date
1942
:
Building and loan associations,
Credit unions
Other corporations 1
Investment industry
All others
Total other than post offices.
Post offices
Grand total
3
28
March
28
: April
11
7,676
11,571
13,688
14,097
14,240
14,331
14,368
739
1,481
2,064
2,434
2,560
2,632
2,645
8
389
1,368
2,080
2,479
2,695
2,748
-
-
-
351
686
931
1,050
-
-
-
37
63
66
65
27
28
99
137
135
136
8,430
13,468
17,148
19,098
20,165
20,790
21,012
15,812
16,429
16,883
17,123
17,928
18,208
18,305
24,242
29,897
34,031
36,221
38,093
38,998
39,317
April 16,
1942
7
Office of the Secretary of the Treasury,
Division of Research and Statistics.
1
Feb.
31
:
Commercial and savings banks
Jan.
Jan.
Sept.
30
7
:
May
:
1941
In accordance with telegram of December 27, 1941.
Classification of the ber of agents qualified to
issue Series E Savings Bonds, on April 11, 1942
:Building
and
Banks
Credit
loan
:associa-
unions
:
: tions
Other
Invest-
:corpora-
ment
:tions 1
:industry
All
others
Total
2
Corporations and associations:
Federal Reserve District of
Boston
837
252
230
77
1
14
1,411
1,166
257
425
117
17
69
2,051
855
115
124
217
-
-
1,311
Cleveland
1,189
391
351
58
7
Richmond
1,029
196
149
46
Atlanta
1,030
165
194
Chicago
2,373
484
St. Louis
1,402
Minneapolis
Kansas City
Dallas
San Francisco
Subtotal
New York
Philadelphia
Post offices
Grand total
2
1,998
8
1
1,429
29
-
-
1,418
284
322
17
28
3,508
164
81
51
7
1
1,706
1,283
60
87
8
1,789
194
217
24
864
124
251
551
243
14,368
3
1,441
2,232
2
6
64
3
9
355
37
3
3
2,645
2,748
1,050
65
136
21,012
-
-
-
-
-
-
18,305
14,368
2,645
2,748
1,050
65
136
39,317
Office of the Secretary of the Treasury,
Division of Research and Statistics.
1 In accordance with telegram of December 27, 1941.
Except post offices.
2
-
1,315
1,192
April 16, 1942
00
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)
over
March
:
:
:
:
:
:
:
:
:
:
:
Total
:
Series G - Banks
: February
:
Series F - Banks
over
: April
:
Series E - Total
:
Series E - Banks
February :
Percentage of Increase
or Decrease (-)
:
:
:
Series E - Post Offices
March
over
March
:
: April
or Decrease (-)
March
April
:
:
Item
Amount of Increase
:
Sales
March
over
February
-$ 8,059
- 13.5%
207,044
-$ 7,350
- 68,279
- 17.1%
- 23,347
186,029
22,911
102,970
261,658
32,759
160,908
- 31,406
- 3,578
- 75,629
- 9,848
- 16.9
- 15.6
- 28.9
- 30.1
- 57,938
- 19.1
- 36.0
$311,910
$455,324
$ 54,630
$143,414
- 17.5%
- 31.5%
$ 39,205
$ 47,264
$ 54,614
115,418
138,765
154,623
19,333
83,324
$257,280
- 19,646
Office of the Secretary of the Treasury, Division of Research and Statistics.
- 16.8
- 33.0
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.
61
CONFIDENT
UNITED STATES SAVINGS BONDS
Daily Sales - April, 1942
On Basis of Issue Price
(In thousands of dollars)
Post Office
Date
All Bond Sales
Bank Bond Sales
Bond Sales
Series E
Series E
Series F
Series G
Total
Series E
Series F
Series G
Total
$ 2,476
$ 10,517
$ 2,380
$ 9,608
$ 22,504
$ 12,993
$ 2,380
$ 9,608
$ 24,980
2,999
3,222
2,778
8,264
7.572
9,292
2,119
1,185
1,387
7.570
6,235
5.334
17,953
14,992
16,013
11,263
10,794
12,070
2,119
1,185
1,387
7.570
6,235
5,334
20,953
18,214
18,790
4,961
2,958
2,309
2,906
2,730
2,150
13,035
5,722
9,610
9,304
8,052
5,224
2,329
23,391
15,539
17,314
15,974
14,885
8,613
17,996
8,680
11,919
12,210
10,782
7,374
2,329
668
8,027
8,983
6,562
5,715
5,261
2,720
668
8,027
8,983
6,562
5.715
5,261
2,720
28,352
18,497
19,623
18,880
17,615
10,762
4,619
2,513
2,584
17,572
6,152
5,102
2,432
1,076
1,251
8,604
3,333
5,374
28,609
10,561
11,728
22,192
8,665
7,686
2,432
1,076
1,251
8,604
3,333
5.374
33,228
13,074
14,312
$ 39,205
$115,418
$ 19,333
$ 83,324
$218,075
$154,623
$ 19,333
$ 83,324
$257,280
April 1942
1
2
34
6
7
8
9
10
11
13
14
15
Total
834
1,142
955
1,573
834
1,142
955
1,573
Office of the Secretary of the Treasury, Division of Research and Statistics.
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.
April 16, 1942.
62
April 16, 1942
5:05 p.m.
HMJr:
Ted
Gamble:
HMJr:
What's this thing with the Post Office and
Detroit, you know, and that business?
Yes. Do you want the whole story on it?
Well, no, I just wanted
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
G:
General Motors.
HMJr:
Yeah.
And Frank's complaint is - 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
G:
do.
HMJr:
I see.
G:
We were trying to get a little bit more information 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.
Yes.
G:
HMJr:
So he'11 see you before he goes.
G:
Fine.
HMJr:
But
G:
HMJr:
But I think this is 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.
All right.
63
2G:
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:
G:
That's right.
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:
G:
Good.
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
TO
Secretary's files
FROM
Ferdinand Kuhn, Jr.
April 16, 1942
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 calling 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.
Thkin car of Per Kuhn- 4/16/42
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 me to make another
try let me know.
Joseph Gaer
67
approx 4/16(42
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 was organised as a service agency. It had two main objec-
tives: One was to minister to the religious interests of Jewish soldiers;
the other, and by far the meet important, was to help supply recreational
and social needs of all mon in uniferm.
When the war was over, the Jewish Welfare Board became the
parent organization of the Young Men's and Young Women's Hebrew Associa-
tions 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 duties. It joined hands with other organisations through the USO and partakes to the limits of its facilities
and abilities in making all servicemen -- soldier and sailer, marine
1.
68
and aviator -- feel at home wherever they are.
The services of this Board, in a sense, reflect the essen-
tial unity of our nation in time of emergency. In time of peace the
Board is concerned primarily with Jewish problems and aurtures the
spiritual strength of our youth. Through various activities it stimulates pride in our great moral heritage and encourages the achievement
is 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 utmost for our military forces in recognition of the fact
that the sacrifices we civilians must make in the war effort pale into 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 organization is our nation
during peacetime creates precisely that unity which we find now in the
2.
69
war effort. Net in spite of, but because of -- bedause of the freedoms we all enjoy to develop our spiritual differences in peacetime we stand welded together in this emergency. The Jegish Welfare Board
takes its place among the service agencies in the same way and in the
same spirit as our soldiers and sailers are taking their posts to
meet the enery 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 no NonJews, there are no whites and there are no negrees, there are no Slavs
and there are no Nordice. 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.
70
APR 16 1942
My dear Mr. Robertson:
This is 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 enforcement 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 Department has conducted spot checks from time to time to
ascertain whether organizations claiming exemption were
properly entitled thereto, such a method has obvious
disadvantages. Considerable study was therefore given
to the feasibility of developing a more systematic
71
-2method of checking upon the organizations claiming exemption 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 requirement of annual returns at the start to those subdivisions 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 organisation is operated exclusively
for educational or charitable purposes (section 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
72
-3recreation (section 101(9)), than whether the organiza-
tion is a fraternal beneficiary society, a labor organization 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 as to some
of the subdivisions or organizations by requiring returns
at less frequent intervals than a 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.
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.
his
ofSSS:hdr
gun
is
4-14-42
TO:
Mis Herty 74
The letter
lnks okto
me I have
initials Mr.
C
FROM: MR. GASTON
75
DEFENSE SAVINGS STAFF
709 12th St. N.W.
G
ROUTING SLIP
For Immediate Action ( ) For Files
) Please Return
For Your Attention
)
( ) Prepare Reply
Mr. Adad
D. W. Bell
Mr. Chas. Bell
N.
Mr. Broughton
Mr. Buckley
Mr. Callahan
Miss Chauncey
Mr. Cole
Mr. Cox
Mr. Johnston, Gale F.
Mr. Johnston, Lyle
Mrs. Jones
Mr. Kilby
Mr. Kuhn
Mr. Mahan
Mr. G. F. Milton
Mr. Cunningham
Mr. Olney
Mr. Powel
Mrs. Ready
Mr. Duffus
Mrs. Russell
Mr. Edwards
Mrs. Evans
Mr. Schram
liss Finucane
(
Graves
Houghteling
Mr. Sloan
Mr. Sparks
Mr. Thompson
Mr. Arthur Wilson
Mrs. Klotz
Ress approved and
intisted
76
A. WILLIS ROBERTSON
COMMITTEE
SEVENTH VISA DISTRICT
WAYS AND MEANS
CHAIRMAN SELECT CONSERVATION
COMMITTEE
Congress of the United States
House of Representatives
Washington, 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.
Dinner Cordially
yours Dervicion
A. Willis Robertson.
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 way 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.
78
-2The 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 silver on such basis and engaged in further discussion with
representatives of the War Production Board and the Defense Plant Corporation.
If you do not think that the Defense Plant Corporation should enter into such an arrangement, I believe
promptly
you should notify the War Production Board, 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 am
sending a copy of this letter and your letter to me,
79
to Donald Nelson.
Very truly yours,
the YES
Secretary of the Treasury.
The Honorable,
The Secretary of Commerce.
EHF: kfa 4-16-42
the
is
2
International
nmc,
Copies to Foley
4/16
80
APR 16 1942
Dear Donald:
In connection with the proposal to use the free
silver stocks of the Treasury in liew.of copper for bus
bars and other purposes, I am enclosing for your inform-
ation copy of a 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,
(STATE) N. with
Secretary of the Treasury.
Hon. Donald M. Nelson,
Chairman,
Bar Production Board,
Washington, D. C.
BB:EHF:vls - 4/16/42
N.3.C.
copies to toley
for whites
1451
81
OF
DEPARTMENT OF THE INTERIOR
DEPARTMENT THE SECURITY
INFORMATION SERVICE
OFFICE OF PETROLEUM COORDINATOR
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 C1vilian 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 extent 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 is 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 a tank ship makes an ocean voyage. Mini-
wizing
can make.of non-essential consumption will be a major contribution that the public
"We are sure the American people prefer to see their own bombers in the air
to unnecessary use of their cars."
P.N. 185119
82
APR 16 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 following which may be used as a background in the event you
decide to call in and question Monnet.
A letter written by Hess, President of American 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, Rotterdan _sic --
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,
to it.
did not dispute this statement and made no reference
You will recall that Murnane became a director
of American Bosch Corporation in 1935 and Chairman of the
Board in 1937. Shortly after Murnane had reorganized
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 a voting trustee of the Swedish interests of American
Bosch (approximately 70% of the voting stock).
83
-2In early 1940 American Bosch failed in its
efforts to obtain Army contracts because of its German
connections. Hess turned to Batt for advice and as-
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:
Batt.
a. The relationship between Murnane and
b. What Monnet knows about German interests in American Bosch, both at the time when
Murnane became a director in 1935 and the
present time.
C. Conversations with Murnane or Batt
concerning German interests in American Bosch.
(Initialed) E. H. F., Jr.
MQ:EHF:vls - 4/14/42
84
Personal and
Confidential.
April 16, 1942.
The Honorable Harold L. Ickes,
Secretary of the Interior,
Washington, D.C.
My dear Mr. Secretary:
Our non have apparently reached a stalemate in the
matter involving bank transactions of Captain Torkild Rieber
in New 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 Lealie, Editor of The Protestant.
The Whitney National Bank of New Orleans reports that
Rieber never had an account there. Our men 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 photostats as are mentioned in Mr.
Lealie's letter. The F.B.I. office at New Orleans, however,
has recently had a tip similar to that given to us and is
understood to be pursuing an investigation.
The story 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 report 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 Port Arthur, Texas, was specifically mentioned as the final
recipient.
We have instituted a 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 a: transaction such as that described. We have, however,
learned the following facts: In April, 1941, Rieber invested
$7,500 in an interest in the Charleston Shipbuilding and Drydock
Company and in February, 1942, he became a director of the Southeastern Shipbuilding Corporation at Savannah, Georgia. Both
85
-2companies 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 competitive company.
I know you will understand that because of its source
all
of the above information is to be treated as entirely confidential.
Very truly yours,
(Signed) Herbert K Gaston
Herbert E. Gaston
Assistant Secretary of the Treasury.
86
April 14, 1942.
MEMORANDUM
TO:
FROM:
Secretary Morgenthau
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 a 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, a 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 a complete blank. Rieber has never had
a bank account with the Whitney National Bank. Transactions 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.
87
-2The alleged payment of $20,000 was first brought
to the attention of this Department by the Military Intelligence 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 was supposed to have occurred
at a 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 a memorandum dated August 19, 1940. (He was at that time referred 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 a summons being presented
by Special Agent Larry Smith of the Federal Bureau of
Investigation, as had been reported. He is not known at
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 requested 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 a cost of
$7,500. Mr. Rieber also told the agent that in February,
1942, he became a director of the Southeastern Shipbuilding 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 a 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 a 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 a bank, a railroad and a newspaper 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 a 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
89
-4agent 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 because of his long service and also in consideration
of
his not becoming affiliated with a competitive
company.
per
90
4/16
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
commodity
Total
April 5
to
April 11
Sunday
April 12
Monday
April 13
Tuesday
April 14
Wednesday
April 15
Brass
American Brass Co
Chase Brase & Copper Co
Revere Copper & Brass Co
513
75
39
58
176
Scovill Manufacturing Co
Wallingford Steel Co
58
92
36
97
35
16
Copper
American Brass Co
Anaconda Wire & Cable Co
19
24
Nickel
International Mickel Co
200
Steel
Alan Wood Steel Co
Allegheny Ludlum Steel Co
Armoo International Co
Bethlehem Steel Co
Brainerd Steel Co
Cold Metal Products Co
152
440
1,762
2,331
128
1,420
103
103
217
65
37
547
55
24
837
41
330
109
58
81
34
622
135
52
76
99
102
254
1,258
44
185
90
772
VRS
52
255
457
3,838
1,074
862
30
37
217
25
234
60
200
98
460
136
309
269
1,122
701
9
1
138
52
231
71
1,365
193
221
Electro Co
58
29
74
132
199
309
130
Vanadium Corp
Total
143
9
Youngstown Sheet & Tube Co
Miscellaneous
213
86
P Co
U. S. Steel Export Co
Universal Cyclops Co
Vulcan Crucible Co
Wallingford Steel Co
Weirton Steel Co
Wheeling Steel Corp
17
300
115
15
Newport Rolling Mills
Otis Steel Co
Seneca Steel Co
Sharon Steel Co
Superior Steel Co
Thomas Steel Co
Thompson Steel & Wire Co
Union Drawn Steel Co
154
50
Madison Wire Co.
McLouth Steel Co
National Tube Co
New England High Carbon Wire Co
Pitteburgh Steel Co
Renublic Steel Coro
365
94
50
Collyer Insulated Wire Co
Elliott Bros
Great Lakes Steel Corp
Inland Steel Co
Johnson Steel & Wire Co
Jones & Laughlin Steel Corp
Keystone Steel & Wire Co
405
144
56
18,952
Office of the Secretary of the Treasury,
Division of Research and Statistics.
Source: Procurement Division, Treasury Department.
1,576
2,268
4,205
2,949
April 16, 1942
91
STRICTLY CONFIDENTIAL
Bottom cargo for Russians sent from mills to Baltimore,
total April 5 to 11 and daily April 12 to 15, 1942
Name of company and
commodity
Tonnage
Total
April 5
to
April 11
Sunday
April 12
Monday
April 13
Tuesday
April 14
Wednesday
April 15
Brass
American Brass Co
Chase Brase & Copper Co
329
47
42
45
Steel
Allegheny Ludlum Steel Co
Armoo International Co
Bethlehem Steel Co
Blair Strip Steel Co
Brainerd Steel Co
Colonial Steel Co
Colorado Fuel & Iron Co
Great Lakes Steel Co
Inland Steel Co
Johnson Steel & Wire Co
Jones & Laughlin Steel Corp
Otis Steel Co
P & M Co
Republic Steel Co
John A. Roebling & Sons
Seneca Steel Co
Sharon Steel Co
Thomas Steel Co
U. S. Steel Export Co
Weirton Steel Co
Youngetown Sheet & Tube Co
11
116
334
70
19
141
96
23
50
33
33
731
1,010
548
226
247
45
92
339
167
448
643
689
44
25
3,342
293
51
3,830
253
33
54
37
194
71
35
59
25
2.736
644
1,310
50
431
334
106
710
491
285
35
819
297
2,573.
638
Miscellaneous
McKenna Metals Co
Total
353
15,478
Office of the Secretary of the Treasury,
Division of Research and Statistics.
Source: Procurement Division, Treasury Department.
684
2,148
April 16, 1942
92
STRICTLY CONFIDENTIAL
Bottom cargo for Russiane sent from mills to New York,
total April 5 to 11 and daily April 12 to 15, 1942
Tonnage
Total
to
April 11
Sunday
April 12
Monday
April 13
:
April 5
:
commodity
:
Name of company and
Tuesday
April 14
Wednesday
April 15
Brass
Phelpe Dodge Co
113
Iron
Oliver Iron Co
22
Steel
Armco International Co
Bethlehem Steel Co
Cold Metal Products Co
Crucible Steel Co
Great Lakes Steel Co
Halcomb Steel Co
Heppenstahl Co
Indiana Steel & Wire Co
Inland Steel Co
Jones & Laughlin Steel Corp
Otis Steel Co
P & M Co
Pittsburgh Steel Co
Republic Steel Co
Sheffield Steel Co
U. S. Steel Export Co
Washington Tin Plate Co
Weirton Steel Co
Wyckoff Drawn Steel Co
Youngstown Sheet & Tube Co
530
123
356
283
252
195
65
53
28
1,641
60
230
84
126
66
34
46
59
135
137
55
956
1,783
148
469
46
46
981
90
289
375
97
52
51
1,473
391
52
65
3,103
52
597
632
1,224
166
84
127
42
114
213
3,356
1,919
34
45
348
2,939
Miscellaneous
National Standard Co
Total
13,679
Office of the Secretary of the Treasury,
Division of Research and Statistics.
Source: Procurement Division, Treasury Department.
500
2,377
April 16, 1942