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183
November 17, 1943
MEMORANDIN FOR THE PRESIDENT
Policy on Land-Lesse and British Dollar Palences
On January 1, 1943, Messrs. Wallace, Ball, Stimson, Stettinius and
Bell (asting for Mr. Morgenthan), who formed the senior inter-agency
Committee on the Dollar Position of land-lease countries, submitted
the following recommendation to you which you approved
"It is recommended, in the light of present circumstances,
that the United Kingdom's gold and dollar balances should
not be permitted to be less than about $600 million nor
above about $1 billion.
The reasons supporting this decision were:
1. Land-lease countries should be allowed to maintain their gold
and dollar balances at a level consistent with their needs for
the vigorous prosecution of the war.
2. In the early discussions with the British they suggested that they
should have a Maining working balance of $600 million required to
met contingencies everywhere. This figure was made the "floor."
3. The $1 billion "eeiling" was a freesing of the states are since
on January 1 British balances were actually at about that level.
4. In your March 11, 1942 Report to Congress on Land-Lease Operations
you said:
"No items (1.0., for land-lease aid) are approved unless the
following conditions are not (e) the
land-lease
aid
re-
quested must not be obtainable, as a practical matter, by
payment therefor in American dollars or other currency available
to the requisitioning country."
5. In testifying on the Land-Lease Bill in January 1941 the Secretary
of the Treasury assured Congress that the British had only sufficient dollar exchange resources to pay for the goods already
ordered in this country. In this connection (with the full
approval of the British authorities) he told the Senate Committee:
184
-
"every dollar of property, real property or securities
that any English citizen owns in the United States, they
have agreed to sell during the next 12 months, in order
to raise the money to pay for the orders they have already
placed, they are going to sell - every dollar of it."
6. The liquid dollar assets of the British had risen from some
$350 thousand at the start of lend-lease to $1 billion on
January 1, 1943 - exclusive of very large holdings by South
Africa. Early in 1941 the Treasury Department, in cooperation
with the other agencies, had initiated and pressed for an increase in the scope of land-lease in order to relieve the
pressure on Britain's gold and dollar holdings, and later to
restore those balances to a level considered by the British
as necessary for working purposes. In accordance with that
policy a number of transactions were placed under lend-lease,
which otherwise would have had to be handled by the British
on a cash basis. Since the scope of lend-lease had been
increased in order to maintain and boost British balances,
it became necessary, when those balances continued to rise,
to consider whether a limit should be placed upon them.
*
*
Since January 1943 British balances have continued to rise, until
they are now at approximately $1.6 billion, or $600 million more
than the top figure set at the beginning of the year. In May the
Treasury initiated discussions with the British for raw materials
as reciprocal aid. It was originally expected that between
$200-$300 million would be received in this way. However, the
negotiations have taken a long time, major parts of the Empire
have still not agreed, and even twelve months from now it is not
believed that the Foreign Economic Administration will have received
raw materials from the British Empire much in excess of $100 million.
British Investments in the United States
of the estimated $1.5 billion of American investments owned by residents of the United Kingdom approximately $400 million have been
sold outright. $500 million were pledged against an RFC loan of
$390 million, which was later reduced by payment to $350 million.
Accordingly, the British still retain about $650 million of these
investments, with no strings on them, and another $450 million are
on deposit as collateral.
185
-3- -
Summary of Dollar Position
In summary the British foreign exchange position vis-a-vis the
United States - excluding the holdings of other parts of the Empire
vis-a-vis the United States, which have improved over the period has changed as follows:
Oct. 31,
Dec. 30,
1940
1943
(In millions)
Gold
Official dollar balances
Private dollar balances
Total liquid balances
$ 202
$ 975
54
615
305
320
561
1,910
U. S. securities
616
360
Direct and miscellaneous
investments in U.S.
900
Deduct collateral pledged to RFC
-
Total U.S. investments (net) $1,516
785
- 500
$ 645
186
-4The British Argument
The British oppose any effort by the United States to narrow the
scope of lend-lease aid, in order to prevent the increase in British
gold and dollar holdings. They point out that foreign countries
hold approximately $7 billion of short-term claims on sterling, that
these sterling balances owned outside England are increasing three
or four times faster than the British balance of gold and dollars,
that accordingly their international financial position is worsening,
and that they need all the gold and dollars they are accumulating.
Furthermore, they assert that of the $1.6 billion holdings, $365
million must be deducted because of specific gold and dollar payment
obligations to foreign countries.
There is no doubt that these mounting sterling obligations of the
British constitute a serious financial problem especially for the
post-war. The policy problem is whether the scope of lend-lease to
the British should be kept as wide as it now is for the purpose of
enabling the British to keep a growing reserve against obligations
to foreign countries, which the British do not intend to meet until
the post-war. A further consideration is that most of the shortterm obligations owed by the British fall under two heads:
1. Many were accumulated before the U. S. extended lendlease aid; and
2. Most of those contracted since lend-lease are owed to
British Empire countries.
It is recognised that in all probability Britain can make no better
deals with the Dominions and with India than to pay in sterling or
sell their securities back to them. But it must also be recognised
that the essence of the British position is that the scope of U. S.
lend-lease should be kept wide in order to compensate for monetary
payments made to the Empire.
Recommendations
The considerations which prompted the President's directive of
January 1, 1943, are still sound, and require action to curtail
the scope of lend-lease aid to the British, unless Congress is in-
formed of the situation and agrees to a more generous policy.
1. It is therefore proposed to have the British pay for a larger
proportion of civilian goods obtained in this country.
2. In particular, it is proposed to discontinue certain transactions
which would never have been undertaken except for Britain's acute
shortage of dollars, and which experience has shown are opposed
187
-by considerable sections of opinion in this country. Among the
transactions which it is proposed to out are: (a) long-term
capital installations; (b) off-shore purchases such as Iceland
fish, Caribbean sugar, and oil from outside the U. S. (c) civilian goods to the Middle East; (d) all goods to South Africa
(which is well off financially); (a) small requisitions (which
are a nuisance); (f) certain other controversial civilian items.
If you approve will you please indicate below:
FCoe:icn
11/17/43
188
NOV 18 1943
My dear Admiral Leahy:
The U. S. Treasury has been requested by the
Government of India to grant its immediate approval
for the lend-leasing of 100 million ounces of silver
to the Government of India. The Government of India
has indicated that this silver will be used for antiinflationary purposes.
The U. S. Treasury has been studying the situation
in India and believes that the use of this silver may
be of assistance to the Government of India in its
efforts to cope with the difficult problem of inflation.
However, since India is a base for military operations
in Eastern Asia and since the Government of India has
given military necessity as one of its principal arguments for the lend-leasing of this silver, I feel that
the Combined Chiefs of Staff may have an interest in
this matter.
Therefore, I would appreciate if the Combined
Chiefs of Staff would take under consideration the
question of whether or not the importance of granting
this request from a military point of view outweighs
the financial considerations Involved.
If the Combined Chiefs of Staff feel that this
matter is of concern to it, I would be pleased to
receive its opinion as to the desirability of acquiescing to the Government of India's request.
Sincerely yours,
(Signed) H. Morgenthau, Jr.
Secretary of the Tressury
Admiral William D. Leahy,
Chief of Staff to the Commander
in Chief of the U. S. Army and Navy,
Washington, D. C.
Hew/ISH/efs 11/18/43
183
November 16, 1943
TO:
Dr. White
FROM:
The Secretary
I wish you could either take it up with
the Combined Chiefs of Staff or prepare a letter
for me to write to Admiral Leahy explaining to
Admiral Leahy that we have been asked for this
100 million ounces of silver for India and does
it mean anything to the Combined Chiefs of Staff
that we make this loan to India and also explain
to them that I am asking for this information be-
cause I could use it, if it is favorable, when I
appear before the Silver Committee in the Senate.
190
11/18/43
Reading copy of Secretary's address before
the Association of National Advertisers in
New York City. .
191
GENTLEMEN:
I am glad to have this opportunity tonight to talk
to the Nation's leading advertising people, because I
have confidence in the ability of advertising men to
bring the facts of the war to the American public. And
today, perhaps more than at any time since the war began,
there is a vital job to be done on that front.
The dangerous dream of a quick end to this war
grows more serious every day. It is particularly
pressing right now. On every hand we see a surge of
activity to prepare for post-war, sometimes at the
expense of the vital job at hand. The stock market
has been in a steady decline ever since word first got
around that the Nazis are about to crack.
192
-2The newspapers regularly report new signs of the coming
collapse of Germany. In Washington the exodus to
after-the-war jobs has started in earnest.
No one in Washington can give me any concrete
evidence that Germany is tottering on the brink of
capitulation -- and I have sought out practically
everyone who would have any reason to know. And I can
tell you that on the Italian front the Nazi troops
are not near cracking.
It is always possible, of course, that the people
on the Nazi Home Front will be unable to take the bad
news from Russia or the terrible destruction our bombs
are raining upon them.
193
-3But 1f the Nazi Home Front should crack, that
would be a wind-fall. In the meantime, we are only
playing Hitler's game when we see peace just around the
corner.
I am convinced, by the way, that the Nazis have
a proprietary interest in this wave of optimism.
The early signs of German collapse came from stories
printed in Nazi-controlled newspapers; then from
travelers out of Germany, who reported their
observations to neutral newspapers, chiefly those with
pro-Nazi tendencies. Finally, Hitler himself managed
to convey the impression in his most recent speech that
life in Germany 1s hell. I cannot think that he and
Mr. . Goebbels would be so tender about keeping us posted
of a coming crisis unless there is a rabbit in the hat
somewhere.
194
-4Those who hail an early crack-up of the German
nation have not talked to German prisoners, I can assure
you of that. I had some first-hand reports on the
state of mind of prisoners when I was in Italy. They
are mighty arrogant. They believe in Adolf Hitler, and
say the Russian campaign is the fault of the German
generals. They don't understand when you talk to
them about Democracy. They say: "What? A nation
without a Fuehrer? That is chaos !" Then if you
pursue the subject of their present leader, they may
admit he is not perfection -- but he will do very well
until they find another. And -- get this, gentlemen -they say their next Fuehrer will win the next great war.
So here they are -- these defeated prisoners -- already
planning another assault on civilization.
195
-5This is one reason why we must concentrate on
fighting the war right up to the last bitter day. There
is a good chance that letting down now can needlessly
prolong the war for weeks and months.
I was in Italy three weeks ago. I went with
General Mark Clark up to the front lines. I drove in
a jeep through the mountains to a spot within a mile
of the Nazi troops. I went through a small village -or what had, a few days before, been a village --
called Dragoni. It was still smouldering. American
bulldozers were busy clearing debris out of the streets
so that our supply trucks could get through; and at
one spot our Jeep had to climb high over a pile of
masonry and stones that the day before had been a public
building.
196
-6That was about all there was left of Dragoni -- that
huge pile of wreckage. It was the same in a half dozen
other small towns that we passed through. That happens
because the Nazis don't like fighting in the open.
They run from building to building, and Mark Clark's
Fifth Army or Jimmy Doolittle's planes simply have to
take the buildings down around them. It is, I can tell
you, a mighty slow and difficult process. When I
broadcast from Algiers, I pointed out some of the
difficulties of fighting over there. "I had no idea,
"
I said, "of the terrible terrain in this area over which
we must fight the Nazis. The area between Naples and
Rome is mountainous and thick with trees and follage.
197
-7It is ideal for defensive action, because the Nazi
forces can hide high in the mountains, and fire on
our forces without being seen. And when they are
driven from one mountain, they need only to retreat
a few hundred yards to another and it is the same
thing all over again. "
Since I left Dragoni, the Allied Armies have
managed to get fifteen miles closer to Rome. Five
bloody, hard-earned miles a week, that's all. But
it isn't the fault of our fighting men. They are tough
and in the pink of condition. They've got what it takes
to lick the Nazis, man for man. The fact is that no
Army in the world could move any faster
almost a miracle if we are in Rome
198
-8And that's the picture on the Italian front while we,
back here, are congratulating ourselves on polishing off
the war in a hurry.
But even that's not the whole story.
The weather is closing in over there. Our troops
may be without air protection more of the time than
they will have it, and they tell me that air protection
is just about the most important single factor in
modern invasion.
I talked to General Doolittle about that in Tunis.
In his war room, lined with huge maps of the entire
Allied battle front, he showed me how aircraft are
dispatched almost on a moment's notice to any fighting
sector to take care of difficult enemy implacements
or stubborn resistance.
199
-9Just two days before I arrived in Tunis, Doolittle said,
some of the forces in Italy were caught in what might
have been a serious trap had it not been for the medium
bombers called to the scene.
In an hour or two the bombers had done a job
that would have been next to impossible without them -and certainly would have meant heavy, bloody losses !
This was only one case that Doolittle pointed out
where a temporary setback had been turned, through
immediate air support, into a victory.
200
- 10 -
But now the winter is here, and the weather is
closing in. Jimmy Doolittle and Air-Marshal Tedder cannot
send airplanes anywhere, at any time, on a moment's
notice, as they did this summer. Is there any promise
of early peace about that?
Or, can you find hope of quick victory in the fact
that the Allies have still not crossed that narrow ditch
called the English Channel, for the simple reason that
the other side is lined solidly with sudden death?
Can anyone really think it is going to be easy to bring
Germany to her knees in unconditional surrender while her
troops are planted within gunshot of Great Britain?
201
- 11 But because the Nazis promise, through their
propaganda bureau, to fold up; and because we'd like to
get on with the peace, too many of us are getting eager
to sidetrack the main job.
Personally, I think it is serious enough to call
for somebody to do something; and I came here tonight
because I think you advertisers and advertising people
who are already using your talents and facilities and
genius to make the American people understand many of
the facts of war, can do still more.
I asked your help once before. Representatives of
your group came to Washington a year ago and I told them,
1f I recall correctly, that we were faced with the biggest
selling job in history with practically no precedent
to go on.
202
- 12 -
Through your War Advertising Council, you secured
the volunteer help of the ablest advertising people
in the United States and the cooperation of advertisers
and media, and went to work. I think everyone knows
what a splendid job has been done.
During the Third War Loan, advertisers sponsored
89,000 advertisements in the daily newspapers -- a total
61,000,000
of 61,573,588 lines, at a cost to themselves of more
than six and one-half million dollars. Two-thirds
of the advertisements were prepared by the advertisers
themselves, and one-third were prepared for us by the
War Advertising Council.
203
- 13 -
Throughout the Drive, I am told, practically all
of the 10,000 weeklies carried advertisements which were
paid for by one or more local businesses.
In daily and weekly newspapers, business supported
the campaign with more than eight and one-half million
dollars worth of space.
On the radio you did a magnificent job. The
National Association of Broadcasters tells me
3,382 hours of radio time and 200,000 announcements
is
(valued at $12,000,000) carried Third War Loan messages
to the public, throughout the days and nights of the
Drive.
204
- 14 Through the Allocation Plan and additionally
contributed time, advertisers played a most important
part. You gave us the use of your best radio audiences.
At least $3,000,000 in magazine space was provided
by advertisers and the magazines themselves. 250 general
magazines, 50 farm journals and 450 business and trade
magazines each contributed a full page.
Advertisers and the Outdoor Industry provided by
all odds the most expansive outdoor showing of all
time. I am told this had a value of $1,700,000.
This 3-week campaign, provided by advertisers,
would have cost a commercial advertiser $30,000,000 --
10 million dollars a week :
205
- 15 A National survey made afterward revealed that 90%
of the people in the country knew about the Bond Drive,
and understood that extra Bond purchases were the
measurement of participation. This was an important
contribution, for in previous Drives, too much of the
public took the position that "They don't mean me "
You see, therefore, something of the job advertising
has done.
You may be interested to know that my experience
with advertising in connection with this war started
even before the War Loans.
206
- 16 It started back in the days when those of us who
felt that an attack on the United States was inevitable,
were trying to get the country ready to defend our
shores against any aggressor. Our biggest job was
trying to make the people see that, as the President said,
we couldn't simply climb into bed and pull the covers
over our heads.
In those days -- about four years ago -- Gallup polls
pointed out that 92% of all Democrats and 94% of all
Republicans were saying that we simply should not fight.
Yet steps had to be taken to protect ourselves -steps that worried some Americans because they thought
we were inviting war, inviting war simply because we
admitted its approach.
207
- 17 But even then we had a good idea of Hitler's program.
We felt sure he intended to take Britain in the Spring
of 1941, and then join forces with Japan and go to work
on us in the fall. And we could not be sure that this
program would not succeed.
Today everyone everywhere agrees that we were
scheduled on the aggressors' program as much as Poland,
Czechoslovakia, or Britain. But things were different
then.
Even Dunkirk, and the Fall of France, did not
arouse the American people to a sense of the reality
of the danger ahead.
208
- 18 -
Here was the very moment when the light of
civilization in Europe came nearest to dying, perhaps
forever. The British were desperate. Their entire
future, their whole defense depended upon getting
materiel, and getting it quickly.
Winston Churchill had made it clear that equipment
losses at Dunkirk had been staggering. Britain needed
everything -- artillery, ammunition, aircraft, and
most of all rifles. Every able-bodied man in England
had to be prepared to fight off invasion, but in all
Britain there was only a handful of rifles for them,
and not much of anything else, and you can't stop Nazis
with sticks and stones.
209
- 19 The British needed help. Somehow, by some means,
we had to get them some rifles, and enough other
equipment to prepare them for the invasion which seemed
imminent -- and which, if it had been imminent, almost
certainly would have been successful.
General Marshall, and a group from the War and Navy
Departments, came several times to my office to discuss
what might be done. After twenty years of peace, we
had very little equipment of any sort to use in fighting
-
a war. But we felt that 1f we dug deeply enough we
could find some obsolete materiel, and perhaps some
equipment in private hands, that would help out. Before
long we found quite a collection of usable materiel.
210
- 20 For example, we found 500 old 75 millimeter guns,
and 400 Thompson sub-machine guns left over from the
last war. The Navy turned up 5000 obsolete 30-pound
bombs and the Army found 560 hundred pounders. Some
place, we found 80 out-of-date torpedoes, and someone
came up with 500 38 caliber revolvers which antedated
even the First World War.
To arm the British foot soldiers and the Home Guard,
we managed to dig up nearly a half million rifles. We
might have added to this several thousand more old
Springfield 30-30's, but there was no ammunition to
be found anywhere in the world, and the guns were no
good without bullets.
211
- 21 -
What was more important, we found that this
equipment could be sold legally to the British without
involving the American Government in an act of war.
When I look back over the last three or four
years, I think this meeting stands out above all else
in my mind, because the stakes were so great. I am
proud and happy to have had a hand in arranging for
this materiel to go to England in her darkest moment.
I shudder a little to think of our cast-off equipment
being thrown into battle against the Nazi's modern
machinery of war, but it was certainly better than nothing.
212
- 22 -
Britain was again armed, inefficient and meager though
the armament may have been, and civilization passed
a crisis. But it was a mighty narrow squeak.
It was back in these days when we were struggling
to make the public see what stark dangers lay ahead
that American advertising men first came to the aid
of their Government. It seemed obvious, at least to me,
that the American people were not getting the true
significance of the news reports. They did not see
the approaching danger. Something more positive had
to be done. That something, it seemed to me, was some
good, factual, hard-hitting advertising to help the
people see and feel what we were up against.
213
- 23 Not long after that, advertising began to appear.
It was bought and paid for by patriotic Americans who
took upon themselves the responsibility of making their
friends and neighbors aware of the situation. They
were written by some of you advertising men, I think,
who are here tonight. You were pioneers then. You
were pioneering the biggest job of public information
in history. And you were pioneering too in giving
advertising the dignity of social responsibility.
Obviously we could not continue indefinitely
to find antiquated guns and odd bits of equipment in
private hands for the British to buy and use.
214
- 24 The time had come to take drastic steps. We knew for
example that a few months later there would be a crisis
in the British Navy; that with the rising power of the
German Navy, Britain would have too few ships to defend
herself, let alone keep the invading Nazis in any kind
of check.
The public had to be made aware of this situation.
The majority of newspapers went to work on the problem
editorially and you prepared an advertising campaign
that helped achieve amazing results. That was only
three months after Dunkirk, but the Gallup box score
began to look much different than it had before.
215
- 25 Sixty per cent of the American people stood solidly
back of the President in transferring over-aged destroyers
to the British to help bolster their Navy. The people
were beginning to see.
A few months later there was another educational
job to be done. Nazi U boats were preventing our
shipping from reaching its destination. It became
necessary either to convoy our freighters or simply to
consign a good part of our materiel to Davy Jones.
To tell the public about this, you developed an advertising
campaign. I remember one of the advertisements. It was
headed, "Okay, Mr. President, go ahead and clear the
Atlantic." And again you were helped by many influential
editorial columns.
216
- 26 What the President was able to do in a fireside
chat, plus what you were able to do, gained the support
of a majority of American voters behind the idea of
arming and convoying our ships. Fifty-five per cent
of the people backed the decision, and only thirty-eight
per cent definitely opposed it. A few weeks before,
fifty per cent of the people had been definitely
against it and only forty-one per cent were willing to
see it done. Here again was a victory for the policy
of letting the people know the facts.
217
- 27 -
Public sentiment is much improved now. Today
the Nation is not only solidly behind the war, but has
gone on record as wishing to take on a big share of the
responsibility in helping keep the world peace through
world organization.
Much of this change was due to the Jap attack at
Pearl Harbor. But even while the Japs were pulling
their sneak attack, three out of every ten Americans
still felt that it was most important to stay out of
the European war.
The striking reversal of public sentiment from
narrow isolationism to a complete acceptance of
International responsibility is a monument to public
education.
218
- 28 And some of you who are here in this room, by writing
and financing advertising campaigns, had as much to do
with that education over a period of time as any other
group of people.
Since the early days, when most of the work was
done in spare time by patriotic volunteers you have
taken the war as your professional assignment. It is
no longer a spare time operation. You are applying
your best brains, and converting sizeable portions of
your appropriations to this war information job -- this
job which I want to repeat must be stepped up, not tapered
off, as we march toward Victory.
219
- 29 Some of this increased war information effort can
and should be channeled through bond advertising.
Promoting bonds, I feel, is a double-headed job. Half
the job is raising money, but the other half is
maintenance of interest in this war, and what it means
to every American.
We hit a high spot in this job, I believe, the day
the Third War Loan opened, which also was the day Italy
surrendered. I wondered what the effect would be on
the drive. I was not long finding out. One of our
State Chairmen called up and said: "Well, I guess
the Third War Loan is off -- the war's over and there's
no need to raise money "
220
- 30 So we called in the Advertising Council. I asked
them to write us an advertisement that would stop this
in its tracks. They went to work and in a few hours
produced what I think was a great advertisement. You
may remember it. It said: "Will the Surrender of Italy
mean a Home Front Defeat?" Then, because of the
smooth working arrangement between your people and
ours, the ad started running, the next day, in 970
newspapers throughout the Nation. We followed this up
=
by telling the people the bitter truth about our
equipment losses in Sicily. We must have had a
sobering effect on a lot of people, because we didn't
get any more phone calls, and that particular surge of
optimism soon faded away.
I want to make one more observation.
221
- 31 A year ago, I went to England. What I saw there
gave me a lot of inspiration, and a lot of confidence
about the outcome of this war. I came back knowing
in my heart that we were going to win. The British
had survived the Blitz; the Russians had stopped the
German advance; we had halted the Jap drive in the
Far East. Slowly and painfully the Allies were overtaking
the enemy's lead. Obviously, it would take a long time,
but in the end we would win.
When I returned from the front early this month,
I still felt sure we would win, but I felt far more grim
about the war than I did a year ago.
222
- 32 I had an opportunity to discuss the actual fighting
and the nature of our enemy with many American and
British officers and men. I was given a pretty clear
idea of the heroism required of our men when they face
the tough, fanatic Nazis, and as a result I achieved a
healthy respect for the blood and sweat that goes into
every foot of enemy ground we take. And I found no
evidence anywhere along the line that we are near the
end, unless the end should come through some freak
of circumstance.
I do not want to underestimate, however, the
effects that the terrible defeats in Russia, or the
destruction of Germany from the air, must have on the
Nazi Home Front.
223
- 33 -
That destruction must be fantastic. In Italy I saw what
bombs can do. I saw the Port of Naples, lying in a
mass of ruins. I saw the Port of Palermo in Sicily
battered so badly that one sizeable ship lay high and
dry on a wharf, blown completely out of the water. But
General Patton assured me that Palermo was only three
or four per cent destroyed. Hamburg has been seventy
per cent destroyed, the Germans themselves admit, and
several other Nazi cities have received even more
destruction.
Yes, it is conceivable that the Germans can't take
it. It is possible that the same thing will happen
that happened the last time. We may be awakened some
morning by whistles and bells and newspaper boys selling
extras.
224
- 34 -
-
But it is also possible that we can waste a great
deal of precious time thinking about that morning, and
we can divert a great deal of our energy into making
ready for it, and then find that it shows no signs
of coming. And in the meantime, good American young men
are losing their lives trying to end the war the hard
way, because they have no choice except to do it that
way, or not at all.
I am glad that you and I have been partners so
often in the use of advertising in connection with this
war. I have told you the whole story. I have enjoyed
working with you.
225
- 35 -
You have established a remarkable record. By
concentrating on the job to be done, and casting aside
all thought of political differences, you have
immeasurably improved the stature of advertising.
But this is no funeral oration. Your job is
barely begun. And the job is going to get more difficult
every week, and every month, that the war wears on.
Because we are going to get tired. Everybody is going
to get tired. We are going to want peace and relief from
the restrictions that war puts on what we do, and what
we eat, and what we have.
226
- 36 -
Pouse Unconditional surrender is a large order, and
there may be a temptation to settle for less as the
possibility of peace approaches. I hope you will
remember that. I hope you will put your minds to doing
something about it, and thus continue the patriotic
record that some of you started back in those early
days of Defense.
=
End
227
NOV 18 1943
My dear Senstors
I have your letter of November 15. concerning deductions
made from salaries of Federal employees for the purchase of
War Savings Bonds.
There has been no deviation from the voluntary policy
established by the Treasury Department and the President's
Interdepartmental War Savings Bond Committee when the Pay-
roll Savings Plan was first established in the various Federal
departments and agencies.
At the beginning of the program, we adopted as an over-all
objective a goal of "At Least 10% of gross pay rolls for both
Government employees and those in industry. More recently, a
program has been adopted in which employees are asked to figure
out for themselves the greatest possible amount they can afford
to invest in War Savings Bonds. This policy has been adopted
not only because the investing of money in War Bonds reduces
the danger of inflation, but also because such an investment
forms a backlog of financial security for the employees for
post-var use.
The extent to which different individuals can participate
varies according to circumstances and each person must be the
judge of his own ability to enroll in the plan. The fact that
an employee does not feel financially able to allot as much as
10% of his income is no reflection upon his willingness to support
the Government in its time of need. At the beginning of the Payroll Savings Plan, it was recognised that some employees would
not be able to invest anything at all, and others could not
invest as such as ten per cent. Because of this, a policy was
adopted of encouraging the higher-salaried personnel to invest
more than 10% of their income in order to meet the Government's
over-all objective. Incidentally, some of these percentages
for officials in the higher grades run up as high as 15% and
20%
If any information has come to your attention indicating
that the Pay-roll Savings Plan in any agency is not being conducted on a truly voluntary basis, I would be glad if you would
call the cases to my attention in order that the Chairman of
the Interdepartmental Committee may have an opportunity to
investigate them.
228
-2I appreciate the interest which you have taken in this
matter, and want to assure you that it is far from my desire
to have any employee feel that the Pay-roll Savings Plan is
in any way compulsory.
Very truly yours,
(Signed) H. Morgenthan, Jr.
Secretary of the Treasury
Honorable Robert R. Reynolds
United States Senate
Washington, D.C.
KFB:hbw 11/18/43
229
CABOT LODGE
REVERCOME
United States Senate
COMMITTEE ON MILITARY AFFAIRS
November 15, 1943.
Hon. Henry Morgenthau, Jr.,
Secretary o: the Treasury,
Treasury Department,
Washington, D. C.
My dear Mr. Secretary:
Recently a number of government employees in the smaller
wage soale bracket have communicated with me concerning the recently
announced policy of forced deductions for the purchase of victory
bonds. I realize that in the months past the sale of bonds and the
contributions on the part of government employees has been entirely
on a voluntary basis.
I am frank to say that it is my honest opinion that the
average government clerk is willing and only too glad to purchase
the maximum amount of bonds possible. It does not seem to me to be
either practicable or advisable to adopt any forced plan of purchase
due to the fact that the living costs in Washington have pyramided,
and this coupled with the every day necessities that must be taken
care of by the average employee makes it a physical impossibility
for many of these government clerks to continue even a normal standard
of living, particularly if this 10 deduction is forced upon them.
I trust you will submit this matter to your associates who
have charge of the bond selling section with a view to seeing that
some kind of adjustment is made so that hardships will not be worked
on many of the employees in individual cases. 1 would be glad to
hear from you concerning your reaction to this very important matter.
Singerely yours,
Robert R. Reynolds,
rrr/mw
230
UNITED STATES DEPARTMENT OF AGRICULTURE
BUREAU OF AGRICULTURAL ECONOMICS
WASHINGTON 25. D. C.
industry No. 5.
November 18, 1943
The Honorable
The Secretary of the Treasury
Dear Mr. Secretary:
It occurred to me that you might be interested in
having a copy of the charts we discussed at the recent
conference of the State Chairmen of the War Finance
Division. These charts present the major findings of our
preliminary analysis of the data obtained in our study of
the Third War Loan Drive.
Respectfully yours,
Rensis Liker
Rensis Likert, Head
Division of Program Surveys
Enclosure
PORVICTORY
BUY
STATES
HATES
BONDS
STAMPS
November 9. 1943
Division of Program Surveys, B. A. E.
Treasury Department made by
Based on a study for the
of the War Finance Division
Charts Discussed at the National Conference of State Chairmen
THE T HIRD WAR LOAN DRIVE
AN APPRAISAL OF
How Many Were AWARE of the Campaign ?
NONFARM PEOPLE
Did not
Knew of
National
Knew only
of Local
know of
Drive
Drive
Drive
12%
2ND Drive.
4
3RD Drive
FARM PEOPLE
2ND Drive.
3RD Drive
20%
11% 16%
Of All Gainfully Employed in the Country,
How many BOUGHT EXTRA BONDS in the
2ND and 3RD Drive ?
2ND Drive
3RD Drive
Those
Those
Who
Who
Bought
Didn't Buy
20%
80%
38%
62%
Comparison of Estimated and Actual
Sale of "E" Bonds During the 3RD Drive
Farm Sale
Nonfarm Sale
Extra purchases of
people we talked to. $17,831
We sampled 1 person in 59,300
Thus: $17,831
59,300
= $1,057,400,000
Extra purchases of
farmers we talked to. $6,337
We sampled 1 farmer in 52,000
Thus: $6,337
52,000
= $329,500,000
Total estimated sales of extra
"E" bonds (exclusive of sales
to men in service)
Estimated usual sale of "E" bonds
Estimated total sales
Actual total sales (including men
in service)
$1,387,000,000
992,000,000
$2,379,000,000
$2,472,000,000
How Many People in Different Groups INCREASED
Their BOND BUYING During the Drives ?
Increased
2ND Drive
FARMERS
Didn't
Increase
82%
61%
3RD Drive
PEOPLE ON 2ND Drive
PAYROLL
DEDUCTION 3RD Drive
74%
2ND Drive
76%
OTHERS
I
TOTAL
3RD Drive
2ND Drive
3RD Drive
68%
80%
62%
What REASONS Did People Give
For NOT BUYING in the Drives ?
Of Those Who
Didn't Buy
58%
2ND Drive
80%
3RD Drive
2ND Drive
Said they were
doing their share
21%
Didn't know there
was a special drive
3RD Drive
2ND Drive
3RD Drive
afford to buy
21%
3RD Drive
2ND Drive
Said they couldn't
1%
Had to make
a tax payment
What Types of PROMOTION Do People
Remember FAVORABLY?
Radio
Gifts,
Farm
Admissions
Nonfarm
Rallies,
Booths,
Etc.
Personal
Solicittation
Quotas
15%
Farm
Nonfarm
Posters &
Slogans
8%
Farm
Newspaper
Nonfarm
8%
Farm
2%
Nonfarm
Publicity
4%
1%
4%
1%
2%
Movies
3%
1%
Nothing in Particular
Farm
Nonform
Given
1%
55%
In Talking About the 3RD Drive How Many People
Spontaneously Mentioned NATIONAL and
LOCAL QUOTAS ?
Mentioned National Quota
Farm
Nonform
15%
Mentioned Local Quota
Farm
Nonform
30%
TOTAL POPULATION
Mentioned National or Local Quota
2ND Drive
3RD Drive
55%
How Effective was the QUOTA
of an EXTRA $100 BOND in 3RD Drive ?
Heard they
should buy one
12%
Of These
Farm
1
Bought one
22%
Nonform
Heard they
should buy one
Of These
Bought one
* Includes those whose wives were solicited
Didn't Buy Extra Bonds
Didn't Buy Extra Bonds
88%
53%
Bought Extra Bonds
Bought Extra Bonds
47%
12%
Of These:
Of These:
Not Solicited
Solicited
75%
25%
in 2ND Drive ?
How Many Were PERSONALLY ASKED to Buy
Of All Gainfully Employed in the Country,
241
Of All Gainfully Employed in the Country,
How Many Were PERSONALLY ASKED* * to Buy
in 3RD Drive ?
50%
50%
Not Solicited
Solicited
<<
Of These:
Of These:
59%
17%
Bought Extra Bonds
41%
Bought Extra Bonds
83%
Didn't Buy Extra Bonds
Didn't Buy Extra Bonds
* Includes those whose wives were solicited
242
How Did the Effectiveness of SOLICITATION
Vary at Different INCOME LEVELS in 3RD Drive ?
Weekly Incomes
$0-35
Bought
38%
Were asked
All Buyers
42%
of These-
62%
$36-55.
9%
Weren't asked
of These
51%
Were asked
52%
of These--
49%
Weren't asked-
Were asked
36%
Weren't asked
37%
22%
of These-
64%
Over $55
22%
72%
of These
61%
40%
of These-
243
How Many People in the Different MARKETS
Bought as a Direct Result of Being SOLICITED
In 3RD Drive ?
55%
Farm
Market
Were Solicited
Of These
Bought as a
Direct Result
Were Solicited
54%
Payroll
Deduction
Market
Of These
Bought as a
Direct Result
Were Solicited
36%
Community
Market
&
45%
Of These
P
-e
Bought as a
Direct Result
244
In Counties Where More People BOUGHT,
More People Had Been SOLICITED
in 3RD Drive
Counties
Solicited
81%
Counties
9-18
I-4
Bought
Counties
Solicited
Solicited
47%
Bought.
56%
5-8
Counties
Solicited
34%
19-23
Bought
Bought
TOTAL COUNTRY
Solicited
50%
Solicited
3RD
2ND
Drive
Drive
Bought
Bought
25%
245
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE 11-18-+3
Secretary Morgenthau
TO
FROM
Mr. Haas
Subject: Current
Developments in the High-grade Security
Markets
I. High-grade Bond Prices Declined on Balance
During the last calendar week, prices of most Government securities either registered small declines or showed
no change at all from their levels of a week ago. Declines
of 1/32 were general among the medium-term taxable bonds,
while somewhat larger losses, ranging up to 5/32, were
registered by the medium- and long-term partially tax-exempt
issues. Short-term issues were firm.
Modest price recessions were general in the high-grade
corporate and municipal markets during the week. The
Treasury average of high-grade corporate bond yields
(moving inversely to prices) rose 2 basis points to close
on Saturday at 2.61 percent. The Dow-Jones yield index of
twenty municipals rose to 1.87 percent from 1.85 percent
at the end of the preceding week. The new issue market
was quiet, offerings in the New York market totaling only
$11.0 millions of which $4.5 millions were State and municipal securities.
II. Excess Reserves Show Little Change
At the close of business on Wednesday, November 10,
excess reserves of all member banks were $1,080 millions,
only $4 millions less than at the close of the previous
statement week. Principal factors which offset purchases
of $389 millions of Government securities by the Federal
Reserve System were increases of $160 millions in money in
circulation and $130 millions in required reserves due to
the growth of deposits subject to reserve requirements.
246
Secretary Morgenthau - 2
III. Treasury Bond Market Has Declined
Since Summer
Prices of intermediate and long-term taxable Treasury
bonds have declined from the highs reached early this summer, as shown in the table below. Although these declines
have not broken through the interest rate pattern, they
have resulted in a rather poor tone in the market.
November 13,
1943
:
:
1943
:
June 1,
Net
Change
(Decimals are thirty-seconds)
2 percent bond -
September 1950-52
100.25
100.16
-.09
March 1956-58
104.02
103.20
-.14
100.20
100.03
-.17
101.03
100.15
-.20
2-1/2 percent bond -
2-1/2 percent bond (restricted) - June 1964-69
2-1/2 percent bond September 1967-72
IV. Member Bank Earnings at High Since Bank
Holiday
Apparently fears that low interest rates on Government
securities available to banks would impair bank earnings
have been unjustified. The current Federal Reserve Bulletin
reports that member bank earnings, both gross and net, were
larger during the first six months of 1943 than during the
first half of any year since the Bank Holiday. The annual
rate of net profits on total capital accounts was 8.0 percent in the first half of 1943; as compared with 5.7 percent and
6.9 percent in the comparable periods of 1942 and 1941, respectively. Interest and dividends on securities exceeded
the amount of interest and discount on loans for the first
time in history although the average rate of return on
securities decreased.
V. Canadian Three-month Treasury Bill Rate
at All-time Low
The rate on Canadian three-month Treasury bills has
declined 10 basis points since the beginning of 1943, from
247
Secretary Morgenthau - 3
0.514 percent to 0.411 percent. The latter rate is an alltime low for this type of security in Canada and compares
with the war-time high of 0.925 percent on an issue dated
September 29, 1939. Since that time the rate has declined
steadily. The rate on the last issue prior to the outbreak
of the war in September 1939 was 0.683 percent.
VI. Preliminary Figures on the Canadian Fifth
Victory Loan
The most recently released statistics on the Canadian
Fifth Victory Loan, which ended November 6, show that total
subscriptions reported so far amount to $1,364 millions -14 percent above the $1,200 millions' objective of the loan.
This total, which it may be assumed will be revised upward
when final figures become available, compares with $1,309
millions raised in the Fourth Victory Loan, when the goal
was $1,100 millions.
Reported subscriptions of individuals (not including
those individuals capable of buying $25,000 or more of bonds)
totaled $587 millions -- 12 percent above the $525 millions
goal. In the preceding loan, individuals subscribed $530 millions, only 6 percent more than their quota of $500 millions.
248
78TH CONGRESS
HOUSE OF REPRESENTATIVES
REPORT
No. 871
1st Session
I
THE REVENUE BILL OF 1943
NOVEMBER 18, 1943.- Committed to the Committee of the Whole House on the
state of the Union and ordered to be printed
Mr. DOUGHTON, from the Committee on Ways and Means, submitted
the following
REPORT
[To accompany H. R. 3687
The Committee on Ways and Means to whom was referred the bill
(H. R. 3687) to provide revenue, and for other purposes, having had
the same under consideration, report it back to the House without
amendment and recommend that the bill do pass.
In preparing this tax bill, your committee has given consideration
to the following factors:
(1) The need for additional revenue.
(2) The inflationary problem.
(3) The present tax burden.
(4) The necessity for simplifying the present tax system.
(5) The possibility for economy in governmental expenditures.
(1) THE NEED FOR ADDITIONAL REVENUE
In the Statement by the President on the Summation of the 1944
Budget, released August 1. 1943, it was estimated that for the fiscal
year 1944 Federal expenditures, excluding debt retirement and trust
fund disbursements, would total $104,000,000,000. Of this amount,
$97,000,000,000 were war expenditures. The net receipts were estimated at $38,000,000,000 for the fiscal year 1944.
Based upon the figures for the first quarter of the current fiscal
year, Federal receipts are running at an annual rate of over $2,000,000,000 in excess of the revised Budget estimate of August 1, 1943,
while expenditures are $15,000,000,000 below. Although it is recognized that the receipts during the first quarter were increased somewhat by nonrecurring revenues, and that war expenditures may rise
above present levels, it seems probable that the changes from the
present level of revenues and expenditures necessary to bring the year's
final result into agreement with the August 1 Budget summation are
of so great magnitudes the deficit for the year may be reduced from
the Budget figure of $66,000,000,000 to not more than $57,000,000,000.
1
2
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
Therefore, from the revenue standpoint, the need for additional
revenues has apparently been exaggerated; and lower governmental
expenditures than estimated would reduce income payments, the net
inflationary gap, and pressure on prices.
If our expenditures reach no more than $96,000,000,000 they will
still be far greater than those of the United Kingdom and Canada.
(a) INDIVIDUAL INCOME-TAX RATES AND EXEMPTIONS
Our present individual income-tax rates and exemptions are as
follows:
1. Normal tax, 6 percent.
2. Surtax, 13 to 82 percent.
3. Exemptions for normal and surtax:
It is estimated that the total expenditures for the United Kingdom
will amount to $23,000,000,000 for the fiscal year 1944, while for
Canada the total expenditures for the fiscal year 1944 will amount
Single person, $500.
Married person, $1,200.
Credit for dependents, $350.
4. Gross Victory tax, 5 percent.
5. Victory tax exemptions, $624.
to $5,500,000,000.
Your committee gave serious consideration to the question of
reduction of governmental expenditures, so far as such reduction
would not interfere with the war effort. In this connection, the
Budget Director was called before the committee to explain the
present need for such large expenditures. It is believed that a
considerable reduction of expenditures below the estimate may be
accomplished through joint action of the legislative and executive
departments. This would lessen the tax burden which our citizens
6. Victory tax current credit:
(a) In the case of a single person, 25 percent of the
Victory tax or $500, whichever is the lesser
(b) In the case of a head of family, or married persons
filing one return, 40 percent of the Victory tax or $1,000,
are called upon to meet.
whichever is the lesser.
(e) For each dependent, 2 percent of the Victory tax
(2) THE INFLATIONARY PROBLEM
Your committee gave careful consideration to the inflationary gap
and its effect on price control.
It was found that while there was little variation among estimates of
total income payments to individuals for 1944, or among estimates of
the gross inflationary gap, after deduction of personal taxes and consumer expenditures, there were considerable differences among the
estimates furnished to the committee by official sources of the net
inflationary gap, after allowing for regular forms of savings such as
War bonds and life insurance and other noninflationary consumer
expenditures. These estimates of the net gap varied from about
$10,000,000,000 to over $25,000,000,000, depending upon the classification of savings between those temporarily and those permanently
or $100, whichever is the lesser.
(b) INDIVIDUAL INCOME TAX BURDEN
It is believed that so far as the individual income tax is concerned,
we are approaching the point of diminishing returns. Few persons
realize that under the existing law, with the carry-over of the 1942 tax
required to be paid in 1944 and in 1945, no individual, no matter how
high his income, will have left more than $25,000, assuming his income
remained constant and his uricanceled tax is paid out of current income
The following table illustrates this point:
TABLE 1.-Existing income-tox burden for 1944 and 1945, including net Victory tax
and one-half of unforgiven 1942 far (assuming NO change in net income)-Married
person, no dependents
set aside. Moreover, it was readily apparent that the current
inflationary gap is small in magnitude compared with the grand
total of more than $100,000,000,000 of accumulated savings in the
hands of individuals in the form of War Savings bonds, cash surrender value of life insurance, savings deposits, and idle currency and
demand deposits, of which $50,000,000,000 to $60,000,000,000 renresents potential excess buying power because this amount is clearly in
excess of normal savings.
The conclusion of the committee was that maintenance by the
Government of the proper psychology, and freedom from fear of
inflation, on the part of every consumer, is considerably more important than the absorption of current excess buying power through
additional taxes. The committee is firmly convinced that the proper
Income
Income.
Net income
before personal
exemption
net Victory,
and one-half
unforgiver
Effect
tive
rate
Income
Net income
remaining
after tax
before personal
expenditures, through effective price control, rationing, and wage
(3) THE PRESENT TAX BURDEN
Your committee has endeavored to raise as much revenue as it is
believed can reasonably be borne by the taxpayer at this time without
unduly disturbing our economy.
exemption
tax
net
unforgiv
0.213
$598
$20,000.
$15,000
$7.50
$30,000
$40,000
$1,000
$50,000
$1,200
$60,000
$70,000
$80,000
$00,000
$100,000
$150,000
$200,000
$350,000
$500,000
$7,000
$750,000
$8,000
1,000,000
$2,000,000
$10,000
$15,000
Income
rate
remaining
after tax
Percent
Percent
$600
Effect
tax
psychology can be maintained only by strict economy in governmental
control.
3
9,960.2
$5,000,000
Net Victory tax computed on gross Income equal to ten-ninths of net Income.
THE REVENUE BILL OF 1943
4
THE REVENUE BILL OF 1943
Other tables relating to the amount of unforgiven tax, and to the
5
1944 and 1945 tax burden in the case of a single person and a married
person with two dependents will be found in the Appendix, tables
TABLE 3-Married person, NO dependents
16, 17, and 18.
TAX PAYABLE IN TAXABLE YEARS
It will be noted from the above table that a married person with 8
$10,000 net income will have $7,264.38 left after Federal income taxes,
a $100,000 net income, $23,408.14 left after Federal income taxes; in
the case of á net income of $1,000,000 the total Federal income tax
Net Income before personal
Yearly
exemption
1936-39
1940
1941
1942
1943
1944
$1,200
$1,500
will exceed the net income by over $5,000.
The above table does not include the State income-tax burden. The
$1,800
$2,000
$2,500
following summary indicates the total Federal and State income-tax
$3,000
$5,000
$10,000
burden in selected cases:
III
$25,000
$50,000
$100,000
TABLE 2-Combined Federal and State income-tax burden, calendar year 1944,
married
North
Georgia
Carolina
Federal
and
Federal
$206
$2,000
$204
$5,000
$10,000.
$100,000
$1,000,000
New York
1,004,880
Wisconsin
and
and
and
Federal
Federal
Federal
AMOUNT OF INCREASE IN TAX
1
Net income before personal
1940 over
1943 ever
1942 over
exemption
1943 over
1943 over
1936-39
1940
1941
1942
1939
$206
$200
$209
$1,200
980
1,045
1.037
$1,500
2,872
2,913
76,771
2,914
$1,800
76,941
1,005
Minnesota
.
Net Income
$1,000,000
1,005,098
1,005,621
77,081
1,004,261
$21.1
$48.00
$22.80
$2,000
42.00
$2,000
$11.00
$3,000
22.80
$5,000
79.00
100.20
265.00
$10,000
It should be noted, in addition, that these figures do not include
social-security taxes, or Federal and State excise and sales taxes, or
State property taxes, all of which make the direct income tax more
burdensome.
In this connection, one feature in the recent development of American taxes, especially under the stress of war, has been the growing
reliance on direct taxes as against taxes on consumption. Not only
does the income tax put great emphasis on the total amount of taxes
that one must pay, but it exerts little restraint on the use of luxury
items. Significantly, Canada collects 32.4 percent of her taxes by
levies on consumption, and Great Britain 23.9 percent, while the
United States at the present collects only 18.8 percent in consumption
taxes, Federal, State, and Local. The proposed changes will lift this
percentage to 21.
This indicates that the burden of direct taxes on individuals has
been increasing too rapidly and without leaving sufficient time for
people to adjust their budgets to take care of this increased tax burden.
The increases in the individual income tax from the pre-war period
are shown in the following two tables. In addition to the rate
increases taxpayers have to make higher actual payments, while income is rising, as a result of paying on current income instead of the
past year's income. The following table shows the result of increases
since 1936 at certain income levels:
1944 over
1936-391
371.00
847.00
$25,000
1,354.4
$50,000
$100,000
3,020.00
6,310.00
007.40
$1,000,000
$39.60
9,277.0
14,970
4,889.00
11,356.00
121,446.00
4,524
45,000.00
219,956
Includes net Victory tax
Includes 1234 percent of unforgiven tax.
More complete tables showing rates of tax and the tax on a single
person, married person with no dependents, and a married person with
two dependents are given in the Appendix tables 19, 20, 21, and 22.
(c) PRESENT CORPORATE TAX BURDEN
Your committee has given careful consideration to the present tax
burden upon corporations It is recognized that the taxes which are
now being imposed directly upon corporations, and indirectly upon
the dividend income flowing to shareholders, are as high or higher
than those imposed by the other United Nations. It is vitally important that our corporations be kept in a sound financial condition
so that they may be able to convert to peacetime production and
provide employment for men leaving the armed forces after the war.
The following summary will show our existing corporate tax
burden:
L NORMAL TAX RATES
(a) Corporations with normal tax net incomes of not more than $50,000:
First $5,000
$5,000 to $20,000
$20,000 to $25,000
Percent
15
17
19
(b) Corporations with normal tax net incomes In excess of $25,000 and not
in excess of $50,000-$4,250 plus 31 percent of amount over $25,000.
(c) Corporations with normal tax net income over $50,000
24
THE REVENUE BILL OF 1943
6
THE REVENUE BILL OF 1943
11. BURTAX RATES
TABLE 5.->Income from pividends from domestic and foreign corporations by net
Percent
(a) Corporations with surtax net incomes of not more than $25,000
(b) Corporations with surtax net incomes in excess of $25,000 and not In
income classes (including fiduciary Continued
10
PERCENTAGE DISTRIBUTION
excess of $50,000-$2,500 plus 22 percent of the amount over
$25,000.
Net Income classes
(c) Corporations with surtax net incomes over $25,000
(d) Consolidated returns: Consolidated surtax net income, additional
1938
1939
1940
16
Under $1,000
2
3,000 $10,000.
10.000 825,000
III. EXCESS-PROFITS TAX
(a) Rate
90
(b) Specific exemption (85,000).
(e) Excess-profits credit:
$32.4
EIL
$29
14.4
$25,000 $50,000
$50,000 $100,000
19.8
$100,000 $150,000.
$150,000 $300,000
10.3
12.4
12.1
9.7
21
3.8
$300.000 $500.000
(1) Invested capital method:
4.3
21
$500.000 to $1,000,000
10
1,000,000 and over
First $5,000,000 of invested capital
1.5
20
22
100.0
100.0
8
$5,000,000 to $10,000,000
$10,000,000 to $200,000,000
7
Total
100.0
6
Over $200,000,000
5
(2) Income method: Portion of average earnings in base period
95
(d) Post-war credit of excess-profits tax
10
(e) Debt relief: Retirement of debt outstanding as of Sept. 1, 1942 (limited
to amount of post-war credit)
40
(f) Over-all tax limitation applied to surtax net income before being reduced by adjusted excess-profits net income
80
In spite of the fact that some corporations may have large profits
after taxes, the dividend record does not show large distributions,
in comparison with the dividends of corporations in the pre-war
years. The following table shows the net dividends paid by net
income corporations over several recent years:
1936
7
TABLE 4.-Net dividends paid 1936-44
1937
4,675,000
4,794,000
1938
3,155,000
1939
3,783,000
4,036,000
4,426,000
1940
1941
1942 (estimated)
1943 (estimated)
1944 (estimated)
The reduction in dividend distribution to the shareholders can in a
large measure be traced to the heavy taxes we are imposing upon
corporations. In this respect, our present burden upon dividends is
greater than that imposed in either Great Britain or Canada.
To get an accurate picture of this situation it is necessary to consider
both our corporate and individual burden with that of Great Britain
and Canada.
The peacetime normal rate in Canada was 15 percent This has
been raised to 40 percent except where the 100-percent excess-profits
tax is higher than 10 percent of the net income. In such a case, the
10-percent tax does not apply, thereby making the normal rate only
30 percent. The reason for not increasing the rate in the 1942 law
was explained by the Canadian Minister of Finance in his budget
message as follows:
I have given a good deal of consideration to various alternative means of in.
creasing the excess-profits tax. 1 believe that the increase should affect the tax
on excess profits rather than on profits that have not increased substantially over
pre-war levels. Already the tax on profits that have not increased is heavy when
we bear in mind that those profits when distributed as dividends are subject to
all the personal income taxes in addition to the corporation taxes, This involves,
in effect, a discrimination against income earned in the form of corporate profits
4,000,000
3,900,000
4,000,000
Source Treasury Department
It will be noted that in spite of the fact that some corporations
as distinct from other types of income, such as interest Some discrimination
than in the pre-war years of 1936 and 1937. It should be pointed
may be justified, but I believe we have already gone far enough in that direction
Consequently I propose to increase the rate of tax on excess profits but not the
flat rate of tax which applies to profits generally.
is distributed:
Furthermore, in Canada the Provinces have given up the income-tax
field for the duration of the war.
The British peacetime normal rate was 25 percent and this has been
have large profits, the dividend distributions are less in the aggregate
out that a large portion of dividends go to persons in the low income
groups. The following table indicates how the income from dividends
TABLE 5.-Income from dividends from domestic and foreign corporations by net
income classes (including fiduciary returns)
Net income classes
Under $5,000
$5,000 $10,000
1938
$799,373,000
354,126,000
$635,062,000
1940
$1,025,497,000
474,145,000
392,453,000
558,377,000
435,991,000
$25,000
$50,000
10,131,000
384,540,000
422,008,000
317,082,000
128,095,000
$100,000
$100 004 $150,000
150,000 $300,000
$30,000 $500,000
$500,000 $1,000,000
000,000 and over
Total
1939
54,581,000
36,511,000
38,890,000
2,461,881,000
295,218,000
107,611,000
118,102,000
58,210,000
56,860,000
58,647,000
2,865,080,000
608,740,000
139,419,000
68,464,000
50,443,000
72,703,000
3,268,442,000
raised to 50 percent. But dividends from British corporations are
not subject to a further normal tax in the hands of the British shareholder. Moreover, the British surtax does not apply to incomes of
individuals of less than $8,000, and the British shareholder will
receive a refund of the normal tax if his income is less than his exemption, which is $320 for a single person, $560 for a married person, and
$200 for each dependent.
Great Britain's 50-percent tax on corporations is regarded as the
individual's normal tax and when the individual pays tax on his
total income the 50-percent tax which has been paid by the corpora-
tion on his dividend income is deducted from the sum of the individual's tax; and if the individual owes no individual tax the whole
THE REVENUE BILL OF 1943
8
THE REVENUE BILL OF 1943
50-percent normal tax which the corporation paid will be refunded to
him by the Government. Moreover, in Great Britain, no State or
local income taxes are imposed.
Not only do high corporate normal and surtax rates affect the small
investor, but they also seriously curtail the normal income received
while postal revenue will be increased by $166,800,000. Total
Federal revenue, including net postal revenue, will be increased from
an estimated $41,341,200,000 under present law, to $43,480,500,000
under the committee bill. The above estimates do not include changes
in revenue resulting from the termination of governmental exemption
from certain excise taxes, as such changes in revenue will be completely
offset by changes in expenditures. The additional revenue under this
bill will make the Federal, State, and local tax burden in excess of
by charitable, religious, and educational institutions which is so
necessary for them to carry on their activities. Many of our educational
institutions have had their revenues severely curtailed through
war
activities.
$50,000,000,000 annually.
The curtailment of dividends will not be any great burden upon the
wealthy shareholder. If he is in the surtax bracketiabove $200,000,
the Government will, under present law, take at least 90 percent of
to a tax on comparable income from noninvestment sources of nearly
$50,000. In addition, many States impose corporation income taxes
which also lessen the amount available for dividend distributions.
Details of the revenue effects of the committee bill are shown in
the foHowing table:
TABLE 6 Estimated faz liability under the committee bill, as compared with the
tax liability under the present law, for a full year of operation I
,
every dollar of income above that amount On the other hand, a
shareholder in the lowest bracket will pay, under the existing law, a
tax, even after the post-war credit is taken into account, equivalent
9
(In millions of dollars)
General and special accounts and net postal revenue
Yield committee MII
Yield pres-
1944, Federal excise taxes are estimated to yield over $4,000,000,000,
exclusive of social-security taxes.
(c) PER CAPITA BURDEN
Total central and noncentral government lazes per capita 1943-44
United States
$357
291
United Kingdom
Canada
1. Internal revenue
(1) Income and excess-profits taxes
Corporation:
Income
Excess-profits tax
Declared value excess-profits tax
Total corporation (gross)
Less post-war credit
Total corporation (net)
Our State and local taxes yield approximately $10,000,000,000
When these are added to the Federal tax burden, we find that the total
taxes on a per capita basis are much higher than the per capita tax
burden in Great Britain or Canada This is shown by the following
table prepared by the Treasury Department:
261
(a) ESTIMATED REVENUE EFFECTS
-680
4,666.6
11,648.8
4,734.6
10,888.8
105.6
105.6
16,421.0
15,729.0
1,164.9
1,088.9
76.0
15,236.1
14,640.1
616.0
17,752.1
14,105.1
760.0
692.0
Individual
Net Income tax (gross)
Victory tax (gross)
Less post-war credit
Victory tax (net)
3,646.6
5,324.1
-5,224.2
-1,832
1,832 4
3,491.8
-3,491.8
17,732.1
17,597.3
154.8
33,008.2
32,237.4
770.8
Capital stock tax.
365.0
365.0
Estate tax
522.4
122.4
40.2
40.2
927.6
927.6
Total Individual
Total income and excest-profits
taxes
(2) Miscellaneous Internal revenue
Capital stock. estate and gift taxes
Gift tax
COMMITTEE PROPOSALS
Increase (+)
over yield
present law
(d) EXCISES
The existing law also imposes a long list of excise taxes. This has
been greatly increased since 1939. For the fiscal year ended June 30,
or (-)
Total capital stock. estate, and gift
taxes
Taxes on commodities and services:
Liquor taxes
Distilled spirits (domestic and
It is estimated that the committee bill will increase Federal revenues, including postal, by a total of $2,139,300,000, during a full
year of operation, at levels of income and business activity estimated
for the calendar year 1944. Income-tax receipts will be increased by
$770,800,000. of which corporation taxes will account for $616,000,000,
and individual income taxes for $154,800,000. Revenue from taxes
on commodities and services will be increased by $1,201,700,000,
imported (excise tax)
Fermented malt liquors
Rectification tax
1,106.2
735.2
$70.0
574:4
504.0
70.0
ILS
11.5
l'ines (domestic and Imported)
(excles 181)
54.6
36.6
11.0
11.0
9.4
9.4
18.0
Special taxes in connection with
liquor occupations
Container stamps
Floor-stooks taxes
All other
Total liquor taxes
Ege ectnotes at end of table
1.6
LE
1,767.9
1,309.9
458.0
THE REVENUE BILL OF 1943
10
THE REVENUE BILL OF 1943
TABLE 6. .Estimated for liability under the committee bill, as compared with the
tax liability under the present law, for a full year of operation -Continued
General and special accounts and net postal revenue
Yield com-
TABLE -Estimated tax liability under the committee bill, as compared with the
far liability under the present law, for a full year of operation Continued
Increase (+)
Yield pres-
mittee bill
or derease (-)
ent law
over yield of
Yield com
General and special accounts and net postal revenue
mittee bill
present law
Taxes commoditie and services Con
Tobacco taxes:
Cigarettes (small)*
892.8
Tobacco (chewing and smoking)
Cigars (large)
Snuff
45.0
31.7
31.7
7.0
7.0
1.3
1.3
Sugar tax.....
Coln-operated amusement and
Bowling alleys and billierd and
pool tables
977.9
977.9
Stock transfers
Playing cards
19.0
5,110.0
3,909.3
1,201.1
revenue
6,038.6
4,836.9
1,201.7
(3) Employment taxes
Employment by other than carriers
Federal Insurance Contributions Act
Federal Unemployment Tax Act
2,799.0
207.0
2,799.0
8,006.0
3,006.0
Total miscellaneous Internal
7.8
51.6
51.6
251.1
Total
54.3
Passenger automobiles and motor
Taxes on carriers and their employees
cycles
(chap. subchap. B of the
9
9
Automobile trucks, basses, and
3.5
Parts and accessories for auto-
Electric ESS. and all appliances
Electric light bulbs
Internal Revenue Code)
Total employment taxes
25.0
21.0
40.0
40.0
48.5
48.5
3.6
3.6
25.0
5.0
Total Internal revenue
20.0
3.5
3.5
Business and store machines
1.1
1.1
Photographic apparatus
Matches
2.8
2.8
11.9
11.9
10.5
10.5
Luggage
2.0
Local delivery letters
+25.9
+143.2
-86.0
-81.0
+00.4
-24.0
-17.9
+74.4
-8.3
-1.5
-4.5
+4.5
+6.5
+.9
+14.3
-6.7
-17.9
-1.
.
Registry
Insurance
+5.0
Collect delivery
15.0
8
72.5
38.2
54.8
Tollet preparations
86.4
35.0
Total retailers' excise taxes
51.4
Total net postal revenge
58.4
Total yield. general and special accounts, and
net postal revenue
399.5
102.4
170.0
121.2
Transportation oil by pipe line
of property
General admissions, etc
Cabarets,
dues and initiation fees
Leases safe deposit boxes
motor vehicles and boats
Coconut and other vegetable oils
processed
mated
14.5
etc.,
48.5
48.9
146.7
14.5
216.8
141.8
174.8
170.3
127.0
163.4
143.5
110.7
19.4
91.3
11.3
6.2
******
+175.4
48.6
+100 8
43,490.5
41,341.2
2,133.3
75.0
6.1
for
the
calendar
and
year 1944
do not
take
into
consideration
changes
which
are
completely
Collections for credit to trust funds are not included
These estimates are after allowances for drawbacks of $19.7 millions under the committee bill and of
$14.8 millions under present law.
Less than million.
The tax on luggage has been changed from . manufacturers' excise to retailers' excise tax.
. Includes collections from taxes on narcoties taxes under the National Firesrms Act; and the tax or
hydraulic mining, all of which are effective currently addition, colle from repealed
115.5
by the Revenue Act 1942 rubber articles electric signs,
optical equipment and washing machines
below
Excludes
2.0
postal
surplus,
any
shown
secretely
. Excess of revenue over expenditure based upon the Cost Asortainment Report for the Fiscal Year
1942, of the Post Office Department: nonpostal services excluded
including
adulterated
3.1
revenue
offset changes monditure such as termination of governmental excise tax exemptions
taxes not reinstated by the Revenue Act of 1941 and collections from the following excise taxes repealed
6.3
115.5
20
and
-4.9
Estimates of the yield of the committee bill and of present law are at levels of income and business est
Telephone, telegraph, radio and
Transportation of persons
+5.4
+21.0
237.1
Miscellaneous taxes
cable facilities leased wires, etc.
Telephone bill. local service
-49
Other
Lucgage, handbags wallets
58.4
+44.0
--8
Money order
89.2
03.0
See footnotes at end of table
+140.2
Special services
161.7
1,972.5
+11.0
class
hird class
Furs
taxes
41,332.6
Air mail, domestic
-8.0
2.0
409.5
$77.5
Special delivery
Jewelry, etc.
butter
+40.9
Other than local delivery letters
Retailers excise taxes:
Oleomargarine,
43,305.1
Fourth class (see tax on transportation of property)
484.5
1,972.5
400.0
First class
Total manufacturers' excise
taxes
12.1
577.5
Total yield. general and special accounts
Firearms, shells, pistols, and re
volvers
40,363.0
12.1
Customs
5. Net postal revenue:
5.0
Sporting goods
42,315.5
4. Miscellaneous receipts
and musical instru
ments
262.7
1,298.7
Railroad unemployment Insurance contributions
sets, phonograph
Refrigerators refrigerating appsratus and air conditioners
262.7
8,268.7
3.5
.
mobiles
207.0
251.1
54.3
tres and inner tubes
491.6
(')
Manufacturers' excise taxes:
Electrical energy
27.5
1.2
938.0
19.0
7.5
27.0
1.8
1,429.6
25.0
(1)
122
1.2
Total miscellaneous taxes
Total taxes on commodities and
25.0
12.2
EA
taxes
Issues of securities bond transfers. and deeds of conveyance
61.0
All other, Including repealed
Stamp taxes:
trailers
over yield of
61.0
28.8
Parimutuel wagers
Total tobacco taxes
special
devices
gaming
other
Lubricating alls
Increase (+)
or decrease
Miscellaneous taxes Continued
822.8
45.0
Cigarette papers and tubes
Gasoline
entlaw
1. Internal revenue- Continued
(2) Miscellaneous Internal revenue-Continued
Taxes commodities and services- Con
(2) Miscellaneous revenue-Continued
Total stamp taxes
Yield pres-
present law
1. Internal revenue-Continued
Silver bullion sales or transfers
11
3.1
None-Figures are rounded and will not necessarily add to totals
Source: Staff of Joint Committee on Internal Revenue Taxation, Nov. 19. 1943
THE REVENUE BILL OF 1943
12
THE REVENUE BILL OF 1943
(b) INDIVIDUAL INCOME TAX
Your committee is of the opinion that there should be no increase
in individual income taxes, at this time, except where a slight increase
is necessary for the purpose of integrating the Victory tax without a
13
COMMITTEE BILL SURTAX SCHEDULE
If the surtax net income is-
The surfax shall be-
Not over $2,000
Over $2,000 but not over $4,000
$260. plus 16 percent of excess over
Over $4,000 but not over $6,000
$580, plus 20 percent of excess over
Over $6,000 but not over $8,000
$980, plus 23 percent of excess over
many as possible of the twelve to fourteen million persons now subject
Over $8,000 but not over $10,000
$1,440, plus 27 percent of excess over
manner that the $3,500,000,000 of revenue brought into the Treasury
under this tax would not be lost. These requirements are substan-
Over $10,000 but not over $12,000
$1,980, plus 31 percent of excess over
Over $12,000 but not over $14,000
$2,600, plus 36 percent of excess over
Over $14,000 but not over $16,000
$3,320 plus 40 percent of excess over
Over $16,000 but not over $18,000
$4,120, plus 43 percent of excess over
Over $18,000 but not over $20,000
$4,980, plus 46 percent of excess over
Over $20,000 but not over $22,000
$5,900, plus 49 percent of excess over
Over $22,000 but not over $26,000
$6,880. plus 52 percent of excess over
Over $26,000 but not over $32,000
$8,960 plus 55 percent of excess over
Over $32,000 but not over $38,000
$12,260, plus 58 percent of excess over
Over $38,000 but not over $44,000
$15,740. plus 62 percent of excess over
Over $44,000 but not over $50,000
$19,460. plus 65 percent of excess over
Over $50,000 but not over $60,000
$23,360. plus 68 percent of excess over
Over $60,000 but not over $70,000
$30,160. plus 71 percent of excess over
Over $70,000 but not over $80,000
$37,260, plus 74 percent of excess over
Over $80,000 but not over $90,000
$44,660. plus 77 percent of excess over
Over $90,000 but not over $100,000
$52.760. plus 80 percent of excess over
Over $100,000 but not over $150,000
$60,360. plus 82 percent of excess over
Over $150,000 but not over $200,000
$101,360, plus 83 percent of excess over
Over $200,000
$142,860. plus 84 percent of excess over
net loss in revenue.
The committee felt that in the interest of simplification of the tax
structure it was advisable to repeal the Victory tax. But, at the
same time, it was believed highly desirable to retain as taxpayers as
only to the Victory tax, and to integrate the Victory tax in such
tially met by the committee bill.
In brief, your committee bill, as it pertains to the individual income
tax, is as follows:
1. Repeal Victory tax.
2. Increase the normal tax rate from 6 percent to 10 percent.
3. Adopt the surtax rate schedule which is shown below.
4. Repeal the earned income credit.
5. Require married persons filing separate réturns each to take a
single person's exemption.
6. Provide that the tax shall not be less than 3 percent of the
net income in excess of a special exemption of $500 for a
single person, $700 for married persons, and $100 as a credit
for each dependent.
7. Retain all other major provisions of present law, including
regular income tax exemptions of $1,200 for married persons
and $500 for single persons and credits for dependents of $350
each, and the over-all tax limitation of 90 percent of net
income.
A few changes have been made in the surtax rates to effect the
integration of the Victory tax with the income tax in such manner as
to retain as nearly as possible the existing tax burden. The revised
surtax table is as follows:
13 percent of the surtax net income
$2,000.
$4,000.
$6,000.
$8,000
$10,000
$12,000
$14,000
$16,000.
$18,000.
$20,000
$22,000.
$26,000.
$32,000
$38,000.
$44,000.
$50,000.
$60,000.
$70,000.
$80,000.
$90,000.
$100,000.
$150,000.
$200,000.
THE REVENUE BILL OF 1943
11
THE REVENUE BILL OF 1943
After the changes above described, the individual income tax
burden will compare with that under present law as follows:
TABLE 7. -Comparison of far burden, exclusive of one-half unforgiven faz, under
present law and under committee bill
Net Income before
Single person
Married person no depend Married person, dependents
exemp
Present Committee
Present law Committee
Present law Committee
bill
bill
bill
Net Victory computed net Income
15
THE REVENUE BILL OF 1943
16
THE REVENUE BILL OF 1943
17
It will be noted that only relatively small changes in individual
income tax burden result from the committee bill. Those that do
occur result, in general, from the fact that the net Victory tax, which
was levied at different rates for different family status, but with the
use of a flat exemption, is being replaced by a flat rate of tax, applied
to the
net
income
in excess of exemptions and credits which vary
with
the
family
status.
The following steps toward simplification have been achieved
through the integration above described:
(a) The separate computation of Victory tax and credit taken
currently has been eliminated
(b) The income base subject to normal tax and surtax has been
made the same for practically all persons (all those not
receiving partially tax-exempt interest).
(c) The computation of earned-income credit has been eliminated.
(d) The use of the short-form return for those receiving less than
$3,000 gross income has been retained but the return has
been simplified by (a) providing for the number of dependents in the tax table and thereby eliminating the deduction
of the credit for dependents on the face of the return and
(b) reducing the number of alternative headings for family
status from 3 to 2.
A further simplification is achieved in the committee bill by setting
July 1 of the taxable year as the date for determination of the family
DA
status of the taxpayer for purposes of all returns; heretofore the
family status determination date of July 1 applied only in connection
with the filing of the alternative tax on the short form of return;
under the committee bill it will apply as well to both the long form of
return and the declaration of estimated tax. Hereafter no taxpayer
in filing his return will be required to prorate exemptions and credits
because of a change in status.
The following table has been designed for inclusion in Supplement
T of the code, and for inclusion in the optional form of return for use
by persons having gross incomes of $3,000 or less, consisting wholly
of one or more of the following: salary, wages, compensation for
personal services, dividends, interest, or annuities. For purposes of
this report, a heavy line has been drawn through the table and certain
figures are printed in italies. Figures in the tax columns to the left
of the heavy line represent regular income tax, while those to the right
represent minimum tax. Figures printed in italies indicate that at
these points the taxpayer has income above the income-tax exemptions
and credits but that his minimum tax is greater than his income tax.
92237-43
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
TABLE 10.-Short-form return income tax table
TABLE 10.-Short-form return income tax table Continued
individual
If the Individual
return
One
And the
Four
Five
Six
depend
ents
Or the Individual
a
the
19
it
18
no
gross
No
dependents
Or
One
Three
Four
depend
Five
depend
ents
ents
ents
depend
ent
ents
the
No
Over
One
Five
The tax shall be
The
00
tax
the
for
the
shall
each
be
the
depend
shown
The table shown above was computed by using the gross income at
the midpoint of each gross income bracket: deductions were allowed
at the rate of 6 percent of gross income, and the resulting tax figure
If
THE REVENUE BILL OF 1943
20
THE REVENUE BILL OF 1943
was rounded to the nearest 10 cents. The following examples will
illustrate the procedure:
TABLE 11.-Gross income level above which the regular income far is greater than the
minimum tar, according to marital status and number of dependents
EXAMPLE 1.-Married person, no dependents
Gross income at midpoint of bracket
Deductions (6 percent of gross income)
Married person
1,012.50
Number of
dependents for
60.75
Net income
Income-tax exemption
credit
allowed
951
1, 200.0
Single person,
return
person making
married
making
married
separate
Minimum tax exemption
Minimum tax rounded to nearest 10 cents
making Joint
Single person
Number of
dependents
arate
credit
return whose
allowed
spouse has
gross Income
married
for
person making
separate
return whose
spouse has
$531.
$700.00
arste return
whose spouse
has
the bead
family
$1,356.80
$3,005.32
944.18
1,356.36
251.75
return
married person
income
family
Not subject to income tax, as exemption exceeds net income.
Income subject to minimum tax
Minimum tax at 3 percent
Married person
making
S1,
3,417.54
3,829.79
7. 55
3,005.32
7.60
2,593.00
10
Gross income bracket
21
3,417.55
4,654.2
5,478.72
This figure of $7.60 will be found in the twenty-first line, fifth
column, of the above table.
Assumes deductions of percent of gross income as allowed on short-form return
taxpayer is head of family only because of dependents for whom he would be entitled to credit,
.
credit is allowed for each of such dependants except L
EXAMPLE 2. Married person, tire dependents
Gross income bracket
Gross income at mid-point of bracket
Deductions (6 percent of gross income)
Net income subject to income tax
Income tax exemption
Income tax credit for dependents
Amount subject to income tax
Normal tax at 10 percent
Surtax at 13 percent
Total income tax
Minimum tax exemption
Minimum tax credit for dependents
Amount subject to minimum tax
Minimum tax at 3 percent
Minimum tax rounded to nearest 10 cents
$2, 100-$2. 125
2,112.50
126.75
1,985.75
1,200.00
700.00
85.75
8.38
11.15
19.73
700.00
200.00
Three further modifications in individual income-tax provisions
are made in the committee bill. One of these provides that married
couples filing separate returns must each take a single person's exemp-
tion. While one effect of this provision will be to reduce slightly the
present advantage available to married persons filing separate returns
over those filing joint returns, this requirement was 8 necessary step
for this simplification of the short-form return. Another modification
is found in the section which discontinues the allowance of Federal
excise taxes paid as a deduction from gross income, except where the
tax paid is a business expense. This provision will not only raise
revenue but eliminate existing confusion and administrative difficulty.
Lastly, the committee has provided for a special deduction of $500
from the gross income of every blind person in order to cover the
expenses resulting directly from blindness, such as the cost of readers
and guides. This would relieve many blind persons of any tax whatsoever, and would reduce the tax of other blind persons.
1,085.75
WITHHOLDING RATES AND EXEMPTIONS
32.57
32.60
As the minimum tax is higher than the income tax, this person
would be required to pay the minimum tax; therefore, the rounded
figure of $32.60 is contained in the table, $2,100-$2,125 line,
seventh column.
In connection with the income tax table it should be made clear that
those using the short-form return will not be required to compute
either the regular income tax or the minimum tax. It will be immaterial whether the required tax is minimum tax or income tax. Those
having a gross income in excess of $3,000, and therefore using the long
form, will only in rare instances be required to compute the minimum
tax as it will apply only where the number of dependents is in excess
of five in the case of a single person, or three in the case of a married
person. The following table shows the gross income level above which
the regular income tax would be greater than the minimum tax.
Because the present law's income-tax burden is not materially altered
under the committee bill, it was not necessary to change the present
20 percent withholding rate applicable with respect to salaries and
wages above the income-tax exemptions Nor was it necessary to
change the 3 percent minimum rate applicable under present law to
those subject only to the Victory tax, and under the committee bill,
to those subject only to the minimum tax. It was found. desirable,
however, to adjust by small amounts the exemptions used for withholding purposes, in order to approximate more closely the correct
amount of tax than does the existing system.
THE REVENUE BILL OF 1943
following exemptions are to be used for purposes of withholding
TABLE 12
spouse
claims none.
or head
family
personal
emption for
withholding
whose spouse
claims per
cent
Person
claiming no
Each de
pendent
personal
emption for
withholding
sonal
First $5,000,000 invested capital
$5,000,000 to $10,000,000 invested capital
$10,000,000 to $200,000,000 invested capital
Over $200,000,000 invested capital
4
ing whose
claiming
Existing
law, per
5
for withhold
Proposed
percent
ried person
6
exemption
Pay-roll period
Single per-
son. mar
5
son claiming
a personal
23
(4) Reduce the invested capital credit with respect to invested
capital in excess of $5,000,000 as shown by the following table:
NORMAL TAX AND SURTAX WITHHOLDING EXEMPTIONS
Married per
THE REVENUE BILL OF 1943
6
The
only:
8
22
tion
withholding
Weekly
$10
$24
Biweekly
Semimonthly
Monthly
Quarterly
$7.00
$0
14.00
22
106
318
Remiannual
Annual
636
264
186.00
1,272
Daily or miscellaneous (per day of such period)
528
8.50
872.00
1.50
1.00
MINIMUM TAX WITHHOLDING EXEMPTIONS
Weekly
$14
$10
Biweekly.
Semimonthly
$0
$2.00
Monthly
Quarterly
Daily or miscellaneous (per day of such period)
2.00
(6) Prevent litigation under the present law by affirmatively
closing the loophole by which stock of defunct corporations is
purchased, or other acquisitions made, for the purpose of avoiding
Federal income or excess-profits taxes,
(7) Require returns from certain tax-exempt organizations
Your committee was of the opinion that to extend the normal and
surtax rate beyond 40 percent might also seriously affect the war
production of the smaller companies It is believed, however, that a
rate of 95 percent on excess profits, as suggested in the hearings before
the War Policy Commission, 1931, is not unreasonable, so long as an
132
Bemiannual
Annual
(5) Increase the specific exemption credit now allowed for
excess-profits taxes from $5,000 to $10,000.
1.50
The wage brackets used in the withholding tables have been made
narrower than those used in the Current Tax Payment Act of 1943
in order to reduce the amount of over-with.holding and under-withholding resulting from the fact that wages may vary from the midpoint of the bracket in which they fall. In the weekly table, for example, the wage brackets rise in steps of only $1 up to a weekly wage
of $60, or $2 from wages of$60 per week to $100 per week, etc. The
withholding tables are computed by the so-called precise method
which is made optional for employers. The tax is computed upon the
gross income at the midpoint of the wage brackets, deducting the
proper exemption and credit for dependents, and applying either the
3 percent minimum rate or the 20 percent regular income tax rate to
the excess. The resulting tax is then rounded to the nearest 10
cents.
(c) PROPOSED CORPORATE INCREASE
Your committee recommendations as to corporate taxes may be
briefly summarized as follows:
(1) Retain existing corporate normal and surtax rates.
(2) Increase the excess-profits rate to 95 percent.
(3) Retain the present 80 percent over-all ceiling with respect
to corporate normal, surtax, and excess-profits taxes.
added incentive is retained through the 10 percent post-war credit
together with an 80 percent ceiling.
Your committee also gave careful consideration to the effect upon
the excess-profits tax of the various credits, carry-backs, and carryovers. While it was not possible to suggest changes in these credits,
carry-overs, and carry-backs at this time, these matters, as well as the
relief provisions of section 722 of the Internal Revenue Code, will be
carefully studied in connection with the 1944 revenue bill. However,
there is 8 change which we believe should be made at this time.
Under the invested capital method, corporations are permitted to
increase their invested capital by plowing back into the business earnings which have-not been subject to taxation in the hands of the individual shareholder. However, corporations using the average earnings method are not permitted to increase their earnings base by
plowing back into the corporation profits which have not been subject
to taxation in the hands of the shareholders
Earnings after January 1. 1939, are not permitted under the Canadian law to increase the invested capital of the corporation until they
have been capitalized by being subject to taxation in the hands of the
individual shareholder. The reason for such a rule was very obvious,
for otherwise a company would stop paying dividends and leave its
profits in the business in order to obtain the additional invested capital
credit. Moreover, the Government would lose not only excess-profits
taxes but also individual income taxes from the individual shareholder.
In view of this obvious advantage of the invested capital method over
the average earnings method, it does not seem unreasonable further to
reduce the invested capital credit, particularly with respect to capital
in excess of $5,000,000.
THE REVENUE BILL OF 1943
24
THE REVENUE BILL OF 1943
AVOIDANCE OF INCOME AND EXCESS PROFITS TAXES
There has come to the attention of your committee a practice on
the part of some corporations with large excess profits of purchasing
corporations with current, past, or prospective losses, deficits, or
large current or unused excess profits credits for the purpose of reducing excess profits and income taxes. It is the custom of many reputable attorneys to advise clients not to indulge in such transfers since
they feel that the courts can interpret present law so as to invalidate
them, and if the courts should not act the impression has been prevalent that Congress would take direct action to close this loophole.
In order to prevent further abuses that might undermine the position
of the honest taxpayers, your committee has inserted a provision
allowing the Commissioner to invalidate such claims for deductions
or credit where he finds that the transfer was made for the purpose of
avoiding payment of taxes. Your committee believes that taxpayers
deserve the assurance that they are not going to be discriminated
against in favor of tax dodgers, and that they may continue to conduct
their affairs and business in the ordinary way without fear either
that they will bear a tax burden which others similarly situated will
escape, or that their ordinary and usual transactions will be impugned
as tax dodging. Since the devices dealt with by the bill have always
been such palpable tax-dodging schemes, the legality of which was
questioned from the beginning, this provision is made retroactive to
all taxable years beginning after December 31, 1939. This would
avoid giving approval, even by implication, to any previous tax-
25
of the information contained in such returns with the view to closing
this existing loophole and requiring the payment of tax, and the
tection of legitimate companies against this unfair competitive situa- protion. Your committee exempted from this requirement to file returns,
religious, educational, and charitable organizations which meet the
definite standards se forth under section 112 of the bill.
(d) EXCISE TAX RECOMMENDATIONS
Your committee felt that the most productive source of revenue,
and the most effective device feasible for the curtailment of inflationary spending, was increased excise taxes. By this method, it is
possible to select those goods which are clearly luxuries and tax them
at a rate in accord with the particular market situation. The following recommendations impose only minor administrative burdens since
in most cases they only involve a rate change in a tax that is now being
successfully collected. The excise taxes selected have the virtue that
in individual cases where the tax would be a hardship, consumption
may be curtailed or shifted to nontaxable items.
Even if the entire increase in excise taxes were shifted to consumers,
an extreme assumption, the general cost of living would be raised by
only a slight degree. The total increased revenue from excises and
postage will be $1,368,500,000.
TABLE 3.-Excise for and postal rate changes contained in the committee bill
dodging scheme.
Article or service
RETURNS BY TAX-EXEMPT ORGANIZATIONS
Estimated additional rever
Present tax base and rate
Propored tax base and rate
nue under
posed tax base
and
Under existing law a large group of corporations enjoy tax exemption and many of which are not required to file information returns.
It has come to the attention of your committee that many of these
exempt corporations and organizations are directly competing with
companies required to pay income taxes, and that this practice is
becoming
more widespread and affording a loophole for tax evasion
and avoidance.
alcohol).
$7 per barrel.
? Beer
8. Wine
Still
70.0
10 cents gallon
Under percent
percent
Over percent
Sparkling
18.0
gallon
10 cents per has plat
Other
half
4. Electric light bulbs and
cents
. Jewelry
10 percent retail price
Fur and fur-trimmed articles.
half
relied
half
percent
manufac
turers' sales pelor
tubes
DET
pint
25
percent
tainer
25
percent
sales
manufac
percent
price
price
10 percent of manufac
urers' sales price on
7. Luggage handbags wallets,
etc.
luggage
72.5
MA
53.4
ealy
10 percent retail price
8. Tollet preparations
Telephone telegraph radio
20.0
price.
retal
do
11.4
9.
15 percent of charge (do
mestle).
national
x percent of charge
15 percent charge
Leased wires etc
percent
of
charge
for
48.8
percent of charge for
service
service
service
15 percent of charge
10 percent of charge
a
Ree footnote at end of table
11 percent of charge
10 percent charge (inter-
cable.
10 Transportation of persons
11. Transportation of property
45.9
05 percent charge
25 percent charge
percent of charge
Telegraph radio. and
Wire and equipment
15 percent of charge
10 percent of charge
Local telephone
Long-distance telephone
a
These returns, under the bill, are required to be made for the taxable years beginning after December 31, 1942, and all subsequent
years, and it is the intent of your committee to make a thorough study
370.0
DOD
20
to require them to file reports stating specifically the items of gross
income, receipts, and disbursements and such other information, and
keep such records, as the Commissioner of Internal Revenue may
prescribe
$9 per pallon
$3.72 per gallon on
$1
izations are not now required to file reports, and in the absence of such
information it was felt best to continue the present tax exemption, but
dollars
M per enilon (draw back
1. Distilled spirits
$8
These organizations were originally given this tax exemption on
the theory that they were not operated for profit, and that none of
their proceeds inured to the benefit of shareholders. However, many
of these organizations are now engaged in operation of apartment
houses, office buildings, and other businesses which directly compete
with individuals and corporations required to pay taxes on income
derived from like operations. Your committee was without sufficient
data to act intelligently, since many of these corporations and organ-
Millions of
nald:
percent
cents
per
short
Apply tax to fourth-class
75.0
4.5
THE REVENUE BILL OF 1943
26
THE REVENUE BILL OF 1943
TABLE 13.-Excise tax and postal rate changes contained in the committee bill-Con.
Present tax base and rate
Article or service
Proposed tax base and rate
Estimated additional rever
sue under pro
posed tax base
and rate
mark-up may have to be allowed on the amount of the tax in the new
ceiling
sothe
thatconsumer.
slightly more than the amount of the tax may be
passedprices
along to
A draw-back of $5 a gallon is allowed on alcohol used for non-
beverage purposes.
12 Admissions:
Leased boxes, etc
Cabarets
14 Club duesandiitiationfees
is Bowling alleys. billard and
pool tables.
16. Pari-mutuel wagers
1
General admissions
13
cent for each 10 cents or
fraction thereof
11 percent charge
percent charge
percent charge
2 cents for each 10 cents or
fraction thereof.
20 percent charge
BEER AND ALE
163.5
30 percent of charge
20 percent of charge
91.1
$10 per table
$20 per table
27.0
None
5 percent of total wagber
($10 alley
Total excluding postage
A.I
27.5
1,201.7
17. Postage:
First class
2 cents per ounce, local deEvery
Air mail
Third class
cents per ounce
1 and 156 cents for each
2 ounces
Money orders
6 to 22 cents per order,
Registered mail
15 cents per article
c. mail
cents per article
12 cents to $1 20 per article
depend line upon amount
mail
a centa per ounce
8 cents pm ounce
2 and cents for each 2
44.0
11.0
74.4
ounces
10 cents
21.0
20 cents to $1 as per article
cents per article
24 cents to $2 40 per article
Total postage
High wartime incomes and the shortage of distilled spirits together
indicate that an additional tax of $1 a barrel on beer, bringing the tax
to $8, will have little effect on the market situation while raising additional revenue of $70,000,000. The probabilities are that beer consumption during this and next year will for the first time pass the preprohibition peak. On the supply side, producers are faced with shortages of malt and containers and with limitations on transportation
Hence, despite the tax, brewers will be able to sell as much of their
product as they can market. The tax is imposed at the manufacturer's
level.
WINE
&
166.8
Grand total
Taxes on various grades of wine are recommended according to the
following schedule:
1,358.8
Estimates of additional revenue are for full year of operation at levels of business estimated for calendar
year
27
Present rate
1944
Estimated
additional
Proposed rate
revenue
Estimates are based upon the revenue figures cited In the Cost Ascertainment Report for 1942. released
by the Post Office Department
(a) Still wines:
As your committee felt that the rates of excise taxes contained in
this bill were justified only in view of the wartime emergency, it was
provided that the increases imposed shall terminate 6 months after
the close of hostilities in the present war. In this connection, it was
brought to the committee's attention that in the case of distilled
spirits, wines, and fermented malt liquors, upon which floor stocks
taxes, corresponding to the respective rate increases, are imposed in
this bill, there might result extremely heavy burdens upon certain
dealers if, when the increases in tax are ter minated, there 8 not
provided some form of adjustment for floor stocks then on hand. As
there was insufficient time to study this question fully it was decided
to take the matter up in the next tax bill.
DISTILLED SPIRITS
The most important excise proposal from a revenue standpoint is
that raising the tax on distilled spirits from $6 to $9. This will result
in increased revenue of $370,000,000. Since the production of
all liquor with the exception of limited amounts of rum and brandy
has been suspended, the demand is so high that the added tax will
not reduce consumption. Ordinarily such a high tax rate might increase the amount of bootlegging. It is felt that this will not occur
under the present circumstances. The wartime shortages of such
materials as sugar and copper will prevent a substantial increase in
illegal distillation
Distilled spirits are now subject to price control. Since payment of
the tax by the dealer will result in a greater capital investment, some
Under percent alcohol
14-21 percent alcohol
Over percent alcohol
(b) Sparkling
(c) Other
cents ret rallon
gallon
cents
cents
gallon
cents per half plot.
cents per hall pint
Millions of
15 cents per gallen
dollure
gallon
gallon
cents
half
plnt
10 rents hall plnt
The consumption of wine in 1943 is running considerably above
1942. An increase in consumption is indicated even with the increased
tax. This tax also is imposed at the manufacturer's level and it may
in most cases be necessary to allow some mark-up on the amount of
the tax, resulting in a slightly heavier burden on the consumer.
ELECTRIC LIGHT BULBS AND TUBES
Increasing the present tax on electric light bulbs and tubes from
5 to 25 percent of the manufacturer's sales price will result in increased
revenue of $20,000,000. Since the tax is measured as a percent of
manufacturer's sales price it is not believed that this rate will result in
any substantial increase in retail price.
In cases where bulbs are used in stores and factories the tax will be
reflected as an added business cost but it was felt that this would be
negligible in the whole picture of business expenses.
JEWELRY
Increasing the tax on jewelry from 10 to 20 percent of the retail
price is estimated to bring in $72,500,000 in additional revenue after
allowance for the exemption for silver plrt I flatware. While it was
felt that most jewelry was a luxury and at n many cases individuals
THE REVENUE BILL OF 1943
28
THE REVENUE BILL OF 1943
were investing in jewelry as an inflation hedge, nevertheless some
items classed as jewelry are actually utility articles. Since it appears
administratively impracticable, except in the case of silver plated
flatware, to separate various items sold in jewelry stores, a lower rate
was adopted. The tax is levied at the retail level.
29
FURS AND FUR-TRIMMED ARTICLES
It is generally recognized that the telephone lines are at the present
time overburdened While these rates will probably not reduce nonessential use materially, this does appear to be a desirable source of
revenue To the extent that these taxes represent business expenses
they are déductible for income-tax purposes. The tax on leased wires
is necessary since they are in competition with telegraph services,
All of these taxes are levied directly on consumers.
Increasing the tax on furs and fur-trimmed articles from 10 to 25
TRANSPORTATION OF PERSONS
percent of the retail price is expected to bring an additional $54,800,000
in revenue. The increase in sales of expensive furs and fur coats in the
past year has been phenomenal and demand promises to continue well
ahead of the dealers' ability to get furs. On these articles the tax
will be passed along to consumers, On cheaper fur coats and furtrimmed coats, which compete with tax-free cloth coats some of the
tax might have to be absorbed, or shifted to the wholesalers.
LUGGAGE, HANDBAGS, WALLETS, ETC.
It is proposed that the tax on luggage be increased from 10 to 25
percent and that it be measured against the retail price instead of
against the manufacturers' sales price as at present. In addition to
this the bill extends the tax to various related articles including wallets,
and handbags. Together, these changes will result in increased
revenue of $53,400,000. Shifting the tax on luggage to the higher
retail base at a 25 percent rate is the equivalent, on the average, of
raising the rate to 45 percent on the manufacturer's price.
TOILET PREPARATIONS
At present there is a tax of 10 percent of the retail price of certain
toilet preparations, mainly cosmetic, and perfumes. The suggested
increase to 25 percent will add $51,400,000 in new revenue. The
main limitation on the supply of most cosmetics is a scarcity of
containers, and on the whole the sales will not be affected appreciably
by the tax.
TELEPHONE, TELEGRAPH, RADIO, ETC.
Taxes on various communication services are proposed at the folEstimated
Proposed tax
additional
revenue
(millions)
Local telephone
Long-distance telephone
Telegraph, radio, and cable
10 percent of charge
percent charge.
15 percent of charge (do-
15 percent of charge
$48.9
25 percent charge
mestic)
10 percent charge (international).
Lessed wires, etc
and equipment service
15 percent of charge
5 percent of charge for
service.
15 percent of charge
20 percent of charge
nevertheless, seem desirable to make those that do travel pay extra for
the privilege. The proposed increase of the rate from 10 to 15 percent
would increase revenues by $75,000,000. This tax is levied directly
on individuals while servicement on furlough or being transferred, are
specifically exempt while traveling in coaches.
We have also provided that this tax should be paid with respect
to official travel by employees of the Federal Government, out of
funds specifically appropriated for such purpose. The bill authorizes
such appropriations and further directs all disbursing officers of the
Government to make quarterly reports to the Comptroller General
setting forth the names of officials or employees traveling on official
business, the date of each trip and destination points, and the total
amount of expense allowance for each trip. These provisions also
apply in the case of persons other than officials and employees traveling
at the expense of the Federal Government This information shall
be furnished to the Congress in the annual report of the Comptroller
General.
Your committee is convinced that there is a considerable amount
of unnecessary travel by officials and employees of the Government.
It is believed that by requiring this information to be furnished the
Congress much of the present abuse and waste of the taxpayers
money will be eliminated, and those who must travel on essential
business will be afforded a greater opportunity to secure suitable
accommodations to do so.
TRANSPORTATION OF PROPERTY
lowing rates:
Present tax
The wartime increase in transportation has been far beyond that
required for essential uses. Since much railroad travel is necessary
in view of gasoline restrictions, it would be unwise to impose a tax at
sufficiently high rates to cut substantially civilian travel. It would,
as
The tax of 3 percent on the transportation of property imposed in
the Revenue Act of 1942 has worked satisfactorily. The tax imposes
only a slight burden on a particular article while returning a net
revenue of $170,300,000. While it did not seem advisable to increase
this tax the committee felt that it should be made applicable to
fourth-class mail or parcel post. The proposal to extend this tax to
parcel post will account for an increase in revenue of $4,500,000.
This is necessary to restore the previous competitive situation.
GENERAL ADMISSIONS
7 percent of charge for
service.
An increase in the general admissions tax from 1 to 2 cents per 10
cents or fraction thereof of the price of the ticket, will raise additional
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
revenue of $163,500,000. Most types of amusement are greatly
Increasing the cabaret tax from 5 to 30 percent of the total
bill would yield an increase of $91,300,000 in revenue. With the
exception of a few roadhouses that have been hurt by the gasoline
shortage, cabarets have been experiencing an unprecedented demand
for their entertainment services. It is felt that this is more of a luxury
than those services which are subject to the general admissions tax
which is a minimum of 20 percent.
CLUB DUES AND INITIATION FEES
TABLE 14.-Comparison of postage rates under present law and under committee bill
and entertainment field. The rate of 20 percent in place of the
present 11 percent will account for $5,100,000 additional revenue.
It is not contemplated that this tax will affect the use of club facilities.
BOWLING ALLEYS, BILLIARD AND POOL TABLES
For bowling alleys, it is recommended that the present annual
license tax of $10 per alley be converted into a tax of 20 percent of
the charge. For pool and billiards, since records of charges are very
inadequate in most establishments, it is recommended that the license
tax be increased from $10 to $20 per table. These two changes will
provide $27,000,000 in new revenue. These recreations are in a
general way in competition with amusements subject to the admissions
tax. For this reason, the bowling alley tax was shifted to a percentage
basis comparable with the general admissions tax. This was not
practical for pool and billiards.
POSTAGE RATES
Were it not for the great lack of sources to which the committee
could turn for additional revenue, it would not recommend increases
in postage rates, especially in view of the fact that the Committee
on the Post Office and Post Roads expect at an early date to consider
the desirability of making adjustments in postage rates. The com-
mittee thought that it was desirable to provide for this additional
revenue at this time and adjust the rates later, especially since the
Post Office Department continues to operate most of its services at
a loss under present rates despite the heavy volume of wartime
mailings. The Cost Ascertainment Report for 1942 of the Post
Office Department shows that while first-class mail service was operated at a profit of $163,000,000 during the fiscal year 1942, all other
classes of mail service operated, in the aggregate, at a loss of
$172,000,000. A similar over-all situation has existed with respect
to postal services for years.
Present base and rate
Proposed base and rate
ditional rever
tiue under proposed base and
rate
Millions of
17. Postage:
First class
2 cents per ounce, local de
Air mail
Third class
Money orders
livery
curre
mail
mail
dollars
3 cents per section
2 and cents for each 2
to 22 cents per order,
10 cents
ounces
amount
44.0
cents per expense
and is areta for each
upon
Registered mail
It is proposed to raise the tax on club dues and initiation fees so
as to apply similar rates to the various services in the amusement
Estimated at
Article service
6
CABARETS
31
The following table shows, for the postage rates dealt with in the
committee bill, the rates under present law and the modifications
adopted by the committee, together with the estimates of additional
revenue.
.
profiting from the expanded national income. The 2-cent rate
appeared to our committee to be desirable in order to secure additional
revenue and which would create no great hardship. On leased boxes,
and sales of tickets outside of the box office, the tax is raised from
11 to 20 percent of the charge.
1
30
11.0
74.4
21.0
15 cents $1 per article
20 cents to $1 per article
4.1
12 cents $1 20 per article
24 cents to $2 per article
R
to cents per article
10 cents article
Total postage
166.8
Estimates of additional revenue are for . full year of operation and NET based upon the revenue figures
cited in the Cost Ascertainment Report for 1942 telenard by the Post Office Department
PARI-MUTUEL WAGERS
The introduction of a Federal tax on the total wagers at pari-mutuel
racetracks at 5 percent would raise $27,500,000 in revenue. As a
result of high wartime incomes betting at the large racetracks in the
past year has been greater than ever before. This tax would be paid
by those who can afford to bet.
TERMINATION OF CERTAIN GOVERNMENTAL EXCISE TAX EXEMPTIONS
In a letter to your committee, dated August 1, 1943, the President
recommended that legislation be enacted which would terminate
numerous excise tax exemptions conferred by existing law with respect
to articles sold for the use of, and services rendered to, the Federal
Government. In support of his recommendation, the President
stated: "I propose this step for the purpose of saving the very considerable manpower utilized both inside and outside the Government
for the administration of these exemptions, and for the further
reason that the manpower and expenditure devoted to such administration results in no benefit to the Government. Stated otherwise,
the termination of the exemption will not operate to the disadvantage
of the Government inasmuch as the expenditure incurred by the
Government in the payment of the taxes in question will be recovered
in the collection of those taxes."
To give effect to the President's recommendation, therefore, the bill
removes many excise-tax exemptions now existing with respect to
articles sold, or services rendered, to the United States. In general,
the taxes thus affected-by the bill are the retailers' excise taxes, the
manufacturers' excise taxes, and the taxes applicable to telegraph,
telephone, radio, and cable facilities, and the transportation of persons
and property. Except in the case of the manufacturers' excise taxes
32
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
applicable to sales of pistols and revolvers, firearms, shells and
cartridges, and radio receiving sets, phonographs, phonograph records,
and musical instruments, the taxes will become applicable to articles
sold, or services rendered, to the United States approximately 3
months after the date of enactment of the act. This period has been
allowed to permit the various governmental agencies to make any
necessary changes in their contracting practices and policies.
The application of the manufacturers excise taxes on sales of pistols
and revolvers, firearms, shells and cartridges, and radio receiving sets,
phonographs, phonograph records, and musical instruments is postponed until approximately 6 months after the termination of hostilities
in the present war. The difference in the treatment accorded the
taxes on the sales of pistols and revolvers, firearms, shells and cartridges is justified by the fact that under present conditions nearly the
entire output of these articles is now being sold to the War or Navy
Department or other Federal governmental agencies directly concerned
in the prosecution of the war and the administration of the exemption
is not, accordingly, attended by the same difficulties that exist in the
case of other taxes. The difference in the treatment accorded radio
receiving sets, etc., proceeds from difficulties which would be involved
in determining the taxability of certain radio equipment purchased by
the armed forces. The section which imposes the tax on radio receiving sets also imposes taxes on phonographs, phonograph records,
249
33
or distributed. The amendment is made retroactive to all taxable
years where proper consents are filed so that all taxes which would
have been payable if this amendment had been in effect, will be paid.
(2) BACK PAY OF INDIVIDUALS
The taxes on back pay received by an individual because of an
alleged unfair labor practice under the National Labor Relations Act,
or a violation of the Fair Labor Standards Act, or a retroactive wage
increase approved by the National War Labor Board, are limited
to such taxes as would be payable if the back pay were received in
the years for which paid. This amendment is made effective with
respect to taxable years beginning after December 31, 1940.
(3) PERCENTAGE DEPLETION
and musical instruments Administrative convenience makes it
Percentage depletion is extended to flake graphite, vermiculite,
potash, beryl, feldspar, mica, lepidolite, and spodumene, in addition
to those minerals presently receiving it, and discovery depletion is
consequently terminated with respect to these minerals The extension to flake graphite applies to years beginning after December 31,
1942, but the extensions made by this bill and the Revenue Act of
1942 are limited to the duration of the war.
advisable that the exemption with respect to all taxes imposed by the
section be terminated at the same time.
(4) STRATEGIC MINERALS
(e) MISCELLANEOUS PROVISIONS
(1) TRUSTS FOR BENEFIT OF MINORS AND OTHERS LEGALLY DEPENDENT
UPON GRANTOR
Fluorspar, flake graphite, and vermiculite are added to the list of
strategic minerals exempt from the excess-profits tax.
(5) EXCESS-PROFITS TAX TREATMENT OF TIMBER, COAL, AND NATURAL
GAB
Your committee have given careful consideration to the decision of
the Supreme Court in the case of R. Douglas Stuart (317 U. S. 154)
which held that a father, who created an irrevocable trust containing
a provision that the income thereof might, in the discretion of the
trustees, be used for the support and maintenance or education of his
minor children, was taxable on the trust income even though it was
not actually used for such maintenance, education or support but was
accumulated in the trust.
Prior to the decision of the Supreme Court in the Stuart case, the
Bureau of Internal Revenue, The Tax Court of the United States
and the lower courts had held that where the trust income or a portion
thereof might, in the discretion of the trustees, have been used to
support minor children of the grantor, only the amount of the trust
income actually distributed for the support and maintenance of such
beneficiaries was-taxable to the grantor.
Your committee believes that the rule in effect prior to the Stuart
case is a sound rule and has inserted a provision in the bill to restore
the old rule. Under the bill, income of a trust is not taxable to the
grantor merely because such income in the discretion of another
person or the trustee may be applied or distributed for the support or
maintenance of a beneficiary whom the grantor is legally obligated to
support or maintain, except to the extent that such income is so applied
The present excess-profits tax treatment given certain excess output
and bonus income for mineral and timber property is extended to
lessors of mineral property or a timber block, new coal and iron mines
and timber blocks not in operation during the base period, and certain
natural gas companies. The amendments with respect to lessors
of property in operation during the base period and with respect to
natural gas companies are made retroactive to years beginning after
December 31, 1941.
(6) VALUATION OF CLOSELY HELD CORPORATIONS UNDER ESTATE TAX
An amendment to the estate tax provides that in certain instances
the value of unlisted stock and securities shall be determined taking
into consideration, in addition to all other factors, the value of stock or
securities of comparable corporations which are listed on an exchange.
(7) GIFT TAX
A gift tax amendment provides that in certain instances the appointment of a new trustee, the vesting of discretion in a trustee or the
exercise by a trustee of discretion shall not be a taxable gift.
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THE REVENUE BILL OF 1943
35
(8) COMMISSIONERS-TAX COURT OF UNITED STATES
In the years prior to the present World War, the provisions of the
Vinson-Trammell Act, the result of searching studies by the Committee on Naval Affairs under the able direction of Chairman Vinson,
sought to limit profit by certain limiting provisions as to contracts
for naval vessels and aircraft. In 1940, on the recommendation of
the departments, the provisions of these acts were suspended and
there was enacted the excess profits tax on corporations seeking to
control war profits.
An amendment limiting profits was proposed by Representative
Case of South Dakota in connection with the sixth supplemental
national defense appropriation bill. Subsequently, a provisio was
adopted as section 403 of such appropriation act. This provision
directed the Secretary of each department concerned (1) to insert in
Provision is made permitting The Tax Court of the United States to
use commissioners in particular cases.
(9) CREDIT FOR STATE UNEMPLOYMENT TAXES
The present restriction limiting the credit against Federal unemploy-
ment tax for contributions made to a State unemployment fund to
contributions made before June 30 next following the due date for the
Federal tax return is lifted, and provisions are made with respect to
the operation of this credit for the years from 1936 to 1942
Your committee was not able to give full consideration to the problem of reserves for post-war conversion; that is, reserves to convert
factories engaged in war production back to peacetime production
contracts for amounts in excess of $100,000 a provision for renegotia-
tion of the contract price at a time when the profits could be determined with reasonable certainty, and (2) a provision for the
and prevent unemployment. This matter will be given early con-
sideration by your committee.
retention or recovery of excessive profits by the Government
In the Revenue Act of 1942 the Committee on Finance of the Senate
reported and the Senate adopted amendments recommended by the
RENEGOTIATION OF WAR CONTRACTS
(Sec. 701 of the bill)
departments concerned, which were limited to implementing the
practices and procedures of such departments under section 403 as
enacted. In the conference report on the revenue bill of 1942 the
managers on the part of the House inserted the following statement:
GENERAL STATEMENT
The prevention of excessive profits out of war has long been a deep
The committee of conference does not feel that the amendments which are made
concern of the Congress. During the last World War, intensive
Capable management, or good fortune in investment and operation, were
apparently the major factors In determining the rate of profit, and they, rather
than mere size were the characteristic elements of business success.
A War Policies Commission was established by joint resolution
of Congress, approved June 27, 1930, to report to the President
methods of such prevention. Its purpose was stated as a plan to
mobilize effectively the resources of the Nation for war which shall
eliminate war profiteering, prevent wartime inflation, and equalize
wartime burdens. The commission was composed of four Members
of the House and four Members of the Senate, and the Secretaries
of War, Navy, Agriculture, Commerce, Labor, and the Attorney
General. Its report was submitted on December 4, 1931. It made
definite recommendations of procedure for the control of profits in
wartime. It recognized the part of industry in the prosecution of war.
Mr. Bernard Baruch, testifying before the Commission, quoted
Field Marshal Von Hindenburg's statement as to the United States
and its war industry in which he said, "Her brilliant, if pitiless, war
industry had entered the services of patriotism and had not failed
it.' The control of war profits during the last World War was left
mainly to taxation and price control.
which it might be desirable to make. No attempt has been made to study and
reexamine all the possible methods for dealing with excessive profits realized on
contracts The bill merely attempts to remove some of the more pressing
objections to the present law and to make the law administratively workable.
It is anticipated that the Ways and Means Committee will study section 403 in
connection with matters now pending before the committee with an eye to
a
studies were conducted and reports made thereon. In an address
to the joint session of Congress, May 27, 1918, the President said,
"The profiteering that cannot be got at by the restraints of conscience
and love of country, can be got at by taxation. Following the war,
a report was made by the Federal Trade Commission dated June 25,
1924, on wartime profits and costs in the steel industry, in which
Chairman Huston Thompson stated:
by the bill to the renegotiation law contain all the changes and improvements
general revision than is contained in the 1942 revenue bill.
o
Your committee has devoted considerable study to the problem of
renegotiation. A subcommittee of the Ways and Means Committee
was appointed in July which conducted studies on the subject.
Public hearings were held before the full committee which started on
September 9 and lasted for a period of 12 days. These hearings were
in addition to those conducted by the House Naval Affairs Committee
which started on June 10, 1943, and covered a 14-day period. The
subcommittee, as & result of its studies, made a report to the full
committee on November 8, 1943.
After considering the excellent report of the subcommittee, the
reports of the Naval Affairs Committee and the Truman committee,
the suggestions of the departments and the testimony of the witnesses
appearing at the public hearings of both our committee and the Naval
Affairs Committee, your committee reached the following conclusions:
First, that the renegotiation law should be continued, with amendments, until after the termination of hostilities.
Second, that there is just ground for complaint about the existing
renegotiation law and the manner of its administration, particularly
as applied to the small contractor.
Third, that certain changes in the renegotiation law should be made
to make it more workable and equitable in its application.
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36
THE REVENUE BILL OF 1943
It is believed that the changes recommended admittedly will
materially improve the situation.
The following is a summary of the principal changes recommended
by your committee:
subcontractor in keeping his books. All items of the character allowed
as deductions and exclusions for income and excess profits tax
poses, including the currently deductible annual amortization allow- purance, are allowed as items of cost to the extent allocable to contracts
with the departments and subcontracts.
8. State income taxes are allowed only with respect to income after
eliminating excessive profits upon renegotiation, and then only to the
extent allocable to the renegotiable business.
9. Credit is allowed against excessive profits for income and excess
profits tax paid with respect to such profits.
10. The present system of future or forward repricing is continued
PRINCIPAL CHANGES RECOMMENDED IN RENEGOTIATION LAW
1. In lieu of the existing provision, exempting contracts or sub-
contracts of $100,000 or less, it is provided that contracts or subcontracts shall be exempt from renegotiation for a particular year if the
aggregate of the amounts received or accrued during the fiscal year
does not exceed $500,000. This change is being made at the suggestion of the Departments.
2. The definition of subcontract has been rewritten to include only
subcontracts for the article, work, services, building, structure, improvement or facility contracted for under the prime contract or for
articles to be incorporated in the item contracted for under the prime
under the bill. However, the bill gives the contractor or subcontractor the right to petition The Tax Court of the United States in
case he is dissatisfied with the price as refixed by the Secretary.
11. A central board called the War Contracts Price Adjustment
Board, is created to have charge of renegotiation This Board is to
consist of five members, selected from the departments. Though the
Board may delegate its powers of renegotiation, every contractor or
subcontractor
is entitled, upon request, to have his case reviewed by
the
Board
contract.
3. Contracts or subcontracts for agricultural commodities, such as
grains of all kinds, vegetables, cotton, tobacco, cattle, hogs, wool, eggs,
milk and cream, including canned, bottled, or packed fruits or vegetables or their juices, are exempt from renegotiation.
12. The contractor or subcontractor is required to file with the
War Contracts Price Adjustment Board a statement of actual costs
of production and such other financial statements as the Board may
4. The bill grants discretionary authority in the War Contracts
Price Adjustment Board (a new Board hereafter discussed) to exempt
from renegotiation standard commercial articles, if in its opinion
by regulations prescribe unless the aggregate of the amounts received
in the fiscal year by the contractor or subcontractor does not exceed
normal competitive conditions exist affecting the sale of such articles.
5. The bill also exempts from renegotiation contracts or subcontracts with religious, charitable, or educational organizations if such
organizations are exempt from income tax.
$500,000.
13. The War Contracts Price Adjustment Board is required to determine excessive profits with respect to the aggregate amounts received or accrued during the fiscal year by a contractor or subcontractor and not separately. However, at the request of the contractor
6. Your committee has set forth in the bill certain factors to be
taken into consideration in determining excessive profits. These
factors are as follows:
(a) Efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs, and
economy in the use of raw materials, facilities, and manpower;
(b) Reasonableness of costs and profits, with particular regard
to volume of production and normal pre-war earnings;
(c) Amount and source of public and private capital employed
and net worth;
(d) Extent of risk assumed, including the risk incident to
reasonable pricing policies;
(e) Nature and extent of contribution to the war effort, includ-
ing inventive and developmental contribution and cooperation
with the Government and other contractors in supplying technical
assistance;
(f) Character of business, including complexity of manufacturing technique, character and extent of subcontracting, rate of
turn-over:
(g) Such other factors the consideration of which the public
interest and fair and equitable dealing may require.
Your committee believes that in computing excessive profits,
consideration should be given to the financial problems in connection
with reconversion in applying factor (g).
7. In computing profits, costs are determined in accordance with
the method of cost accounting regularly employed by the contractor or
37
o
or subcontractor, the Board may make such determination with
respect to the amounts received under any one or more separate
contracts.
14. If the War Contracts Price Adjustment Board finds that the
amounts received under the contracts with the Department and the
subcontracts may reflect excessive profits, the Board is required to
give to the contractor or subcontractor reasonable notice of the time
and place for a conference. This notice is required to be sent to the
contractor by registered mail and constitutes the commencement of
the renegotiation proceedings.
15. The War Contracts Price Adjustment Boartl is required to furnish. upon request of the contractor or subcontractor a statement of
its determination, of the facts used as a basis therefor, and of the
reasons for such determination
16. The contractor or subcontractor is given the right to have his
excessive profits determined by The Tax Court of the United States
in a de novo proceeding, in case he is unable to reach an agreement
with the War Contracts Price Adjustment Board.
17. If the contractor or subcontractor is aggrieved by a determina-
tion of the Secretary made prior to the enactment of this act with
respect to a fiscal year ending before July 1, 1943, whether or not such
determination is embodied in an agreement, he is also entitled to have
a determination in a de novo proceeding before The Tax Court of the
United States.
THE REVENUE BILL OF 1943
38
18. Proceedings must be commenced by the Board within 1 year
after the close of the fiscal year in which the excessive profits Were
received or accrued, or within 1 year after financial statements are
filed by the contractor or subcontractor, whichever is the later; otherwise, liabilities for the excessive profits for such fiscal year will be
DETAILED DISCUSSION OF THE TECHNICAL
PROVISIONS OF THE BILL
discharged.
19. In order to expedite the disposition of the case, after a proceeding has been commenced, the bill provides that the liabilities for excessive profits with respect to which such proceeding was commenced, will
be discharged if B determination by agreement or order is not made
within 1 year following the commencement of the renegotiation pro-
TITLE I-INDIVIDUAL AND CORPORATION INCOME
TAXES AND WITHHOLDING OF TAX AT SOURCE ON
WAGES
ceedings. This limitation does not apply to a review by the Board
of an order by the Secretary. The 1-year period of limitation may
PART I-INDIVIDUAL AND CORPORATION INCOME TAXES
SECTION 101. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE
This section provides that except where otherwise expressly indicated the amendments made by title I shall be applicable only with
respect to taxable years beginning after December 31, 1943.
SECTION 102. NORMAL TAX ON INDIVIDUALS
a
also be extended by agreement between the parties.
20. Your committee continued the provisions of existing law as to
war contract brokers, who are subject to renegotiation if the aggregate
of the amounts received by such broker for the fiscal year exceeds
$25,000. This provision was further strengthened by disallowing as
costs to the prime contractor any commission, percentage, brokerage,
or contingent fee paid or payable to any person for, or in connection
with, the soliciting or securing by such person of a contract with
department, unless such person is a bona fide established commercial
or selling agency maintained by the contractor for the purpose of
securing business
21. The bill provides for closing agreements. Such agreements,
according to their terms, in the absence of fraud or willful misrepresentation, cannot be reopened, so far as the determination of excessive
profits is concerned
22. The renegotiation provisions of the bill are terminated with
respect to contracts or subcontracts made after the date proclaimed
by the President as the termination of hostilities, or such earlier date
as may be specified in a concurrent resolution of Congress.
23. The bill applies to fiscal years ending after June 30, 1943.
Exceptions are made with respect to the exemption for agricultural
commodities which is effective as of April 28, 1942, and the right to
petition The Tax Court of the United States which applies to fiscal
years ending before July 1, 1943, as well as fiscal years ending on or
after that date.
24. All amounts of excessive profits, whether recovered by repay-
ment, withholding, or credit, shall be covered into the Treasury as
miscellaneous receipts.
25. The War Shipping Administration was not specifically named
in the Renegotiation Act as originally adopted. However, the War
Shipping Administration derives substantially all of its powers from
the Maritime Commission, and has been one of the renegotiating
agencies pursuant to Executive order. The amendments continue
the War Shipping Administration as one of the renegotiating agencies,
since under the amendments all of the renegotiating agencies (including the War Shipping Administration) are specifically named.
26. It is the opinion of your committee that under the existing renegotiation law, or such law as amended by this bill, there is no authority to renegotiate the profits accruing to a company by reason of
the increment in value of its long inventories (i. e., inventories over
and above its normal requirements to fulfill existing contracts).
o
Section 11 of the Internal Revenue Code imposes upon individuals
a normal tax of 6 percent of the net income in excess of the credits
provided in section 25 of the code for interest on certain Government
obligations, earned income, personal exemption, and dependents.
Section 102 of the bill amends section 11 to increase the normal tax
rate to 10 percent and to impose such tax upon the net income in
excess of the credits provided in section 25 (a) for interest on certain
Government obligations and the credit provided in section 25 (b) as
amended by section 106 of the bill, relating to the personal exemption
and credit for dependents. Section 11 is also amended by the addition of subsection (b) to impose a minimum tax of 3 percent of the
net income in excess of the credits for interest on certain Government
obligations and a personal exemption and credit for dependents provided in section 25 (c) of the code, as added by section 106 of the
bill. The minimum tax imposed by the new subsection (b) of section 11 is effective in any case in which such tax is greater than the
combined normal tax and surtax imposed by sections 11 (a) and 12.
Under the amendments, the 10 percent normal tax and the 3 percent
minimum tax will not be applicable to interest on Government obligations which under existing law is subject only to surtax. The minimum tax will take effect at varying levels of income depending upon
the status of the individual, the number of dependents, and whether
joint or separate returns are filed. A cross-reference to the alternative tax imposed by section 400 for individuals having gross income
from certain sources of $3,000 or less, is redesignated subsection (c).
SECTION 103. SURTAX ON INDIVIDUALS
This section amends section 12 (b) of the code relating to the rates
surtax on individuals. Under the amendments the rates on surtax
net income between $6,000 and $12,000 are slightly lowered and on
of
39
40
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
all amounts of surtax net income over $38,000 the rates are slightly
imposed by chapter I, computed without regard to the limitation
provided in this section and without regard to the credits for foreign
taxes provided in section 31, to the credits for taxes withheld at the
source provided in section 32, and to the credits for taxes withheld
increased.
SECTION 104. ALTERNATIVE TAX ON INDIVIDUALS WITH GROSS INCOME FROM CERTAIN SOURCES OF $3,000 OR LESS
on wages provided in section 35, exceeds 90 percent of the net income
of an individual for any taxable year, the tax, before the allowance of
such credits, shall be reduced by the amount of such excess. This
limitation is applicable also to estates and trusts.
Subsection (c) of section 105 of the bill contains 13 technical amendments necessitated by the repeal of the Victory tax. These amendments eliminate references in other sections of the code to the pro-
Subsection (a) of this section amends section 400 (supplement
T) of the code to conform the table of taxes on specified amounts of
gross income with the changes made in section 11 relating to the
normal tax and section 25 relating to the credits against net income
for normal tax purposes. Under the proposed amendment, the normal tax, the surtax, and the minimum tax are combined into one
visions of the code relating to the Victory tax. In appropriate in-
table which sets forth the specific amount of the tax at varying income
levels depending upon the status of the individual as single, married,
or head of a family, and the number of his dependents.
stances they replace the reference eliminated with a reference to the
credit provided in section 35 of the code with respect to the tax withheld on wages under chapter 9. The sections of the code affected by
these amendments are: 3, 34, 56 (f), 58 (a) (2) (B), 58 (b) (1) and
(2), 103, 131 (a), 131 (i), 145 (e), 291 (b), 294 (a) (5), 322 (a) (2),
Subsection (b) of section 104 amends section 404 of the code,
relating to taxpayers who are ineligible to determine their tax under
supplement T, to deny to citizens of the United States entitled to the
benefits of section 251 of the code the right to make a return under
supplement T. Such citizens are subject to tax only on gross income
from sources within the United States, and are not entitled to the
same exemptions and credits allowed to citizens generally. Inasmuch as the tax imposed under section 400 takes into account the
personal exemption, credits and deductions ordinarily allowable for
income tax purposes, the use of supplement T by persons entitled to
the benefits of section 251 would operate further to reduce the taxes
paid by such individuals and confer additional benefits to which they
would not otherwise be entitled.
and 322 (e).
SECTION 106. PERSONAL EXEMPTION AND CREDIT FOR DEPENDENTS
This section amends several provisions of the code relating to the
amount and computation of the personal exemption allowed in the
case of individuals (including estates and trusts), and also provides
for personal exemptions and credit for dependents for the purpose of
the minimum tax provided under the amendment to section 11 made
by section 102 of the bill.
Under existing law a single person or a married person not living
with husband or wife is allowed a personal exemption of $500; and
the head of a family or a married person living with husband or wife
is allowed a personal exemption of $1,200. If married persons living
SECTION 105. REPEAL OF VICTORY TAX
This section provides for the repeal of the Victory tax and contains
several technical amendments necessitated by such repeal.
Subsection (a) repeals subchapter D of chapter 1, relating to the
Victory tax on individuals, The repeal of part I of subchapter is,
by section 101 of the bill, made effective for taxable years beginning
after December 31, 1943. By subsection (d) of this section the repeal
of part II of subchapter D, relating to collection of tax at source on
wages, is made effective only with respect to wages paid on or after
January 1, 1944. Thus the provisions of part II of subchapter D
continue in effect with respect to wages paid during 1943 for pay-roll
periods beginning on or before June 30, 1943.
Subsection (b) of this section adds to the code a new section, designated as section 16, which is in substance similar to section 456 of the
present law. Section 456 provides in effect that the Victory tax shall
in no case cause the total tax under chapter I (excluding increases
under section 6 of the Current Tax Payment Act of 1943 and computed without regard to credits against the tax) to exceed 90 percent
of the net income of an individual. Subsection (a) repeals this section
together with all the other sections contained in subchapter D of
chapter I. In view of the fact that section 102 of the bill provides
for the integration of the Victory tax with the normal tax, it was
deemed advisable to retain the underlying principle set forth in section 456. Therefore, this new section provides that in case the tax
41
o
together make separate returns the personal exemption of $1,200 may
be taken by either husband or wife or divided between them in any
proportion. In addition to the personal exemption, section 25 (b) (2)
of the code provides a credit of $350 for each person (other than husband or wife) dependent upon and receiving his chief support from
the taxpayer if such dependent person is under 18 years of age or is
incapable of self-support because mentally or physically defective.
If the taxpayer's status with respect to personal exemption and credit
for dependents changes during the taxable year, section 25 (b) (3) of
the code provides that such exemption and credit shall be apportioned
in accordance with the number of months before and after such change.
Subsection (a) of section 106 amends section 25 (b) (1) of the code to
provide for the purposes of the regular normal and surtax as distinguished from the minimum tax, personal exemptions as follows: (1) a
single person (not the head of a family), $500; (2) the head of a family
(not a married person living with husband or wife), $1,200; (3) a
married person not living with husband or wife (not the head of a
family), $500; (4) a married person living with husband or wife: if a
joint return is filed or if one spouse has no gross income, $1,200; and
if each has gross income and no joint return is filed, $500. The
effect of the amendments, therefore, is to make no change from
existing law with respect to the amount of the personal exemption
in the case of a single person, a head of a family, or married persons
THE REVENUE BILL OF 1943
42
THE REVENUE BILL OF 1943
filing a joint return. Where, however, married persons report their
income on separate returns, the amendments eliminate the election
existing under present law to divide the married persons' exemption
between the spouses as they choose. Under the amendments each
spouse is allowed only the amount of personal exemption to which
a single person would be entitled. No change is made in the credit
married person living with husband or wife), $700; (3) married person
not living with husband or wife (not the head of a family), $500;
(4) married person living with husband or wife: if a joint return is
filed or if one spouse has no gross income, $700; or if each has gross
income and no joint return is filed, $500. A credit for each dependent
is provided in the amount of $100, excluding in the case of the head
of a family one dependent if the taxpayer is the head of a family only
because of dependents for whom he is otherwise entitled to credit.
Subsection (d) of section 106 repeals section 47 (e) of the code,
relating to reduction of personal exemption and credit for dependents
in the case of a short taxable year. The effect of this amendment
to provide for an undiminished personal exemption and credit for
dependents in the case of the return of a decedent for a short taxable
year, such exemption and credit depending upon the status of the
decedent as of July 1 of such taxable year or if his taxable year does
not include July 1, his status as of the date of death. In addition,
this amendment would allow the credits provided in section 163 (a) (1)
in the case of an estate or trust to remain undiminished by reason of
a short taxable year.
Subsection (e) of section 106 amends section 163 (a) (1) of the code
to provide in the case of an estate the same personal exemption allowed
to single persons under section 25 (b) (1) and (c) (1) as amended in this
bill and to insure that in the case of a trust the credit of $100 provided
in section 163 (a) (1) shall be in lieu of the personal exemptions provided under section 25 (b) (1) and (c) (1) of the code.
Subsection (f) of section 106 is a technical amendment to conform
the provisions of section 214 relating to credits against net income in
the case of nonresident alien individuals and section 251 (f), relating
to credits against net income in the case of citizens of the United
States receiving income from sources within the possessions of the
United States, with the changes made in section 25 in the case of
for dependents for the purpose of the normal tax under section 11 (a)
and the surtax.
Section 106 (b) of the bill amends section 25 (b) of the code by
striking out paragraph (3), providing for the apportionment of personal
exemption and credit for dependents. In lieu thereof section 106 (c)
adds new subsection (d) to section 25 to provide that for the pur-
poses of the personal exemption and credit for dependents the status
of the taxpayer shall be determined as of July 1 of the taxable year.
If the taxable year does not include July 1, the status shall be deter-
mined as of the last day of such taxable year. If a change in the
status of the taxpayer occurs on the date fixed as the status determination date for the taxable year, the taxpayer would be entitled to
claim the status which is most advantageous for the purpose of the
personal exemption. For instance, persons marrying on July 1 would
be entitled to the exemption allowed married persons if such date is
their status determination date. Moreover, if prior to marriage on
such date one of such persons occupied the status of the head of a
family he would be entitled to claim the exemption allowed the head
of a family in his separate return for the taxable year. If, however,
the spouses-make a joint return under the provisions of section 51 (b),
as amended by section 107 of the bill, they would be entitled to the
exemption allowed married persons making a joint return. With
respect to the credit for dependents if the age of the person for whom
credit is claimed is 8 factor, it is contemplated that the allowance of
the credit be determined by reference to the birthday of the dependent. Thus if the status determination date of the taxpayer is July 1
of the taxable year, the credit would be allowed for a child born upon
such date. If, however, the eighteenth birthday of a dependent child
occurs on July 1 of the taxable year, the credit for dependents in
respect of such child is not allowed. Similar principles are applicable
where the status determination date is the last day of the taxable
year. The status determination date of July 1 conforms with the
rule applied for the purposes of the alternative tax on the short form
of return, and will eliminate the complexities and difficulties occasioned by the present provisions of the law requiring apportionment.
In connection with the amendments made to section 25, fixing July 1
as the status determination date for the purposes of the personal
exemption, consideration was given to the provisions of section 58 (a)
of the code, and it is the opinion of your committee that no change
is required in the rule provided by existing law. In computing the
amount of the estimated tax, however, the taxpayer's personal exemption should be based upon his anticipated status as of July 1, or the
last day of his taxable year if it does not include July 1.
Subsection (c) also adds to section 25 of the code a new subsection
designated (c) to provide a credit in the form of a personal exemption
and a credit for dependents for the purpose of the minimum tax under
section 11 (b). The exemptions provided are as follows: (1) Single
person (not the head of a family), $500; (2) head of a family (not
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is
citizens.
SECTION 107. RETURNS OF INCOME
Under existing law the requirement for filing returns in the case of
individuals is based upon specified amounts of gross income equivalent
to the personal exemption allowed the individual occupying the status
indicated. Thus section 51 (a) of the code requires a return from an
individual who is single or married and not living with husband or
wife if his gross income is $500 or over and from a married individual
living with husband or wife if his gross income is $1,200 or over, or
if the aggregate gross income of husband and wife is $1,200 or over.
For the purpose of the return requirement, the statute ignores the
status of "head of a family." Section 455 of the code sets out addi-
tional return requirements for the Victory tax. This section is repealed by section 105 of the bill.
Section 107 amends section 51 (a) of the code to conform the
return requirements with the new exemptions provided for the purposes of the minimum tax and to fix the date for the determination of
status for the purposes of such section as of July 1 of the taxable year,
or the last day of the taxable year, if the taxable year does not include
July 1. Under the amendments a return is required of every individual having for the taxable year a gross income of $500 or more unless
a
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44
THE REVENUE BILL OF 1943
such individual (1) is married and living with husband or wife on
the status determination date, (2) is permitted to make a joint
return with his spouse under the provisions of section 51 (b), as
amended by this section, and (3) the aggregate gross income of
United States who are bona fide residents of a foreign country during
the entire taxable year. Except as otherwise provided in section
116 (a), earned income is determined by reference to the definition
such husband and wife is less than $700.
of earned income contained in section 25 (a). As a consequence of the
repeal of section 25 (a) (3) and (4), subsection (b) of section 108 of the
Under the provisions of the present section 51 (b) of the code, a
husband and wife living together on the last day of the taxable
bill amends section 116 (a) (1) and (2) of the code to eliminate the
references to section 25 (a). The definition of earned income previously contained in section 25 (a) (4) is inserted as paragraph (3) of
year may include their income in a single return made by them jointly
and compute the tax on the aggregate income. In view of the
proposed changes fixing the status determination date as of July 1
for the purposes of the personal exemption and the return requirements, section 51 (b) would authorize joint returns in the case of
individuals married and living together on July 1 of the taxable year,
or if the taxable year does not include July 1, on the last day of the
taxable year. Under existing law, joint returns are not authorized if
husband and wife have different taxable years or if they are not living
together on the last day of the taxable year. Hence, if one spouse dies
prior to the last day of the taxable year, the surviving spouse may not
include the income of the deceased spouse in a joint return for such
taxable year. It is not intended that the change in the status determination date should effect any change in the rules applicable to cases
involving different taxable years whether or not occasioned by the
death of a spouse prior to the last day of the taxable year. Accordingly, to remove any doubt as to the rule applicable in such cases,
section 51 (b) is amended to provide that no joint return may be
made if husband and wife have different taxable years. Since the
return of a decedent who dies prior to the last day of the taxable year
is a return for short period and thus differs from the taxable year of
the surviving spouse, the latter may not include the income of the
deceased spouse in a joint return even though death occurred after
July 1 of the taxable year.
Subsection (c) of section 107 of the bill amends section 142 of the
code relating to the requirement of fiduciary returns. Paragraph (1)
of subsection (c) amends section 142 (a), relating to the requirement
of returns by fiduciaries acting on behalf of individuals, to require a
return in the case of every individual having a gross income for the
taxable year of $500 or more without regard to marital status.
Paragraph (2) of subsection (c) is a technical amendment redesignating paragraphs (3), (4), and (5) of section 142 (a) as paragraphs
(2), and (4).
SECTION 108. REPEAL OF EARNED INCOME CREDIT
Subsection (a) of section 108 of the bill repeals several provisions
of the code to eliminate the earned income credit. These are section
25 (a) (3) and (4), relating to earned income credit for normal tax
purposes, section 185, relating to computation of earned income in the
case of the members of a partnership, and section 47 (d), relating to
computation of earned income in the case of a return for a period of
less than twelve months. The elimination of the earned income credit
is effective for taxable years beginning after December 31, 1943.
Subject to certain conditions set forth therein, section 116 (a) of
existing law provides an exemption from tax for earned income derived
from sources without the United States in the case of citizens of the
45
section 116 (a) with an amendment authorizing the Commissioner with
the approval of the Secretary to prescribe by regulations appropriate
rules for the determination of earned income in the case of a taxpayer
engaged in a trade or business in which both personal services and
capital are material income producing factors.
SECTION 109. CERTAIN FISCAL YEAR TAXPAYERS
Section 108 of the code, as added by section 140 of the Revenue
Act of 1942, contains special rules for the computation of the tax
under sections 11, 12, 13, 14, and 15, of the code for a taxable year
beginning in 1941 and ending after June 30, 1942. Such tax is the
sum of the prorated portions of two tentative taxes. The first tentative tax is computed under the law applicable to a taxable year
beginning in 1941 (without regard to sec. 108) and at the rates prescribed for such a taxable year. The second tentative tax is computed under the law applicable to a taxable year beginning in 1941,
with certain modifications relating to certain deductions and credits
in the case of corporations, but at the rates specified for a taxable
year beginning in 1942. The second tentative tax is to be computed
without regard to section 108 except as certain provisions of the code
o
are made specifically applicable in such computation by such section.
Under the law applicable to taxable years beginning in 1941 (other
than sec. 108) used in computing the first tentative tax of a corporation, the excess profits tax imposed by subchapter E of chapter 2 is a
deduction in computing net income. Under the law applicable in
computing the second tentative tax, the income subject to the excess
profits tax is a credit in computing normal tax net income and surtax
net income.
The computation of the excess profits tax, under subchapter E of
chapter 2, of corporations whose taxable year began in 1941 and
ended after June 30, 1942, is prescribed in a manner similar to the
computation under section 108 of the code, by section 710 (a) (3)
of the code, as added by section 203 of the Revenue Act of 1942.
As in section 108, the sum of the prorated portions of two tentative
taxes constitutes the tax.
It was intended that the tentative tax computations in the case
of corporations, both under section 108 and section 710 (a) (3) be
computed upon a parallel basis. Thus the excess profits tax to be
deducted in computing net income for the purposes of the first tentative tax under section 108 (a) (1) (A) should be the first tentative
excess profits tax computed under section 710 (a) (3) (A). The
income subject to excess profits tax to be credited in computing
normal tax net income and surtax net income for the purpose of the
second tentative tax computed under section 108 (a) (1) (B) should
be the income subject to excess profits tax computed for the purpose
46
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THE REVENUE BILL OF 1943
of the second tentative excess profits tax determined under section
710 (a) (3) (B).
taxes from being deducted under subsection (a) relating to deductions
Through a technical inadvertence, however, section 108 (a) (1) (A)
did not exclude consideration of section 710 (a) (3) in the computation
for trade or business expenses and, in the case of an individual, nontrade,
or nonbusiness expenses paid or incurred for the production or collection of income or for the management, conservation, or maintenance
of property held for the production of income. In limiting the allowance of deductions for these taxes to subsection 23 (a) the amendment
makes no change in the law respecting the taxable year for which these
taxes are deductible.
of the first tentative tax. It thus appeared that the excess profits
tax to be deducted in computing normal tax net income for such
computation might be the total excess profits tax computed under
section 710 (a) (3) rather than the first tentative excess profits tax
computed under section 710 (a) (3) (A). Moreover, in the computation of the second tentative tax under section 108 (a) (1) (B), reference
to the increased excess profits tax rates and certain other technical
changes in the base for computing the tax was inadvertently omitted.
The regulations promulgated by the Commissioner under section
108 give full force and effect to the method of computation intended
under section 108 (a) (1) and section 710 (a) (3). Inasmuch as an
amendment to section 108 to relate to taxable years beginning in
1943 and ending in 1944 was required in any event, your committee
has made an exception to the decision to postpone to next year
clarifying changes required as a result of the provisions added by the
Revenue Act of 1942, and has therefore amended section 108 (a) (1)
and section 710 (a) (3) retroactively so as to remove any technical
ambiguity which might have inhered in such sections as added by the
Revenue Act of 1942, to clarify their provisions, and to give express
statutory approval to the regulations issued by the Commissioner
Section 109 of the bill also adds a new subsection to section 108 of
the code to provide for the computation of the tax imposed by sections
SECTION 111. SPECIAL DEDUCTIONS FOR BLIND
This section, which adds a new subsection 23 (y) to the code, provides that in the computation of net income a special deduction of
$500 from gross income shall be allowed all blind individuals. For
the purposes of this deduction, the term "blind individual" means an
individual whose central visual acuity does not exceed 20/200 in the
better eye with correcting lenses, or whose visual acuity is greater
than 20/200 but is accompanied by a limitation in the fields of vision
such that the widest diameter of the visual field subtends an angle no
greater than 20°. This definition corresponds to that adopted by the
Social Security Board for the purpose of carrying out title X of the
Social Security Act, as amended, relating to grants to States for aid
to the blind. A person who is blind at any time on the status determination date for the taxable year will be entitled to this deduction
for such taxable year.
SECTION 112. RETURNS BY ORGANIZATIONS EXEMPT FROM TAXATION
11, 12, 13, 14, and 15 in the case of taxable years beginning in 1943 and
ending in 1944. It provides that in the case of a corporation or
an individual the tax shall be in an amount equal to the sum of (a)
that portion of the tentative tax (computed as if the law applicable
to taxable years beginning on January 1, 1943, were applicable to
such taxable year) which the number of days in such taxable year
prior to January 1, 1944, bears to the total number of days in such
taxable year plus (b) that portion of a tentative tax (computed as if
the law applicable to taxable years beginning on January 1, 1944,
were applicable to such taxable year) which the number of days in
such taxable year after December 31, 1943, bears to the total number
of days in such taxable year.
In section 109 of the bill, as in section 108 of the code, insurance
companies subject to the provisions in Supplement G, investment
companies subject to the provisions of Supplement Q. and Western
Hemisphere trade corporations, as defined in section 109 of the code,
are specifically exempted from section 108. In addition, this section
does not apply to individuals who pay their taxes under Supplement T.
SECTION 110. DENIAL OF DEDUCTION FOR FEDERAL EXCISE TAXES
NOT DEDUCTIBLE UNDER SECTION 23 (a)
This section amends section 23 (c) (1) of the code which allows a
deduction in computing net income for taxes paid or accrued during
the taxable year. A new subparagraph is added to section 23 (c) (1)
disallowing a deduction under this paragraph of the code for Federal
import duties and Federal excise and stamp taxes. It is stated, however, that subsection (c) of section 23 shall not prevent such duties and
47
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This section of the bill amends section 54 by adding a new subsection
(f), requiring organizations exempt from taxation under section 101 to
file annual returns of their income, receipts, and disbursements, and to
keep such records and report whatever other information may be required by the Commissioner, with the approval of the Secretary.
The amendment specifically exempts certain of such exempt organizations from the annual return requirement of the subsection. These
include religious organizations which the Commissioner has specifically ruled are exempt from taxation under paragraph (6) of section 101
and organizations similarly ruled to be exempt under such paragraph
which are operated, supervised, or controlled by or in connection with
such religious organizations; educational institutions also exempted by
ruling of the Commissioner under such paragraph, which maintain a
regularly organized faculty, curriculum, and student body in attendance at the places where their educational activities are regularly
carried on; charitable organizations, likewise ruled by the Commissioner to be exempt under paragraph (6), which are supported, wholly
or partially, by Federal or State funds or which are supported primarily by contributions of the general public, as distinguished from a
few contributors or donors or from related or associated persons.
The insertion of this subsection, as well as the exclusion of these
organizations from the operation of the subsection, 80 far as it relates
to the filing of annual returns, does not impair the powers the Commissioner now exercises or otherwise has with respect to requiring
such returns, by duly prescribed and approved regulations.
This new subsection is made applicable to all taxable years beginning after December 31, 1942.
THE REVENUE BILL OF 1943
48
THE REVENUE BILL OF 1943
SECTION 113. BACK PAY ATTRIBUTABLE TO PRIOR YEARS
SECTION 115. ACQUISITIONS To AVOID INCOME OR EXCESS
As a result of an alleged unfair labor practice of his employer under
the National Labor Relations Act, an alleged violation of section 6 or 7
of the Fair Labor Standards Act of 1938, or a retroactive wage increase
provided for by the National War Labor Board, an individual taxpayer
may receive during the taxable year back pay which is in part attributable to one or more prior years. In this event the back pay may be
subject to a greater income tax than if it had been received in the years
from which it arises. Section 113 of the bill adds a new section 110
to the code to limit the tax in this event. Under the new section, the
tax on such back pay is limited to the aggregate of the taxes which
would be attributable to that pay if the portions of the pay attributable
to prior years were included in gross income for those years according
to the amount arising from each such year for which payment is made.
The Commissioner, with the approval of the Secretary of the Treasury
is to prescribe regulations for determining the portions of such pay
PROFITS TAX
This section adds 8 new section 129 to chapter I of the code providing
that in the case of acquisitions on or after October 8, 1940, of an interest in or control of corporations or property which the Commissioner
finds to be principally motivated by or availed of for the avoidance of
income or excess profits tax by securing the benefit of a deduction,
credit, or other allowance, then the tax benefits are to be disallowed
or allowed only in part in a manner consistent with the prevention of
tax avoidance. This section is designed to put an end promptly to
any market for, or dealings in, interests in corporations or property
which have as their objective the reduction through artifice of the
income or excess profits tax liability.
The crux of the devices which have come to the attention of your
committee has been some form of acquisition on or after the effective
date of the Second Revenue Act of 1940, but the devices take many
forms. Thus, the acquisition may be an acquisition of the shares
of a corporation, or it may be an acquisition which follows by operation of law in the case of a corporation resulting from a statutory
merger or consolidation. The person, or persons, making the acquisition likewise vary, as do the forms or methods of utilization under
which tax avoidance is sought. Likewise, the tax benefits sought
may be one or more of several deductions or credits, including the
utilization of excess profits credits, carry-overs and carry-backs of
losses or unused excess profits credits, and anticipated expense or
other deductions. In the light of these considerations, the section
has not confined itself to a description of any particular methods for
carrying out such tax avoidance schemes but has included within its
scope these devices in whatever form they may appear. For similar
which may be attributable to years prior to the taxable year. This
new section is made applicable to all taxable years beginning after
December 31, 1940.
SECTION 114. PERCENTAGE DEPLETION FOR FLAKE GRAPHITE,
VERMICULITE, POTASH, BERYL, FELDSPAR, MICA, LEPIDOLITE,
AND SPODUMENE
Subsection (a) of this section amends the heading and the first
sentence of section 114 (b) (4), relating to percentage depletion for
coal, fluorspar, ball and sagger clay, rock asphalt, and metal mines,
and sulphur, so as to include among the mines or deposits entitled to
percentage depletion flake graphite, vermiculite, beryl, feldspar, mica,
lepidolite, spodumene, and potash. In the case of flake graphite,
vermiculite, beryl, feldspar, mica, lepidolite, and spodumene mines,
the allowance for depletion shall be 15 percent, and in the case of
potash mines or deposits, the allowance for depletion shall be 23 percent, of the gross income from the property during the taxable year,
excluding from such gross income an amount equal to any rents or
royalties paid or incurred by the taxpayer in respect of the property.
This allowance is subject to the further limitations contained in the
existing provisions of section 114 (b) (4).
Subsection (b) amends section 114 (b) (2) relating to discovery value
of certain mines, so as to debar the use of the discovery value as the
basis for depletion in the case of flake graphite, vermiculite, beryl,
feldspar, mica, lepidolite, spodumene, and potash mines.
Subsection (c) provides that the amendments made by subsections
(a) and (b), insofar as they apply to flake graphite mines, shall be
applicable to taxable years beginning after December 31, 1942.
Subsection (d) provides that the amendments made by subsections
(a) and (b) and the amendments made to section 114 of the code by
section 145 of the Revenue Act of 1942, providing percentage depletion
for fluorspar, ball and sagger clay, and rock asphalt, shall not be
applicable to any taxable year beginning on or after the date of the
termination of hostilities.
49
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reasons, the scope of the terms used in the section is to be found in the
objective of the section, namely, to prevent the tax liability from being
reduced through the distortion or perversion effected through tax
avoidance devices. The term "Federal income or excess profits tax'
refers to any Federal tax imposed by Congress upon an income base.
The term 'deduction, credit or allowance" has reference to any
provision which has the effect of diminishing the tax liability resulting
from the gross amount of any item of income or the aggregate of the
gross amounts of any or all items thereof.
Since the objective of the section is to prevent the distortion
through tax avoidance of the deduction, credit, and allowance provisions, the section does not abrogate or delimit, but supplements
and extends, the present provisions of the code, and the principles
established by judicial decisions, having the effect of preventing
the avoidance of taxes. (See I. R. C., secs. 45, 102, 112, 115, and
337: Gregory v. Helvering, 293 U. S. 465; Griffiths v. Commissioner,
308 355; Higgins V. Smith, 308 U. S. 473; U. Joliet & Chicago
R. Co., 315 U. S. 44; Moline Properties V. Commissioner, 319 U.
436; Interstate Transit Lines V. Commissioner, 63 Sup. Ct. 1279;
& A. B. Spreckels Co. V. Commissioner, 41 B. T. A. 370.)
Subsection (a) provides for the disallowance in its entirety of
the tax benefit sought by the tax-avoidance device, but in order that
the disallowance may be consistent with the purpose and appropriate
scope of the section, subsection (b) authorizes the allowance of such
92237-43-
50
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THE REVENUE BILL OF 1943
part of the deduction, credit, or allowance as will not result in the
avoidance of the taxes sought by the acquisition or its utilization.
It also contains authority permitting the allocation or distribution of
the grantor, whom he is legally obligated to support, except to the
extent that such income is actually so applied or distributed It
any deduction, credit, or allowance between or among the corporations
further provided that in those cases where the amounts so applied or is
or properties involved Due to the complex and varied form in
distributed are paid out of corpus or out of other than income, such
amounts are to be considered paid out of income to the extent that
which transactions of this character may be cast, the apportionment
problems involved will require the specialized knowledge and experience of the Commissioner and his staff. Accordingly, section 129 (b)
grants the Commissioner broad authority (of the same kind as that
now exercised by him under secs. 45 and 141) commensurate with the
task of determining such proper allowance. Thus the consideration
passing upon the acquisition or the income of the corporations or
they do not exceed the income of the trust for such taxable year which
is not paid, credited, or distributed under section 162 of the code.
Thus, if the trust provides for the annual payment of income to the
grantor's adult son whom he is no longer legally obligated to support
in an amount not exceeding $10,000. and the application of the remain-
ing income or principal, in the trustee's discretion, to the support of
the grantor's minor daughter, and if out of the entire income for the
properties involved may, in appropriate cases, be an important
taxable year aggregating $12,000 the trustee pays $10,000 to the son,
and applies the other $2,000 as well as principal in the sum of $1,000
to the support of the daughter, the grantor is taxable with respect
factor in determining a proper credit, deduction, or allowance.
To prevent any implication that section 45 was or is intended in a
narrower sense than the new section 129, the amendment made by
subsection (b) of this section 115 conforms the phrase used in section
45 to that used in section 129 (sec. 115 (a) of the bill). It is believed
that the amendment makes no change in existing law.
Subsection (c) of this section makes the provisions of this section
applicable to taxable years beginning after December 31, 1939.
Under the applicability clauses in chapter 2 (such as secs. 508, 603,
702, and 729), the provisions of the section become applicable to each
of the taxes imposed under chapter 2, including, of course, the excess-
to $2,000 of trust income. Subsection (c) is not applicable if discretion to apply or distribute the trust income for support, maintenance, or education rests solely in the grantor or in the grantor in
conjunction with other persons unless the grantor has such discretion
as trustee.
profits tax.
SECTION 116. TRUSTS FOR MAINTENANCE OR SUPPORT OF CERTAIN
BENEFICIARIES
Subsection (a) of this section adds a new subsection (c) to section
167 of the code, relating to trust income which is attributed to the
grantor.
Under existing law the income of a trust which is created in order
to maintain or support a beneficiary whom the grantor is legally
obligated to maintain or support is taxable to the grantor (Douglas
v. illcuts. 296 (1935)). In accordance with the settled principle of Douglas v. Willcuts it has been held that if income of a trust
may, in the discretion of persons lacking a substantial adverse interest,
be applied in discharge of the same obligation, the income is taxable
to the grantor regardless of whether or not it is actually so applied
(Helvering V. Stuart, 317 154 (1942)). This decision has, in effect,
overruled G. C. M. 18972, C. B. 1937-2, page 231, which for reasons
of administrative convenience had adopted the rule that in cases of
such discretionary trusts the income is taxable to the grantor only to
the extent that it is actually applied in discharging his obligation of
maintenance or support. In view of various administrative difficulties created by a strict application of the decision in Helvering V.
Stuart, your committee has deemed it desirable to return to the rule
approved in C. M. 18972 and has amended section 167 in order to
accomplish this result.
New subsection (c) provides that income shall not be taxable to the
grantor under section 167 (a) of the code or any other provision of
chapter 1 thereof merely because such income in the discretion of
another person or the trustee, may be applied or distributed for the
support or maintenance of a beneficiary, such as the wife or child of
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Subsection (c) does not' affect the present scope of sections 22 (k)
and 171 of the code. Nor does subsection (c) alter the principles
governing the taxability of trust income to the grantor under some
other provision of law. For example, trust income remains taxable
to the grantor under section 22 (a) of the code if the terms of the
trust, not excluding the discretionary power to apply trust income,
and all the circumstances attendant on its creation and operation
indicate that the grantor has retained a control of the trust so complete that he is still, in practical effect, the owner of its income.
The grantor of a trust continues to be taxable under section 167
with respect to such income as may, in the discretion of persons
lacking a substantial adverse interest, be applied in discharge of
his obligations other than his obligation of support and maintenance
falling within the amendments made by subsection (c). Thus if
the grantor creates a trust the income of which may, in the discretion
of a person lacking a substantial adverse interest, be applied in the
payment of his debts, such income is taxable to the grantor regardless of whether it is actually so applied
The Treasury Department has already provided in I. T. 3609 that
the decision in the Stuart case will not be applied retroactively because
of difficulties which would otherwise arise. While this action adequately provides for prior years, since any limitation of the amendments made by your committee to future years might cause some
misunderstanding as to the tax liability for prior years, it has accordingly provided in subsection (b) of this section for the retroactive
application of the amendments.
Subsection (b) (1) of this section provides that the amendments
made by subsection (a) shall be applicable with respect to taxable
years beginning after December 31, 1942, unless a taxable year of the
trust beginning in 1942 ends within a taxable year of the grantor beginning in 1943, in which case (except as provided in subsection (b) (2))
the amendments shall not be applicable to such taxable year of the
grantor. Thus, if the trust is on a fiscal year ending June 30, and the
grantor is on a calendar year, the amendments will be effective with
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THE REVENUE BILL OF 1943
respect to the trust commencing with its fiscal year beginning July 1,
1943. Since the grantor's return for the calendar year 1943 includes
the income of the trust's fiscal year beginning on July 1, 1942, and
ending on June 30, 1943, the amendments will first be applicable, with
respect to the grantor, to his calendar year 1944.
Paragraph (2) of subsection (b) provides that the amendments
made by subsection (a) shall apply retroactively if there are filed
with the Commissioner (in accordance with regulations prescribed by
him with the approval of the Secretary) at such time and by such
persons as may be prescribed under such regulations, signed consents
that there shall be paid, at such time as the Commissioner may
prescribe, all of the taxes under chapter I of the Internal Revenue
Code or under the corresponding provisions of prior revenue laws
which would have been paid for the taxable years concerned if such
amendments had been B part of the revenue laws applicable to such
taxable years. Paragraph (3) of subsection (b) provides that such
subsection does not change any provision or rule of law limiting the
allowance of refund or credit with respect to overpayments of the
grantor. However, if consents are filed within the period in which
claim for credit or refund may be filed by the grantor, the period within
which such claim for credit or refund may Be filed, or credit or refund
allowed or made if no claim is filed, with respect to any overpayment
by the grantor resulting from the consents shall include one year
immediately after the date of the filing of the consents. It is further
provided that with respect to any deficiency resulting from consents
filed, the period of limitations for making assessment and the beginning
of distraint or a proceeding in court for collection shall include one
year immediately after the date such consents are filed, and such assess-
ment and collection may be made notwithstanding any provision of
the internal revenue laws or any rule of law which bars such adjustment (such as a prior judicial determination of the tax for the taxable
period of the person signing the consent). No interest is to be allowed or paid on any refund or credit to the grantor, and no interest
shall be assessed on any deficiency, resulting from the filing of the
consents.
SECTION 117. TREATY OBLIGATIONS
This section provides that no amendment made by title I of the
bill shall apply in any case where its application would be contrary
to any treaty obligations of the United States.
PART 1I-WITHHOLDING AT SOURCE ON WAGES
SECTION 150. YEARS TO WHICH APPLICABLE
This section provides that the amendments made by Part II of the
bill shall be applicable with respect to wages paid on or after January
1, 1944, except that such amendments shall not apply to wages paid
during the calendar year 1944 with respect to pay-roll periods beginning before January 1, 1944. Wages paid in 1944 with respect to
pay-roll periods beginning before 1944 will be subject to the withholding provisions of the present law.
53
SECTION 151. DEFINITIONS
The exemptions allowed for the purposes of determining the amount
of tax to be withheld at the source are based roughly on the amount
of the personal exemption allowed for income tax purposes under
section 25 of the code. Hence, the determination of the withholding
exemption or the wage bracket table applicable in a specific case is
dependent upon the status of the individual as single, married, etc.,
and in the case of married persons where both spouses are employed,
the amount of the withholding exemption claimed by each spouse.
The status of the individual for the purposes of withholding is determined upon the basis of the information set forth in the withholding
exemption certificate required to be furnished to the employer by the
employee. The definitions relating to status for purposes of withholding are contained in section 1621 of the code. Under existing
law if husband and wife are both employed, each may claim one-half
of the withholding exemption allowed a married person or they may
agree to allow one spouse to claim all of the withholding exemption,
and the other spouse to claim none of the withholding exemption.
The definitions relating to the status of married persons for purposes
of withholding of tax at the source are contained in section 1621
(g), (h), and (i) of the code. These definitions recognize three classes
of married persons: (1) Married person claiming all of personal
exemption for withholding; (2) married person claiming half of personal exemption for withholding; and (3) married person claiming
none of the personal exemption for withholding.
Under existing law the aggregate amount of the personal exemption
allowed a married couple is the same whether joint or separate returns
are filed, and a similar principle was applied for withholding tax
purposes in the case of married persons where both spouses are
employed. However, under the provisions of section 106 of the bill,
married persons filing a joint return are allowed a personal exemption
of $1,200, whereas married persons filing separate returns are allowed
an aggregate maximum exemption of $1,000. In conformity with
these changes in the personal exemption made by reason of the inte-
gration of the Victory tax and the imposition of 8 minimum tax. the
withholding exemption schedules and the wage bracket tables have
been revised. Under the revised schedules and tables if a husband
and wife are both employed and both claim withholding exemption,
the exemption of each is the same as the exemption allowed a single
person, and hence the aggregate of the exemptions allowed does not
equal the exemption allowed where one spouse claims the entire
exemption for withholding tax purposes. Accordingly, subsections
(g), (h), and (i) of section 1621, relating to the status of married
persons for withholding exemption purposes, are amended by section
151 (a) of the bill to conform with these changes and to define, respectively, (1) married person claiming a personal exemption for withhold-
ing whose spouse claims none; (2) married person claiming a
personal exemption for withholding whose spouse claims a personal
exemption for withholding; and (3) married person claiming no personal exemption for withholding.
Section 151 (b) amends section 1621 (k) of the code, relating to the
definition of the term "dependent" for the purposes of withholding
54
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
under the provisions of section 1622. Under existing law, the withholding exemption schedule provides for the elimination of one de-
section with the changes made by section 106, relative to the status
pendent in the case of the head of a family. Likewise, the wage bracket
tables applicable in the case of the head of a family having a specified
number of dependents take into account all but one of such dependents.
determination date for the purposes of the personal exemption
provided in section 25 (b). Section 1622 (h) of existing law provides
that a withholding exemption certificate furnished by reason of
change of status shall take effect not later than the first payment of a
wages made on or after the first status determination date occurring
at least 30 days after the certificate is furnished At the election of
the employer, however, such certificate may be given effect with
respect to any payment of wages made on or after the date the certificate is furnished Status determination date is defined as January 1
The rule thus provided represents an attempt to simplify for withholding tax purposes the rule set forth in section 25 (b) (2) (B) relative
to the credit for dependents for income tax purposes. This latter rule
denies the credit for one dependent in the case of the head of a family
if the taxpayer occupies the status of head of a family solely by reason
of dependents for whom the credit is claimed. It is the opinion
your committee that the rule applied for income tax purposes should
of
or July 1 of the taxable year. In view of the elimination of the
requirement for proration of the personal exemption in the case of a
change of status during the taxable year, and the substitution therefor
of 8 fixed date, July 1, to govern the allowance of the personal exemption, section 1622 (h) (1) is amended so as to permit an employer to
give immediate effect only with respect to changes of status occurring
on or before July 1. Where a withholding exemption certificate is furnished on account of a change of status occurring after July 1 such
change shall not be given effect until the first payment of wages made
on or after January 1 of the succeeding calendar year.
likewise be followed for the purpose of computing the tax to be
withheld under the provisions of section 1622. This is accomplished by amending the definition of dependent contained in section
1621 (k) to provide for the exclusion as a dependent in the case of the
head of a family one who would be excluded under section 25 (b)
(2) (B) for income tax purposes and by complementary changes in
the withholding exemption schedules and the wage bracket tables
applicable to the head of a family.
SECTION 152. WITHHOLDING OF TAX AT SOURCE ON WAGES
TITLE II-EXCESS PROFITS TAX
Subsection (a) of section 152 contains technical amendments chang-
PART I-EXCESS PROFITS TAX AMENDMENTS
ing the reference in section 1622 (a) (1) from "family status withholding exemption" to "normal tax and surtax withholding exemp-
SECTION 201. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE
tion,' and changing the reference in section 1622 (a) (2) from "Victory
tax
tion.'withholding exemption" to "minimum tax withholding exemp-
This section provides that the excess profits tax amendments made
by this title of the bill shall be applicable only with respect to taxable
Section 152 (b) amends section 1622 (b) (1) (A) to change the
reference to "normal tax and surtax withholding exemption" from
years beginning after December 31, 1943, except as otherwise expressly
"family status withholding exemption," and to provide a new schedule
for such withholding exemption in order to conform with the changes
resulting from the integration of the Victory tax and the consequent
changes in exemptions for income-tax purposes.
Section 152 (c) amends section 1622 (b) (1) (B) to change the
reference to minimum tax withholding exemption from Victory tax
withholding exemption, and to provide a schedule for the minimum
tax withholding exemption in lieu of the Victory tax withholding
exemptions The new schedule is based upon the personal exemptions
and credit for dependents allowed for purposes of the minimum tax
and unlike the Victory tax withholding exemptions is dependent upon
the status of the individual involved.
Section 152 (d) amends section 1622 (c) of the code relating to wage
bracket withholding to provide a new series of tables in lieu of those
contained in existing law. The revised tables take into account the
changes made in exemptions as the result of the integration of the
Victory tax and the substitution of the minimum tax and also the
provided.
O
SECTION 202. INCREASE IN EXCESS PROFITS TAX RATE
Subsection (a) of this section amends section 710 (a) (1) (A) of the
code by increasing the 90 percent rate specified therein to 95 percent.
Subsection (b) amends section 26 (e) of the code, which provides
for the credit for income subject to excess profits tax to be used in
the computation of normal tax net income and corporation surtax net
income, by providing that in the case of any corporation which computes its excess profits tax under section 721 (relating to abnormalities
in income in the taxable period), section 726 (relating to corporations
completing contracts under the Merchant Marine Act of 1936), section 731 (relating to corporations engaged in mining strategic minerals),
or section 736 (b) (relating to corporations with income from long-term
contracts), the credit for income subject to the excess profits tax shall
be the amount of which tax imposed by subchapter E of chapter 2 is
95 percent, instead of 90 percent.
SECTION 203. CERTAIN FISCAL YEAR TAXPAYERS
changes made with respect to the credit for dependents in the case
of the head of a family The rules relating to the application of the
law. tables to specific types of cases are the same as those under existing
Subsection (e) of section 152 amends section 1622 (h) of the code, re-
lating to withholding exemption certificates, in order to conform that
55
Section 710 (a) (3), as added by section 203 of the Revenue Act
1942, contains special rules for the computation of the excess profits
tax under subchapter E of chapter 2 in the case of taxable years begin-
of
ning in 1941 and ending after June 30, 1942. This tax is the sum of
56
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
the prorated portions of two tentative taxes. The first tentative tax
is computed under the law applicable to the taxable year beginning in
1941 and at the rates (or in the amounts of tax) specified for such a
taxable year but without regard to the provisions of section 710 (a) (3).
The second tentative tax is computed under the law applicable to the
taxable year beginning in 1941, but with certain modifications relating
to certain deductions and credits in the base for computing the tax,
and at the rates (or in the amounts of tax) specified for a taxable year
beginning in 1942. The second tentative tax is to be computed without regard to the provisions of section 710 (a) (3), except insofar as
certain provisions of the code are made applicable by such section.
In computing the second tentative excess profits tax under section
710
(a) (3) (B) the 80 percent limitation provided by section 710 (a)
(1) (B) might be applicable. Under this limitation the excess profits
tax cannot exceed an amount which when added to the tax imposed
under chapter 1 equals 80 percent of the corporation surtax net income
(computed without regard to the credit provided in section 26 (e) relating to income subject to excess profits tax imposed by subchapter E
of chapter 2). If such limitation is applicable, it becomes necessary to
ascertain the amount of the tax under chapter 1 for the taxable year.
It was the intention that in computing the second tentative excess
profits tax under section 710 (a) (3) (B) the amount of the tax under
chapter 1 to be used in computing the 80 percent limitation should be
the second tentative normal and surtax computed under subparagraph
(B) of section 108 (a) (1). That section provides for a tax computation similar to that of section 710 (a) (3) in computing normal tax and
surtax. However, because of a technical inadvertence, no specific
provision was inserted in section 710 (a) (3) providing that the total
tax computed under section 108 (a) (1) should be disregarded, and that
only the second tentative tax computed under section 108 (a) (1) (B)
Act of 1942, to clarify their provisions, and to give express statutory
approval to the regulations issued by the Commissioner
This section also adds a new paragraph (6) to section 710 (a) of the
code to provide for the computation of the excess profits tax in the
case of taxable years beginning in 1943 and ending in 1944. This
computation is similar to that provided with respect to the computation
109 of
of normal
this bill.and surtax under section 108 (b), as amended by section
The new paragraph provides that in the case of a taxable year
beginning in 1943 and ending in 1944, the excess profits tax imposed
by subchapter E of chapter 2 shall be an amount equal to the sum of
(a) that portion of a tentative tax (computed as if the law applicable
to taxable years beginning on January 1, 1943, were applicable to
such taxable year) which the number of days in such taxable year
prior to January 1, 1944, bears to the total number of days in such
taxable year, plus (b) that portion of a tentative tax (computed as if
the law applicable to taxable years beginning on January 1, 1944,
were applicable to such taxable year) which the number of days in
such taxable year after December 31, 1943, bears to the total number
of days in such taxable year.
SECTION 204. INCREASE IN SPECIFIC EXEMPTION
This section amends section 710 (b) (1) (relating to specific exemption), section 729 (b) (2) (relating to excess profits tax return requirement), and section 141 (c) (relating to the computation of tax in case
consolidated returns are filed), to increase the specific exemption
applicable in the computation of adjusted excess profits tax net
income from $5,000 to $10,000.
SECTION 205. REDUCTION OF EXCESS PROFITS CREDIT BASED ON
should be used in the computation of the 80 percent limitation.
Moreover, this technical omission might give rise to a circular computation in cases in which the 80 percent limitation is applicable since
the first tentative normal and surtax to be used in computing the total
normal tax and surtax under section 108 (a) (1) (A) is based upon the
allowance of the excess profits tax as a deduction in computing net
income, and since the portion of such excess profits tax under the 80
percent limitation could not be ascertained until the total normal tax
and surtax had been first computed under 108 (a) (1) (A).
The regulations promulgated by the Commissioner under section
710 (a) (3) give expression to the computation intended to be prescribed by section 710 (a) (3) which would require a parallel computation of the first tentative excess profits tax under section 710 (a) (3)
(A) and the first tentative normal tax and surtax under section 108
(a) (1) (A), and a parallel computation of the second tentative
excess profits tax under section 710 (a) (3) (B) and the second tentative normal tax and surtax under section 108 (a) (1) (B). Inasmuch
as an amendment to section 710 to relate to taxable years beginning
in 1943 and ending in 1944 was required in any event, your committee
has made an exception to the decision to postpone to next year clarifying changes required as a result of the provisions added by the Revenue
Act of 1942, and has therefore amended section 710 (a) (3) and section
108 (a) (1), retroactively, so as to remove any technical ambiguity
which might have inhered in such sections as added by the Revenue
C7
o
INVESTED CAPITAL IN CERTAIN BRACKETS
This section amends section 714 of the code, relating to the excessprofits credit based on invested capital by reducing by 1 percent the
existing percentages of invested capital taken as the invested capital
credit with respect to amounts of invested capital over $5,000,000.
Under existing law the invested capital credit is computed as 8 percent of the first $5,000,000 of invested capital, 7 percent of the next
$5,000,000, 6 percent of the next $190,000,000, and 5 percent of the
balance over $200,000,000. This amendment provides for a credit
determined as 8 percent of the first $5,000,000 of invested capital, 6
percent of the next $5,000,000, 5 percent of the next $190,000,000,
and 4 percent of the balance over $200,000,000
SECTION 206. PUBLICITY OF RELIEF GRANTED UNDER SECTION 722
This section adds a new subsection (g) to section 722 to provide for
publicity of certain salient facts with respect to relief granted under
section 722 of the code. The amendment provides that the Commissioner shall compile for each fiscal year B list, arranged alphabetically
and according to internal revenue districts, of all cases in which relief
has been allowed pursuant to section 722 during such year either by
the Commissioner or The Tax Court of the United States. This
compilation shall contain the name and address of each taxpayer to
THE REVENUE BILL OF 1943
58
THE REVENUE BILL OF 1943
which relief has been allowed, the business in which the taxpayer is
engaged, the amount of the excess profits credit of the taxpayer before
such allowance, the increase in such excess profits credit claimed and
the increase in such credit allowed, and the amount of the gross reduction in the excess profits tax and of the gross increase in the tax under
chapter 1, which results from the operation of section 722. In the
case of relief allowed by The Tax Court the Commissioner shall also
set forth the data previously reported pursuant to this subsection
with respect to relief previously allowed in such case by the Com-
Section 735 (a) (8) (relating to the definition of "timber block")
has also been amended so as to strike out the prohibition that an
operation unit acquired after December 31, 1941, would not be included in the composition of a timber block.
In addition, this section of the bill extends to natural gas companies
relief similar to the relief granted under the present law with respect to
coal mining and iron mining properties and timber blocks. How-
ever, in the case of natural gas companies, the nontaxable income from
exempt excess output is to be computed with respect to net income
derived from withdrawal, storage, and transportation by pipe line, of
natural gas, but is not to include any income attributable to the distribution of such gas. It is understood that the transportation by pipe
line of natural gas ends at the point where the distribution system
begins, for example, the city gate in the case of natural gas brought to
missioner This compilation shall be published in the Federal
Register.
SECTION 207. STRATEGIC MINERALS
This section amends section 731 of the code relating to the exemp-
tion from excess profits tax of the portion of the adjusted excess
profits net income attributable to the mining in the United States of
a city for local distribution. Transportation by pipe line does not
include the process of distributing the gas to the ultimate consumer.
The relief extended to a natural gas company is available only if the
whole or any part of its natural gas property was in operation during
the base period as defined in section 735.
Therefore section 711 (a) (1) (I) and (a) (2) (K) is amended to
include natural gas companies within the scope of those corporations
entitled to exclude nontaxable income from exempt excess output in
the computation of excess profits net income. Section 735 (a) (1) is
amended by including the term "natural gas company" which means a
corporation engaged in the withdrawal, or transportation by pipe line,
of natural gas. Section 735 (a) (2) and (3) (relating to the definition
certain strategic minerals so as to extend the benefits of such section
to corporations mining fluorspar, flake graphite, and vermiculite.
SECTION 208. NONTAXABLE INCOME OF CERTAIN INDUSTRIES WITH
DEPLETABLE RESOURCES
This section amends sections 711 (a) (1) (I), 711 (a) (2) (K), and
various paragraphs of section 735 so as to exempt from excess profits
tax a certain portion of the income of a lessor of mineral property or
a timber block, of new coal and iron mines and timber blocks not in
operation during the base period, and of certain natural gas companies
of "mineral unit' and "timber unit") are consolidated into section
Under existing law a lessor is not included within the definition
of a producer of minerals or a producer of logs or lumber from a
timber block which is entitled to exclude from its excess profits net
income the amount of nontaxable income from exempt excess output.
Sections 711 (a) (1) (I), 711 (a) (2) (K), and 735 (a) (1) are amended
by this section to permit a lessor to exclude from excess profits net
income nontaxable income from exempt excess output as defined
in section 735 (b). The term "lessor' has been defined to mean a
corporation which owns an economic interest in a mineral property or
a timber block, and is paid in accordance with the number of mineral
units or timber units recovered therefrom by the producer to which
such property or block is leased by the lessor. Section 711 (a) (1) (I)
and (a) (2) (K) are amended so as not to authorize a lessor to exclude
from excess profits net income any amounts of royalties which could
be claimed to represent a distribution by the lessee producer of nontaxable bonus income derived from bonus payments made by any
agency of the United States Government pursuant to section 735 (c).
The present provisions of section 735 extend no relief to coal mining
or iron mining properties or timber blocks which were not in operation
during the base period. Subsection (c) of this section of the bill
adds a new paragraph to section 735 (b) which provides that for any
taxable year, the nontaxable income from exempt excess output of
a coal mining or iron mining property or a timber block, which was
not in operation during the base period, shall be an amount equal to
one-sixth of the net income for such taxable year (computed with
the allowance for depletion) from the coal mining or iron mining
property or from the timber block, as the case may be.
59
735 (a) (2) and this section is expanded to include the term "natural
gas unit which means a unit of natural gas sold by a natural gas
company. Section 735 (a) (4) (relating to the definition of "excess
output is renumbered section 735 (a) (3) and is amended to include
O
"natural gas unit.' Section 735 (a) (5) (relating to the definition
of "normal output") is renumbered section 735 (a) (4) and is amended
to include the determination of normal output in the case of a natural
gas company. In such case the term "normal output" means the
average annual natural gas units sold in taxable years beginning after
December 31, 1935, and not beginning after December 31, 1939 (here-
inafter called "base period"), of the person owning the natural gas
property (whether or not the taxpayer). The remaining provisions
of section 735 (a) (5) are amended to include, along with mineral units
and timber units and mineral property and timber blocks, natural gas
units and natural gas property.
A new paragraph (5) is added to section 735 (a) to define the
term "natural gas property" which means the property of a natural
gas company used for the withdrawal, storage, and transportation by
pipe line, of natural gas, excluding any part of such property which
an emergency facility within the provisions of section 124.
Section 735 (a) (12) (relating to the definition of "unit net income")
is amended to provide that in respect of a natural gas property, the
term "unit net income" means the amount ascertained by dividing
the net income, computed in accordance with regulations prescribed
by the Commissioner with the approval of the Secretary, from such
property during the taxable year by the number of natural gas units
sold in such year. It is contemplated that the Commissioner with the
is
60
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
approval of the Secretary will issue under this section appropriate
regulations providing rules for the allocation of items of income, costs,
section 780 (c) provides, in part, that the bonds shall not be transferable by sale, exchange, assignment, pledge, hypothecation, or
expenses, and other deductible amounts between the natural gas
property and the other property (or activities) of the natural gas
company, and for the elimination of any duplication of benefits
which might result from the application of this section providing for
nontaxable income and any other section providing for allowable
deductions which are also attributable to the natural gas property or
otherwise, on or before the date of cessation of hostilities in the present
war. The effect of the amendment is to permit the transfer of the
bonds, prior to the date of cessation of hostilities in the present war,
to the successor of the taxpayer in such cases as the Secretary of the
Treasury may by regulations authorize. Thus, the Secretary may
authorize the transfer of the bonds to a successor of the taxpayer
which would effect a reduction in the income from such property.
A new paragraph (5) has been added to section 735 (b) to provide
for the computation of nontaxable income from exempt excess output
in the case of natural gas property. It prescribes that in the case of a
natural gas company, any part of the natural gas property of which
was in operation during the base period, the nontaxable income from
exempt excess output for any taxable year shall be an amount equal
to the excess output for such year multiplied by one-half of the unit
in connection with certain liquidations, dissolutions, or reorganizations, or in case of certain transfers by operation of law, where
the transfer would appear not to violate the purpose of the general
provision that the bonds are not to be transferable before the date of
cessation of hostilities. The prohibition on the transferability of the
post-war credit or bonds should not be permitted to prevent a corporate liquidation, dissolution, merger, consolidation, reorganization,
or other similar change in corporate structure which is consummated
net income for such year.
The amendments contained in this section of the bill are made
in good faith and not for the purpose of realizing on the post-war credit
or bonds so that the proceeds thereof may be used prior to the date of
cessation of hostilities in the present war.
The present section 780 (d) of the code provides that the proceeds of
the bonds upon redemption shall not be included in gross income.
Subsection (b) of section 250 amends section 780 (d) so as to limit
this exemption to the taxpayer.
Subsection (c) of this section adds subsections (f) and (g) to sec-
applicable only to taxable years beginning after December 31, 1943,
except that the amendments, to the extent that they affect lessors
of mineral properties which were in operation during the base period,
lessors of timber blocks (as defined in sec. 735 (a) (8) prior to the
amendment made thereto by this section of the bill) which were in
operation during the base period, and natural gas companies, shall be
applicable to taxable years beginning after December 31, 1941.
tion 780 of the Internal Revenue Code. Subsection (f) provides
that subject to, and to the extent provided in, regulations prescribed
by the Secretary of the Treasury, a successor of the taxpayer shall
succeed to all the rights and liabilities of the taxpayer under part III
of subchapter E of chapter 2 of the code, comprising sections 780 to
783, inclusive Among other things, this subsection authorizes regu-
PART II-POST-WAR REFUND OF EXCESS PROFITS TAX
SECTION 250. POST-WAR REFUND OF EXCESS PROFITS TAX
This section amends sections 780 and 781 of the Internal Revenue
Code, relating to post-war refunds of excess profits tax imposed by
subchapter E of chapter 2 of the code.
Under existing law the Secretary of the Treasury is authorized and
directed to establish a post-war credit, for each of certain specified
taxable years, to the account of each taxpayer subject to the excess
profits tax. In general, the post-war credit is equal to 10 percent of
the excess profits tax imposed for the taxable year, but it is subject to
limitations under which it may not exceed the amount by which the
amount of the tax paid exceeds the amount of tax that would be payable if such tax were reduced by 10 percent. Bonds of the United
States in the amount of the post-war credit are required to be issued in
the name of the taxpayer generally within 3 months (with the
exception of bonds for a taxable year beginning or ending in 1942)
after the tax is paid in full. Since the post-war credit is tentatively
determined on the basis of the excess profits tax shown on the return,
provision is made for upward adjustments of the post-war credit and
bonds in case of the payment of a deficiency in respect of the excess
profits tax for a taxable year for which a post-war credit is provided,
and for downward adjustments of the post-war credit and bonds in
case a refund or credit is made of an overpayment of the excess profits
tax for a taxable year for which a post-war credit is provided.
Subsection (a) of this section of the bill amends section 780 (c) of the
code, relating to the terms and maturity of the bonds. The present
61
lations under which transfer of the post-war credit, as well as the bonds,
O
will be permitted in proper cases. The rights of the Government
can be safeguarded in those cases where transfers are permitted by
imposing on the successor the liabilities of the taxpayer to the extent
deemed necessary. Subsection (g) defines the term "successor" to
mean such person or persons who succeed, either directly or through
one or more other persons, to ownership of property of the taxpayer,
as the Secretary of the Treasury may by regulations prescribe. The
requirement of regulations preceribed by the Secretary will be satisfied
by regulations prescribed by the Commissioner of Internal Revenue
with the approval of the Secretary. Under subsection (f) in appropriate cases the tax exemption accorded the taxpayer under section
780 (d) may be extended by regulations to a successor of the taxpayer.
Subsection (d) of this section of the bill amends section 781 (b) of the
Internal Revenue Code, relating to the effect on the post-war credit or
bonds, of a refund or credit of an overpayment of the excess profits
tax for a taxable year for which a post-war credit is provided. Under
existing law the outstanding post-war credit in favor of the taxpayer
is first reduced by the amount of the post-war credit attributable to
the overpayment of the excess profits tax; and in case the outstanding
post-war credit is less than the amount by which it is required to be
reduced, or if there is no such credit existing in favor of the tax-
payer, the excess of such amount over the amount of the outstanding
62
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
post-war credit, if any, is carried forward as a charge against the taxpayer to be applied in reduction of a subsequent post-war credit; and
63
bonds for the taxable year), and $5.40, being the interest on $90
if no such subsequent post-war credit is made in favor of the taxpayer, the taxpayer is required to pay the amount of such charge
to the United States or the amount of the bonds previously issued to
the taxpayer is reduced by the amount of such charge. The amend-
(overpayment of $100 less charge of $10) at 6 percent from December
31, 1947, to the date of the refund, plus $90, being the amount of the
overpayment of $100 less the charge of $10.
Subsection (e) amends section 781 (d) (which relates to limitation
ment provides that in case of an overpayment of the excess profits tax
for any taxable year for which a post-war credit is provided the out-
on the post-war credit of excess profits tax) first by changing the
limitation on the amount of the post-war credit to give effect to the
standing post-war credit for such taxable year in favor of the taxpayer shall be reduced by an amount equal to the post-war credit
attributable to such overpayment; and that if the outstanding postwar credit for such taxable year is less than the amount by which it
increase in excess profits tax rate from 90 to 95 percent, and, second,
by adding additional rules for the computation of the limitations
upon the post-war credit in the case of certain taxable years beginning
in 1943 and ending in 1944, the excess profits tax for which will be
is required to be reduced, or if there is no such post-war credit existing
in favor of the taxpayer, the excess of such amount over the amount
of such post-war credit if any, shall constitute a charge against the
computed bill. under section 710 (a) (6), as added by section 203 of this
previously issued to the taxpayer with respect to such taxable year;
tive excess profits taxes computed under section 710 (a) (6). The
amount of the post-war credit is the sum of the prorated portions of
each of the credits which would be computed upon the basis of each
of the tentative excess profits taxes provided by section 710 (a) (6)
(A) and (B). Thus, in the case of a taxable year beginning in 1943
and ending in 1944, the post-war credit shall be not greater than the
excess of the excess profits tax paid to the United States for such
taxpayer to be applied in reduction of the amount of the bonds
or, if such bonds are not made available for that purpose or the amount
of such bonds so made available is less than the amount of such charge,
such charge or the excess of such charge over the amount of such bonds
so made available, as the case may be, shall be applied at the time of
the credit or refund (or as of the time of the maturity of the bonds
with respect to such taxable year, if that time is earlier) in reduction
of the amount of the credit or refund of the overpayment of the
excess profits tax. If such reduction in the amount of the credit or
refund of the overpayment for a taxable year for which a post-war
credit is provided is effected on or before the maturity date of the
bonds for such year, the interest on the overpayment is to be computed on the amount of the overpayment before such amount is
reduced by the charge attributable to such overpayment. For example, assuming that on December 15, 1943, the taxpayer overpays
its excess profits tax for the calendar year 1942 by $100; the bonds
for 1942 mature on December 31, 1947; the overpayment is refunded
on December 15, 1944: at that time the taxpayer has no outstanding
post-war credit for 1942; and no bonds are made available for adjustment; the amount of the refund is $96, computed as follows: overpayment of $100 plus interest thereon for one year at 6 percent,
making a total of $106, minus $10, the charge attributable to the
In the case of taxable years beginning in 1943 and ending in 1944,
the excess profits tax is the sum of the prorated portions of two tenta-
taxable year (and not credited or refunded under the internal revenue
laws) over the amount which would be payable to the United States if
(a) in the computation of the first tentative excess profits tax under
section 710 (a) (6) (A), the excess profits tax rate were 81 percent, or
if the 80 percent limitation of section 710 (a) (1) (B) is applicable, if
the amount determined under section 710 (a) (1) (B) were reduced by
10 percent; and (b) in the computation of the second excess profits
tax under section 710 (a) (6) (B) the excess profits tax rate were
85 1/2 percent, or if the 80 percent limitation of section 710 (a) (1) (B) is
applicable if the amount determined under section 710 (a) (1) (B)
were reduced by 10 percent.
Subsection (f) provides that the amendments made by subsections
(a), (b), (c), and (d) shall be effective as if made by section 250 of
the Revenue Act of 1942 and that the amendment made by subsection
(e) inserting a new paragraph (2) of section 781 (d) shall be applicable
with respect to taxable years beginning in 1943 and ending in 1944.
overpayment.
In case the reduction in the amount of the credit or refund of the
overpayment for a taxable year for which a post-war credit is provided is made after the maturity date of the bonds for such year, such
reduction will, for the purpose of computing the interest on the overpayment, be made as of the date of the maturity of the bonds, For
example, assuming that on December 31, 1943, the taxpayer overpays
its excess profits tax for the calendar year 1942 by $100; the bonds for
1942 mature on December 31, 1947; the overpayment is refunded on
December 31, 1948; at that time the taxpayer has no outstanding
post-war credit for 1942; and no bonds are made available for adjustment; the amount of the refund is $119.40. computed as follows:
$24, being the interest on the overpayment of $100 at 6 percent from
December 31, 1943, to December 31, 1947 (the maturity date of the
TITLE III-EXCISE TAXES
SECTION 301. EFFECTIVE DATE OF THIS TITLE
Section 301 fixes the effective date of title III, which relates to
excise taxes. Since the excise taxes are paid monthly and covered
by monthly returns, it is desirable that changes with respect thereto
shall take effect on the first day of a selected month. It is also
desirable that there shall be reasonable opportunity for preparation
by taxpayers, as well as by the Bureau of Internal Revenue, for
compliance with the new requirements. Accordingly section 301
provides that title III shall take effect on the first day of the first
month which begins more than 10 days after the date of enactment
of the act.
THE REVENUE BILL OF 1948
64
THE REVENUE BILL OF 1943
250
65
SECTION 302. INCREASES IN RATES
Section 302 (a) amends chapter 9A of the code to increase the rates
of various excise taxes, impose certain new excise taxes, and make
various administrative provisions relative thereto. The several
sections of chapter 9A, as thus amended, are as follows:
Section 1650 of the code, as amended, increases the rates of various
existing excise taxes as follows:
Description of tax
Old rate
Admissions
for each 10
fraction
War tax rate
2 cents for each 10
taxes, the percentage going to the operators, or any other deductions.
The
tax is to be paid by the person conducting or having control of
the pool.
Increase
Section 1654, added to the code, relates to the taxability of installment payments made under leases, contracts of sale, conditional sales,
Percent
100
cents fraction
percent
increases in rates of existing manufacturers' and retailers' excise taxes,
scope of sections 2405 and 3441 (c) of the code, with respect to install-
Initiation fees
Jewelry
10 percent
25 percent
do
M per gallon
$9 per gallon
15 cents per gallon
(2) Over 14 percent and not over 21 percent of
10 cents per gallon
40 cents per gallon
60 cents per gallon
(3) Over 21 percent and not over 24 percent of
$1 per gallon
$2 per gallon
10 cents per half
15 centa per half-
Imported perfumes containing distilled spirits
ment payments made on or after the effective date of the title under
contracts made prior to such date. The section also contains an existing contracts provision applicable to the excise tax imposed by section
do
Furs.
Tollet preparations
Distilled spirits
Still with
Not over 14 percent of alcohol
alcohol
50
alcohol
Sparklin wines liqueurs, and cordials:
(1) Champagne or sparkling wine
plat fractice
thereof.
(2) Artificially carbonated wine
5 cents per half
fraction
thereof.
(8) Liquidars cordials, etc
Fermented malt liquors
Billiard and pool tables
Electric light balbs and tubes
Telephone
long
distance
Telegraph cable, or radio dispatches:
Domestic
(2 International
Leased wires, etc
Wire and equipment service
Local telephone service
Cransportation of persons
Seats, berths etc
etc., made prior to the effective date of the title. The effect of the
section is to confer exemption from the retailers' excise tax, or from
imposed by the bill in those cases in which the taxes are within the
percent
Dues mem bership fees
Section 1653, added to the code, imposes a tax on the conducting
of parimutuel or totalizator wagering on any racing or sporting event.
The rate of tax is 5 percent of the gross amount wagered or received
into the parimutuel or totalizator pool before deductions for State
thereof.
Permanent GM or lease of boxes or sests
Sales of tickets outside box office
Cabareta root gardens, etc
taxsection
of $10 3268.
per annum on the operation of each bowling alley imposed
by
50
50
Revenue Act of 1941 (section 3453 of the code). Liability for the
tax or the increased rate of tax is shifted from the vendor to the
100
plint fraction
50
thereof.
10 cents per half-
pint fraction
100
thereof
100
$7 per barrel
$10 year per
table.
percent
is per barrel
14
$30 year per
100
table
25 percent
400
percent
15 percent
25
do
percent
percent
percent
percent
percent
10 percent
percent
do
The increased rates, except as otherwise provided by section 302 (b)
of the bill, are applicable with respect to the period beginning with the
effective date of title III of the bill, as fixed by section 301, and con-
tinuing until the first day of the first month beginning 6 months or
more after the date of termination of hostilities in the present war.
Section 1651, added to the code, imposes a tax on enumerated articles
of the general class of travelers' luggage, purses, wallets, key cases,
toilet cases, and other containers sold at retail. The rate of tax is
25 percent of the sale price. The present tax on luggage sold by the
manufacturer, producer, or importer, imposed by section 3406 (a) (2)
of the code is suspended by section 304 of the bill.
Section 1652, added to the code, imposes a tax equivalent to 20
percent of all amounts paid for the privilege of bowling at any bowling
alley. Section 305 of the bill amends section 3268 of the code to make
inapplicable to the period beginning July 1, 1944, and ending with
the date on which the tax imposed under section 1652 terminates, the
1651 (on luggage, etc., sold at retail) and the increased rates of excise
taxes imposed by section 1650 on sales of various articles. The provision is in all respects comparable to that set forth in section 553 of the
vendee in the case of sales made pursuant to contracts executed before
the effective date of the title, but consummated after that date, where
the contract does not provide for the addition by the vendor to the
sales price of the new tax or increased rate of tax but does not, however, prohibit such addition.
Section 1655, added to the code, deals with the situation of an article
classifiable under more than one section of the code taxing articles sold
at retail, namely, sections 2400, 2401, and 2402 of chapter 19, relating
respectively to jewelry, furs, and toilet preparations, and section 1651
of chapter 9A added by section 302 (a) of the bill, relating to luggage.
Section 1655 provides that if in such a case the rates of tax differ, the
highest shall prevail. This rule is applicable to fittings and accessories
sold on or in connection with the sale of the principal article, even
though physically separated from the principal article, and even though
they otherwise would fall within another classification. For example,
a fitted traveling case containing an article classifiable as jewelry under
section 2400 would be taxable in its entirety at the 25-percent rate even
though the article of jewelry would otherwise be taxable at a 20-percent
rate. Thus, the principal taxable article and the fittings and accessories are always subject to the same rate of tax.
Section 1656, added to the code, provides that the taxes imposed
by section 1651 (relating to luggage, etc.), section 1652 (relating to
bowling), and section 1653 (relating to parimutuel wagering) shall not
apply with respect to the period commencing on the first day of the
first month beginning 6 months or more after the termination of
hostilities in the present war.
Section 1657, added to the code, defines the term "date of the termination of hostilities in the present war," as used in sections 1650 and
92237-43-5
66
THE REVENUE BILL OF 1943
1656, added to the code, as meaning the date proclaimed by the President as the date of such termination, or the date specified in a concurrent resolution of the two Houses of Congress, as the date of such
termination whichever is the earlier.
Section 302 (b) of the bill makes exceptions from the general rule
established by section 301 relative to the effective date of the new
taxes and increases of taxes imposed by section 302 (a). The increase
in the cabaret tax becomes applicable at 10:00 a m., prevailing local
THE REVENUE BILL OF 1943
II
This section amends section 3268, which imposes a special tax with
respect to the operation of bowling alleys, to suspend such tax during
the period beginning July 1, 1944, and ending with the date on which
is terminated the tax with respect to amounts paid for the privilege
of bowling at any bowling alley imposed by section 1652, added to
the code by section 302 (a) of the bill.
10 days after the date of enactment of the act. The increase in the
tax imposed by section 3268 of the code with respect to billiard and
pool tables becomes applicable with the year beginning July 1 1944.
The increases in the taxes imposed by section 3465 (a) (1) with
respect to telephone toll calls and telegraph, cable, or radio dispatches or messages are applicable to amounts paid for services
rendered on or after the effective date of the title. The increases in
the taxes imposed by section 3465 (a) (2) and (3) with respect to
leased wires, wire equipment service, and local telephone service are
applicable only to amounts paid pursuant to bills rendered on or after
the effective date of the title for services for which no previous bill
was rendered. Where bills rendered on or after the effective date
of the title include charges for services previously rendered, the
increased rates do not apply to such services as were rendered more
than 2 months before the effective date of the title.
SECTION 306. TECHNICAL AMENDMENT OF MANUFACTURERS' EXCISE
TAX ON TIRES AND INNER TUBES
This section amends section 3400 of the code which taxes tires and
inner tubes made wholly or in part of rubber, to define "rubber" as
including synthetic or substitute rubber. This is to insure that the
tax shall be applicable to tires and tubes made entirely without
natural rubber.
SECTION 307. TERMINATION OF CERTAIN GOVERNMENTAL EXCISE
TAX EXEMPTIONS
Section 307 removes many excise tax exemptions now existing with
SECTION 303. FURS
ished article.
SECTION 304. SUSPENSION OF MANUFACTURERS' EXCISE TAX ON
LUGGAGE
This section amends section 3406 (a) (2) of the Internal Revenue
Code, which imposes a tax on luggage sold by the manufacturer,
producer, or importer, to suspend such tax during the period of appliration of the tax imposed by section 1651, added to the code by
section 302 (a) of the bill, on luggage, etc., sold at retail.
SECTION 305. SUSPENSION OF SPECIAL TAX WITH RESPECT TO
BOWLING ALLEYS
time, on the first day of the first month which begins more than
This section amends section 2401 of the Internal Revenue Code to
meet a practice which has become somewhat prevalent whereby a
person desiring to have a taxable fur article made for his own use
procures and provides the fur himself, and thus avoids the tax on the
article made from the fur. To put a check on tax avoidance by such
means, it is provided that where a person who is engaged in the
business of dressing or dyeing fur skins, or manufacturing, selling, or
repairing fur articles, produces a taxable fur article for the use of a
customer from fur on the hide or pelt furnished, directly or indirectly
by the customer, the transaction shall be deemed to be a sale at retail
and the person producing the article shall be deemed to be the person
selling the article at retail for the purposes of the tax. The tax is,
in this case, to be computed and paid by such person upon the fair
retail market value, as determined by the Commissioner, of the fin-
67
In
respect to articles sold or services rendered to the United States,
In general, the taxes affected by the section are the retailers' excise
taxes, the manufacturers' excise taxes, and the taxes applicable to
telegraph, telephone, radio and cable facilities, and the transportation
of persons and property. The result of the section will be that these
taxes shall apply with respect to articles sold or services rendered to
the United States. As explained below, certain of the taxes will
become applicable to such articles and services in the near future,
while the application of others is postponed until approximately 6
months after the termination of hostilities in the present war.
The present exemptions are continued, however, with respect to
articles sold to the United States pursuant to contracts entered into
prior to the dates on which sales of such articles to the United States
become taxable. The section also provides that a credit or refund
otherwise allowable under section 3443 (a) (1) (A) (i) of the Internal
Revenue Code to a manufacturer, producer, or importer, with respect
to an article resold by any person to the United States, shall continue
to be allowable with respect to a sale made to the United States prior
to the date on which sales of the article to the United States become
taxable or pursuant to a contract entered into prior to such date
The exemptions are terminated and the taxes will, accordingly,
apply with respect to articles sold (except those sold under preexisting contracts as above noted) and services rendered to the United
States as follows:
(a) In the case of the retailers' and manufacturers' excise
taxes (except the manufacturers' excise taxes applicable to sales
of pistols and revolvers, firearms, shells and cartridges, and
radio receiving sets, phonographs, phonograph records, and musi-
cal instruments), to sales made on or after the first day of the
THE REVENUE BILL OF 1943
68
THE REVENUE BILL OF 1943
first month which begins three months or more after the date of
the enactment of the Act.
(b) In the case of the manufacturers' excise taxes applicable to
sales of pistols and revolvers, firearms, shells and cartridges, radio
receiving sets, phonographs, phonograph records, and musical
instruments, to sales made on or after the first day of the first
month which begins six months or more after the date of the
termination of hostilities in the present war.
(e) In the case of the taxes applicable to telephone toll calls
and telegraph, cable, or radio dispatches or messages, to calls,
messages, and dispatches originating on or after the first day of
the first month which begins three months or more after the date
of the enactment of the Act.
(d) In the case of the taxes applicable to leased wires, wire and
equipment service, and local telephone service, to amounts paid
pursuant to bills rendered on or after the first day of the first
month which begins three months or more after the date of enact-
ID
production in the manufacture of certain nonbeverage products
which are sold or otherwise transferred for use for other than intoxicating beverage purposes. The rate of draw-back under existing law is
$3.75. Subsection (b) raises this rate to $5 with respect to the period
in which the war tax rates specified by section 1650 of the Internal
Revenue Code are in effect. Under the subsection the draw-back will
revert to the rate of $3.75 immediately upon the expiration of 6 full
calendar months following the termination of hostilities in the present
war.
Subsection (c) provides that the amount of tax per proof gallon paid
on the distilled spirits covered by timely claims under section 3250 (1)
(5) of the code shall govern the rate of draw-back: e., if the tax was
properly paid at only the $6 rate the draw-back shall be at the $3.75
rate, and if the tax was properly paid at the $9 rate (basic tax of $9
or present tax of $6 plus floor stocks tax of $3) the draw-back shall be
at the 85 rate.
ment of the Act for service for which no previous bill was rendered.
SECTION 310. EXEMPTION OF SILVER-PLATED FLATWARE FROM TAX
(e) In the case of the taxes applicable to the transportation of
persons and property, to amounts paid on or after the first day
of the first month which begins three months or more after the
date of enactment of the Act.
ON JEWLERY
Section 310 amends section 2400 of the code so as to exempt silver-
plated flatware from the tax on jewelry.
SECTION 308. FLOOR-STOCKS TAXES
TITLE IV-POSTAL RATES
Section 308 amends sections 2800 and 3150 of the code and adds
section 3194 to the code so as to impose equalizing floor-stocks taxes
on tax-paid distilled spirits and tax-paid wines held for sale or for use
SECTION 401. EFFECTIVE DATE
This section provides that the increased postal rates provided by
title IV shall take effect on the thirtieth day after the date of the enactment of the act.
in the manufacture of any article intended for sale on the date the
increased rates become effective, and on all tax-paid fermented malt
liquors held for sale on the date the increased rate becomes effective.
Provisions similar to those contained in the Revenue Act of 1942 are
made for the filing of floor-stocks tax returns and for the payment of
the taxes.
SECTION 309. DRAW-BACK OF INTERNAL REVENUE TAXES ON
DISTILLED SPIRITS
Subsection (a) of Section 309 amends section 2887 of the code,
which provides for the allowance of draw-back (refund) of taxes paid
in respect of distilled spirits which are exported. The section provides
at the present time that the rate of draw-back which is allowed shall
equal the rate of tax paid, but contains a limitation that such draw-
back shall not exceed the rate of $6 per proof gallon. This rate in
the limitation has been raised from time to time as the rate on the
distilled spirits has been increased so that if the taxpayer pays the
higher rate of tax he may recover it. The limitation in figures representing a money value serves no good purpose, since the section already
provides that only the rate paid may be allowed in draw-back.
Therefore, the limitation has been stricken out.
Subsection (b) increases the rate of draw-back authorized by section
69
SECTION 402. FIRST CLASS MAIL
to
Section 402 increases the rate of postage on all mail matter of the
first class mailed for local delivery or for delivery wholly within a
county which is entirely within a corporate city and the population of
which exceeds 1,000,000 (except postal cards and private mailing or
post cards, and except other first class matter on which the rate of
postage under existing law is 1 cent for each ounce or fraction thereof)
by 1 cent for each ounce or fraction thereof
This section also increases the rate of postage on air mail by 2 cents
for each ounce or fraction thereof.
SECTION 403. THIRD CLASS MAIL
Section 403 increases the rate of postage on all mail matter of the
third class by an amount equal to the rate provided by existing law.
SECTION 404. FOURTH CLASS MAIL
This section increases the rate of postage on all mail matter of the
fourth class by an amount equal to 3 percent of the rate provided by
3250 (1) (5) of the code. This section of the code authorizes the
existing law, or by 1 cent, whichever is the greater. It is further
allowance of draw-back of distilled spirits taxes, under certain circumstances, to persons who use fully tax-paid distilled spirits of domestic
part of a cent, such fractional part shall be disregarded unless it
provided that if the additional 3 percent amount results in a fractional
THE REVENUE BILL OF 1943
70
THE REVENUE BILL OF 1943
amounts to one-half cent or more, in which case it shall be increased
to cent.
SECTION 405. MONEY ORDERS
II
Section 405 increases the fees for domestic money orders by 66%
percent, computed in each case, if the amount of such increase is not
a multiple of 1 cent, to the nearest multiple of 1 cent above such
amount.
71
Subsection (b) defines the term "termination of hostilities in the
present war" as used in subsection (a) of this section as meaning the
date proclaimed by the President as the date of such termination, or
the date specified in a concurrent resolution of the two Houses of
Congress as the date of such termination, whichever is the earlier.
TITLE -MISCELLANEOUS ESTATE TAX AND GIFT TAX
SECTION 406. REGISTERED MAIL
AMENDMENTS, AND OTHER MISCELLANEOUS AMEND.
MENTS AND PROVISIONS
Section 406 increases the registry fees for registered mail by 331/2
percent, computed in each case to the nearest multiple of 5 cents, and
the additional fees for registered mail by 3316 percent, computed in
each case, if the amount of such increase is not a multiple of 1 cent, to
the multiple of 1 cent next above such amount.
SECTION 501. VALUATION OF UNLISTED STOCK AND SECURITIES FOR
ESTATE TAX PURPOSES
This section amends section 811 of the code by adding a new sub-
section (k), providing that in the case of stock and securities of a
SECTION 407. INSURED MAIL
corporation the value of which by reason of their not being listed on an
exchange and by reason of the absence of sales thereof cannot be determined with reference to bid and asked prices or with reference to
sales prices, the value thereof shall be determined taking into consider-
Section 407 increases the fees for insurance on mail matter in each
case by an amount equal to the fee provided by existing law.
ation, in addition to all other factors, the value of stock or securities
of comparable corporations which are listed on an exchange. The
effect of this section is to clarify the consideration by the Commissioner, along with other evidentiary factors, of the value of listed
stock or securities of comparable corporations. The Commissioner
retains his present authority under the law to determine the weight to
be accorded all pertinent factors depending on the facts of each case.
SECTION 408. RECEIPTS ON REGISTERED MAIL AND INSURED MAIL
Section 408 increases the fees for obtaining receipts for registered
mail and insured mail in each case by 33 1/2 percent, computed in each
case, if the amount of such increase is not a multiple of 1 cent, to the
multiple of 1 cent next above such amount.
SECTION 502. APPOINTMENT OF NEW TRUSTEE OF CERTAIN DISCRETIONARY TRUSTS NOT TRANSFER SUBJECT TO GIFT TAX
SECTION 409. COLLECT-ON-DELIVERY SERVICE
Subsection (a) of section 409 increases the fees for collect-on-delivery
service with respect to domestic third and fourth class mail in each
case by an amount equal to the fee provided by existing law.
Subsection (b) increases the fee for services in effecting delivery of
collect-on-delivery mail upon terms differing from those originally
stipulated at the time of mailing by an amount equal to the fee
provided by existing law.
Subsection.(c) increases the demurrage charges on collect-on-delivery
parcels in each case by an amount equal to the charge provided by
existing law.
SECTION 410. ADDITIONAL FEE FOR DELIVERY OF REGISTERED,
INSURED, AND COLLECT-ON-DELIVERY MAIL TO ADDRESSEE ONLY
Section 410 increases the additional fee for effecting the delivery of
domestic registered, insured, and collect-on-delivery mail, the delivery
of which is restricted to the addressee only, or to the addressee or
order, by an amount equal to the fee provided by existing law.
SECTION 411. TERMINATION OF INCREASES
Subsection (a) of section 411 provides that the increases in the postal
rates, fees, and charges made by the title shall cease to be in effect on
and after the first day of the first month which begins at least 6 months
after the termination of hostilities in the present war.
This section, which adds a new subsection (e) to section 1000 of the
code, relates to any trust created prior to September 1, 1943, on which
le
a gift tax was paid if created after the effective date of the gift tax,
or if created prior to the effective date of the gift tax, would have
been subject to a gift tax had such trust been created after the effective date of the gift tax, of which the grantor is not a named beneficiary and no part of the net income of which is, under section 166
of the code, includible in computing the net income of the grantor.
The section provides that in the case of any such trust no gift tax shall
be imposed by reason of (1) the appointment, prior to January 1,
1945, of one or more new, successor, or additional trustees, or (2)
the vesting, prior to such date, in the trustee or trustees of discretion
as to the selection of beneficiaries or the distribution of the corpus or
income of the trust, or (3) the exercise by the trustee or trustees of
any such discretion prior to such date.
SECTION 503. Use OF COMMISSIONERS IN CASES BEFORE THE TAX
COURT OF THE UNITED STATES
This section amends section 1114 by adding a new subsection (b),
to permit the appointment of commissioners in cases before The Tax
Court of the United States. Such commissioners are to be attorneys
from the legal staff of the court, designated to act in particular cases,
by written order of the presiding judge. Commissioners so designated
THE REVENUE BILL OF 1943
72
THE REVENUE BILL OF 1943
73
shall proceed under such rules and regulations as may be promulgated
by the court. They shall be entitled to receive the same travel and
subsistence allowance as may be received by commissioners of the
10
Court of Claims.
The amendment to section 1601 (a) (3), made by subsection (a)
of this section, removes the time limitation for payment of State
contributions but preserves the 90 percent limitation on the amount
of the credit applicable under existing law to contributions paid to a
State fund after the due date of the Federal return. However, the
SECTION 504. AUTHORIZATION OF APPROPRIATIONS To PAY CERTAIN
EXCISE TAXES WITH RESPECT TO WHICH GOVERNMENT EXEMPTION TERMINATED
allowance of the refund or credit of the Federal tax, which has been
collected but with respect to which credit is allowable under section
1601 of the code, is subject to the 4-year period of limitation prescribed by section 3313 of the code. The special rule under existing
law applicable to those cases where the assets of the taxpayer are in
the custody or control of a court at any time beginning with the due
date of the Federal return and ending with the next following June
30, both dates inclusive, has been eliminated With the removal of
the time limitation for payment of State contributions, this special
rule does not appear to be warranted except as to past taxable years.
Subsection (b) of section 601 repeals the present section 1601 (a) (5)
of the code, relating to refunds of the Federal tax based on any credit
This section of the bill authorizes the appropriation of sums neces-
sary to pay those excise taxes with respect to which Government
exemption has been terminated, and requires certain reports to be
filed pertaining to one of such taxes.
Subsection (a) authorizes the appropriation of sums required to
be paid by the United States, in each fiscal year, as taxes, under
section 3465 (relating to telephone, telegraph, radio, and cable services, facilities, and equipment), section 3469 (relating to transportation of persons) and section 3475 (relating to transportation of
property).
Subsection (b) specifically requires that sums paid with respect
allowable under section 1601 of the code. The provisions of the
present section 1601 (a) (5) are incorporated in the new section
to the tax imposed by section 3469, for the transportation of persons,
in seats or berths, be paid only out of the funds specifically appropriated for that purpose.
Under subsection (c) each disbursing officer of the United States
1601 (d).
Section 1601 (d) of the code, as added by subsection (c) of section 601,
provides for refund or credit of the Federal tax which has been collected
but with respect to which the credit allowable under section 1601 of
is required to file quarterly reports with the Comptroller General of
the United States setting forth each payment by him of the tax
imposed by section 3469 during any period following the effective
date of the section which is not covered by a previous such report.
Such reports shall also set forth the name of each person with respect
to whom such payments were made (exclusive of members of the
armed forces traveling under orders from one post of duty to another),
the dates of travel by such named persons, their destination points,
the total transportation charges (exclusive of the tax) paid for such
travel of each such person, and the total amounts of the subsistence
payments for each such person in connection with such travel. The
information contained in these reports is to be included in the annual
report to Congress by the Comptroller General.
TITLE VI-FEDERAL UNEMPLOYMENT TAXES
SECTION 601. CREDITS AGAINST FEDERAL UNEMPLOYMENT TAXES
This section amends section 1601 of the code, relating to credits
against the Federal unemployment tax for the calendar year 1939 and
subsequent calendar years. The present section 1601 permits full
credit against the Federal tax for contributions with respect to the
taxable year paid into a State unemployment fund on or before the
due date of the Federal return for such year. Credit is also permitted
under existing law for contributions paid after the due date of the
Federal return but on or before June 30 next following the due date,
but this credit is not to exceed 90 percent of the amount which would
have been allowable as credit on account of such contributions had
they been paid on or before the due date of the Federal return. Under
the present section 1601 no credit, except in special cases, is permitted
against the Federal tax for a taxable year for contributions paid after
June 30 next following the due date of the Federal return for such year.
the code has not been taken. The law (including statutes of limitations or other time limitations) applicable in the case of erroneous or
illegal collection of the tax will apply to such refunds or credits.
10
Thus, all claims for refund or credit of the Federal tax, based on any
credit allowable under section 1601, must be filed within 4 years next
after the payment of the tax. In addition, the amount of the refund
or credit of the Federal tax (including penalty and interest, if any),
based on any credit allowable under section 1601, will be limited to the
portion of the tax, penalty, or interest paid during the 4 years immediately preceding the filing of the claim for refund or credit, or if no
claim was filed, then during the 4 years immediately preceding the
allowance of the refund or credit. No interest will be paid on any
such refund or credit.
SECTION 602. CREDIT AGAINST FEDERAL UNEMPLOYMENT TAXES
FOR YEARS 1936 TO 1942
This section liberalizes the conditions of allowance of credit against
the Federal unemployment tax imposed by title IX of the Social
Security Act for the calendar years 1936, 1937, and 1938. It also
continues without curtailment, for purposes of credit against the tax
imposed by the Federal Unemployment Tax Act for the calendar years
1939 to 1942, both inclusive, the special treatment accorded under
existing law in those cases where the assets of the taxpayer were
the custody or control of a court during the specified periods.
Under subsection (a), paragraph (1), credit is allowable against the
tax for 1936, 1937, or 1938, imposed by title IX of the Social Security
in
Act, for contributions paid into a State unemployment fund at any
time, subject in the case of a refund or credit of the tax to the 4-year
THE REVENUE BILL OF 1943
74
THE REVENUE BILL OF 1943
period of limitation prescribed by section 3313 of the code. Section
75
1601 (a) (3), as amended by section 601 of the bill, contains comparable
provisions with respect to the tax for the calendar year 1939 and subsequent calendar years. If the contributions are paid after December
6. 1940, the credit against the tax for 1936, 1937, or 1938 on account
law which was not allowable under the law in force when the compromise offer was accepted. The law (including statutes of limitations
or other time limitations) applicable in the case of erroneous or illegal
would have been allowable if they had been paid before the due date
determined as though an offer in compromise had not been accepted,
except that any amount paid by the taxpayer under the compromise
agreement will be treated as a payment on account of the tax (including penalty and interest in connection therewith, if any).
Paragraph (4) of subsection (c) provides that on and after the date
of the enactment of this act no refund, credit, or abatement shall be
allowed which is based on any credit allowable under prior relief legis-
of such contributions is limited to 90 percent of the amount which
of the Federal return. Paragraphs (2) and (3) of subsection (a)
provide in special cases for the allowance of credit, which is not subject
to the foregoing limitation. These paragraphs continue without
curtailment the relief heretofore granted in these cases by section 902
(a) (2) and (3) of the Social Security Act Amendments of 1939, section
701 (a) (2) and (3) of the Second Revenue Act of 1940, and section 701
(a) (2) and (3) of the Revenue Act of 1941.
The existing law provides, with respect to the credit against the tax
imposed by the Federal Unemployment Tax Act for the calendar year
1939 and subsequent calendar years, that in those cases where the
assets of the taxpayer are in the custody or control of a court during
the periods specified in the present section 1601 (a) (3) of the code and
section 701 (b) (2) of the Revenue Act of 1941 the taxpayer may
pay the contributions to the State at any time and obtain full credit
against the tax for such years. The allowance of refund or credit of
the tax in such cases is subject to the 4-year period of limitation
prescribed by section 3313 of the code. Subsection (b) continues this
special treatment without curtailment for the calendar years 1939 to
1942, both inclusive.
Subsection (c), paragraph (1), provides for refunds and credits,
without interest, based on the credit allowable under subsections (a)
and (b). The law (including statutes of limitations or other time
limitations) applicable in the case of erroncous or illegal collection of
the tax will apply to such refunds or credits.
Paragraph (2) of subsection (c) permits refunds and credits of the
tax imposed by section 901 of the Social Security Act or section 1600
of the Federal Unemployment Tax Act, based on credit for contribu-
tions allowable under this section or section 1601 of the Federal
Unemployment Tax Act, as amended, in those cases where by virtue
of the disallowance of a claim for refund or credit prior to the date of
the enactment of this act the allowance of such claim would otherwise
be considered erroneous under section 3774 (b) or 3775 (b) of the code
at the time such claim is allowed. No interest will be allowed or
paid on the amount of any such credit or refund.
Paragraph (3) of subsection (c) permits refunds, credits, and abate-
ments, without interest, based on the credit allowable under this
section or section 1601 of the Federal Unemployment Tax Act, as
amended, in those cases where an offer in compromise with respect
to the tax (or penalty or interest in connection therewith) imposed by
section 901 of the Social Security Act or section 1600 of the Federal
Unemployment Tax Act has been accepted prior to the date of the
enactment of this act. This provision permits the reopening of cases
compromised prior to the above-mentioned date so as to allow refunds,
credits, and abatements based on credit allowable under the new
collection of the tax will apply to such refunds or credits. Under
paragraph (3) the amount of the refund, credit, or abatement will be
lation, that is, section 701 of the Revenue Act of 1941. The relief
granted under such legislation is continued without curtailment by
this
section
of
this
bill. and section 1601 of the code, as amended by section 601
DETAILED DISCUSSION OF THE TECHNICAL PROVISIONS
OF RENEGOTIATION
A. WAR CONTRACTS PRICE ADJUSTMENT BOARD
The bill establishes a War Contracts Price Adjustment Board, to be
composed of five members, one of whom shall be the Chairman,
who shall be elected by the other members.
Membership.-Its members are to be officials or employees of the
departments concerned with the renegotiation, one to be appointed
by the Secretary of War, one by the Secretary of the Navy, one by the
Secretary of the Treasury, one jointly by the Chairman of the Maritime Commission and the Administrator of the War Shipping Administration, and one by the chairman of the board of directors of the
Reconstruction Finance Corporation. It is to have an official seal
which shall be judicially noticed
Location.-The principal office is to be in Washington, and it may
establish field offices for the purpose of carrying on its work with
which contractors may deal without the necessity of coming to
Washington. Subject to the civil-service laws and the Classification
Act it may appoint necessary employees and fix their compensation;
and with the consent of the heads of departments or agencies concerned with renegotiation, may utilize the services of officers or employees of the departments and make reimbursement for such services.
It is contemplated by the bill that this board will utilize the same
machinery which is now being used for the purpose of renegotiation.
In fact, representatives of the departments have indicated that this is
their contemplated action. A central board was recently set up by
the departments concerned but its principal purpose is restricted to
effecting a more uniform policy in the determination of excessive
profits.
Duties to renegotiate contracts.-It shall be the duty of the Board
whenever in its opinion amounts received or accrued under war
contracts or subcontracts may reflect excessive profits to initiate
renegotiation by giving contractors or subcontractors reasonable
notice by registered mail of a time and place for a conference. At the
conference the Board is to endeavor to reach an agreement with the
76
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
contractor with respect to the elimination of excessive profits which
have been realized or are likely to be realized, and other matters having
regard to the standards set up in the bill. If it is unable to reach such
an agreement, the Board may determine by order (unilaterally) the
amount. Upon entering into an agreement with the contractor, or
the making of a unilateral determination, the Board shall notify the
Secretary or head of the department concerned, and the head of the
department is authorized and directed by the bill to eliminate the
excessive profits so found, either by reductions in the amounts otherwise payable or revision of the terms of a contract; by withholding
from amounts otherwise due; by directing the contractor to withhold
from amounts due subcontractors; by recovery through repayment,
credit, or suit; or by any combination of these methods which the
head of the department deems desirable. As to these amounts the
head of the department concerned may bring actions in the appropriate courts of the United States to recover the excessive profits determined if not withheld or eliminated by some other method. The
surety on a contract or subcontract is not to be liable for repayment
of any excessive profits. Contractors and subcontractors are indemnified by the Government against claims by any subcontractor as
to amounts withheld
The Board is to renegotiate with respect to the aggregate of the
amount received or accrued under the contracts or subcontracts during
the fiscal year of the contractor or subcontractor, and not with respect
to amounts received or accrued under separate contracts or subcontracts with the departments, except that at the request of the
contractor or subcontractor the Board may exercise its powers separately with respect to the amounts received or accrued under one or
more separate contracts or subcontracts or with respect to classes of
contracts or subcontracts prescribed by regulations by the Board.
Statement to be furnished contractor.-The bill provides that in making a determination with respect to excessive profits, whether the
determination is bilateral or unilateral, the Board shall, if requested
by the contractor or subcontractor, furnish a statement as to such
determination, setting out the facts used as a basis for the determination, and the Board's reasons for its findings. However, the statement thus furnished is not to be allowed in evidence or considered by
the tax courts of the United States (which another provision of the bill
provides shall make a determination de novo under certain conditions).
B. RIGHT OF DETERMINATION BY THE TAX COURT OF THE UNITED
STATES
Under existing law there is no right of appeal or review whereby
the contractor may have the question of his excessive profits redetermined.
Your committee bill establishes this right both as to renegotiation
adjustments already made, and renegotiation adjustment in contracts
entered into after June 30, 1943, the effective date of renegotiation
procedure under the newly established War Contracts Price Adjustment Board. The proceeding before The Tax Court shall be a proceeding de novo, and not a review of the Board's determination.
Any contractor or subcontractor who feels aggrieved by an order
of the Board (a unilateral determination) determining an amount of
77
excessive profits received or accrued by the contractor or subcontractor, or by such an order of the Secretary in determining a fair price,
within 90 days after the entry of such order or unilateral determination, may file a petition with The Tax Court of the United States for
a redetermination of such profits. That court will have exclusive
jurisdiction, by an order, to make a final determination as to whether
excessive profits have been received or accrued, or whether a fair
price has been determined, and The Tax Court's determination may
not be reviewed or redetermined by any other court or agency. The
court may determine an amount less than the amount determined by
the Board or by the Secretary, as the case may be, or equal to or
greater than the amount so determined.
The proceeding before The Tax Court shall not be treated as a proceeding to review the determination of the Board or Secretary, but
shall be a proceeding de novo. Thus the court may adduce any
evidence which it sees fit in making its determination. It is provided
that the contractor or subcontractor, as the case may be, is to have
the burden of going forward with the evidence, whether as to the
existence of excessive profits or as to the amount thereof. The
burden of the proof, however, may be upon the Government or
the contractor or subcontractor according to the court's determination.
It is provided that the court shall have the same powers and
duties, insofar as is applicable in respect to the contractor, the subcontractor, the Board, the Secretary, the attendance of witnesses,
the production of papers, notice of hearings, hearings before divisions,
review by The Tax Court of decisions of divisions, and reports of proceedings, and such other powers as the court has under the applicable
sections of the Internal Revenue Code with respect to a proceeding
to determine a deficiency in income tax.
The filing of a petition with the court does not operate to stay the
execution of an order of the Board or Secretary with respect to excessive profits or fair price.
As to determinations by the Secretary made prior to the enactment
of the Revenue Act of 1943, with respect to a fiscal year ending before
July 1, 1943, as to excessive profits, whether or not the determination
is embodied in an agreement, the contractor or subcontractor by
filing a petition with The Tax Court, may obtain a redetermination
with respect to the excessive profits or as to the determination of the
Secretary made on or after the date of the enactment of the Revenue
Act of 1943, with respect to a fiscal year ending before July 1, 1943.
If the determination of the Secretary is by an agreement with the
contractor or subcontractor neither the agreement nor the amount of
excessive profits agreed upon, may be taken into consideration by the
court in its determination of the amount.
The Tax Court of the United States is peculiarly fitted to determine
what is fair price and what is fair profit, having long been engaged in
the determination of similar questions and being thoroughly equipped
for this purpose.
Moreover a determination before The Tax Court will be of great
convenience to contractors or subcontractors by reason of the fact
that the Board sits through its divisions in various localities all over
the United States. Thus it will not be necessary for an aggrieved
contractor to come to Washington to obtain a determination by The
Tax Court.
THE REVENUE BILL OF 1943
78
THE REVENUE BILL OF 1943
I. REDUCTION OF THE AREA OF RENEGOTIATION
The amendments proposed in your committee bill to the existing
statute governing renegotiation of war contracts considerably reduce
the area of renegotiability.
1. INCREASE OF THE SPECIFIC EXEMPTION TO $500,000
Of the amendments reducing the area of renegotiation, the one
79
with H for some steel for the lathes, G's contract with H is not
gotiable. Also, if B, who contracts to furnish steel plates to A, renetracts with I for typewriters and business machines, that contract con- is
not subject to renegotiation. In other words, only an end product or
products renegotiation which will enter into an end product will be subject to
The chart below will illustrate the above example:
increasing the existing specific exemption of $100,000 to $500,000 is
of major importance. If the aggregate of the amounts received or
accrued in the fiscal year of the contractor or subcontractor and persons
under their control does not exceed $500,000, such amounts are exempt
from renegotiation.
The existing specific exemption of $25,000 relating to so-called war
contract brokers remains unchanged in the bill.
2. DEFINITION OF SUBCONTRACT
General Sherman tank
Typewriters,
business
machines.
Plates
Motors
Lathes
etc.
Steel
Carburetors
Aluminum
products
Steel
The field of operation of the renegotiation statute is further reduced
by the definition of "subcontract in the bill. Under the bill, the
term "subcontract" means any purchase order or agreement (other
than a contract with a department) to make or furnish or perform
any part of the work required for the making or furnishing of a
contract item or a component article. A "contract item" is defined
to mean any article, work, services, building, structure, improvement, or facility contracted for by a departme and a "component
article" is defined to mean any article which is to be incorporated in
or as a part of a contract item. The term "article" is defined to
mean any material, part, assembly, machinery, equipment, or other
personal property.
For example, under the above definition, suppose the War Depart-
ment contracts with X for 1,000 airplanes. X, finding he cannot
produce 1,000 planes in the time required, subcontracts with Y to
furnish 500 of the airplanes complete for delivery, which X delivers,
as produced by Y, to the War Department. Y's subcontract is
renegotiable as a contract item,
Under the new definition of subcontract, factory supplies such as
tools or equipment, typewriters, business machines, etc., are exempt
from renegotiation. The following example will illustrate the scope
of the articles coming within the new definition of component article.
Assume that the War Department contracts with A for the purchase
of a General Sherman tank. A contracts with B to furnish the plates
and with C to furnish the motors. B contracts with D to furnish the
steel and C contracts with E to furnish the carburetors for the motors.
also contracts with F for the aluminum products to be used in the
construction of the motors
Subcontracts for the purchase of all of these articles are subject to
renegotiation because they are incorporated in or as a part of the
contract which is the General Sherman tank. If C, who has contracted to furnish the motors, contracts with G for lathes to be used
in making parts of the motor, C's contract with G is not renegotiable
for the reason that it is not a contract for an article to be incorporated
in or as a part of a contract item. For the same reason, if G.contracts
NOTE-Inclosed portion indicates the contracts and subcontracts subject to renegotiation:
articles, etc., not inclosed, the subcontracts which are not subject to renegotiation
3. SUBCONTRACTS UNDER EXEMPT PRIME CONTRACTS OR SUBCONTRACTS
Under existing law, considerable confusion results from the fact
that a subcontract may be subject to renegotiation even though the
prime contract or any intermediate subcontract may not be so subject.
The bill exempts such subcontracts as are directly or indirectly under
an exempt contract or subcontract.
4. CONTRACTS WITH ORGANIZATIONS EXEMPT FROM INCOME TAX
There are some instances of contracts or subcontracts with religious,
charitable, educational, and other organizations of the type described
in section 101 (6) of the Internal Revenue Code, which enumerates
the organizations exempt from income tax under that section. The bill
specifically exempts contracts and subcontracts with such organizations from the operation of the renegotiation provisions.
5. EXEMPTION OF AGRICULTURAL COMMODITIES
The existing law provides for no exemption from renegotiation of
agricultural commodities as such. The bill expressly makes the
amended provisions inapplicable to contracts or subcontracts for such
commodities in their raw or natural state or (in the case of commodities not customarily sold or having an established market in their raw
or natural state) in the first form or state beyond the raw or natural.
The definition of agricultural commodities in the bill is broad, including not only products of the cultivation of the soil but also saps
and gums of trees; animals such as cattle, hogs, poultry and sheep;
fish and marine life; and the products of live animals such as wool,
eggs, milk, and cream.
Canned, bottled, or packed fresh fruits and vegetables (or their
juices) which are customarily canned, bottled, or packed in the season
of their harvest are also exempted.
THE REVENUE BILL OF 1943
80
THE REVENUE BILL OF 1943
6. EXEMPTION OF STANDARD COMMERCIAL ARTICLES
The Board is authorized in its discretion to exempt any contract or
subcontract for the making or furnishing of a standard commercial
article
if, in article
its opinion,
sale
of such
exist. normal competitive conditions affecting the
A "standard commercial article" is defined in the bill as an article(1) 'Which is not specially made to specifications furnished by a
department or by another contractor or subcontractor,"
(2) "Which is identical in every material respect with an article
which was manufactured and sold, and in general civilian, industrial,
or commercial use prior to January 1, 1940:
(3) 'Which is identical in every material respect with an article
which is manufactured and sold, as a competitive product, by more
than one manufacturer, or which is an article of the same kind and
having the same use or uses as an article manufactured and sold, as
a competitive product, by more than one manufacturer, and'
(4) "For which a maximum price has been established and is
effect under the Emergency Price Control Act of 1942, as amended,
or under the act of October 2, 1942, entitled 'An act to amend the
Emergency Price Control Act of 1942, to aid in preventing inflation,
and for other purposes, or which is sold at a price not in excess of
January 1, 1941, selling price.'
in
An article made in whole or in part of substitute materials but
otherwise identical in every material respect with the article with
which it is compared under subparagraphs (2) and (3) is to be considered as identical in every material respect with such article with
which it is so compared.
71 DISCRETIONARY EXEMPTION OF OTHER ARTICLES
Discretionary authority is also given the Board to exempt contracts
or subcontracts for other than standard commercial articles if, in the
opinion of the Board, competitive conditions affecting the making
of such contract or subcontract are such as are likely to result in
effective competition with respect to the contract or subcontract
price.
8. SUBCONTRACTS WHERE PROFITS OTHERWISE RENEGOTIABLE CANNOT
BE SEGREGATED
Discretionary authority is also given the Board to exempt any subcontract or group of subcontracts not otherwise exempt from renegotiation if. in its opinion, it is not administratively feasible to segregate
the profits attributable thereto from profits attributable to nonrene-
gotiable business.
as the Board may by regulations prescribe, statements of actual
costs of production and such other financial statements as it may by
regulations prescribe. The willful failure or refusal to furnish such
a statement or the filing of a false or fraudulent statement incurs
liability
to a2 fine
of or
notboth.
more than $10,000 or imprisonment for not
more than
years,
2. PROFITS
War contract profits are defined by the bill to mean the excess of
the amount received or accrued under such contracts over the costs
paid or incurred with respect thereto. Costs that are unreasonable
or not properly chargeable to the contract or subcontract, in the
opinion of the Board or of The Tax Court of the United States, as the
case may be, are disallowed. Subject to these qualifications, items
of the character allowed as deductions or exclusions in computing net
income for income tax purposes are, with the exception of taxes
measured by income, allowable to the extent that they are allocable
to such contracts or subcontracts.
All items of the character allowed as deductions and exclusions for
income and excess profits taxes (including the current amortization
deduction), to the extent allocable to such contracts and subcontracts
allowed as items of cost. Federal taxes are not allowable as items of
cost. After the excessive profits have been determined, however,
credit is allowed for any income and excess profits taxes paid with
respect thereto.
State income taxes likewise are disallowed as an item of cost but
the bill provides for a proper adjustment, in determining the amount
of excessive profits to be eliminated. for such taxes attributable to
the nonexcessive portion of profits. For example, if the amount due
on a contract is $1,000 and the cost, exclusive of State or Federal
income tax, $800, the profit would be $200. Suppose it should be
determined that of the $200 profit $100 was excessive, and $100 not
excessive. In determining the amount of excessive profit to be
eliminated it is provided that proper adjustment shall be made for
the State income tax excluded as an item of cost which is attributable
to the $100 not excessive. If in this case the State income tax on the
$100 of fair profit is $10, then this $10 attributable to the $100 of
fair profit would be credited against the $100 determined to be excessive profit reducing the amount to be eliminated to $90.
Any commission, percentage, brokerage, or contingent fee paid or
payable to any person for or in connection with the soliciting or securing by any such person of a contract, with a department, unless such
person is a bona fide established commercial or selling agency maintained by the contractor for the purpose of securing business is expressly disallowed as cost on any contract with a department.
II. DETERMINATION OF EXCESSIVE PROFITS
3. COSTS ALLOWED TO CERTAIN PROCESSORS
1. MANDATORY STATEMENTS OF COSTS
To insure the equitable treatment of contractors or subcontractors
producing minerals, oil or gas, or timber, and who process, refine, or
treat such products to or beyond the first form or state suitable for
The bill requires every contractor and subcontractor holding contracts or subcontracts subject to the provisions of the statute to file
with the Board, at such time or times and in such form and detail
81
s
92237-43-0
82
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
industrial use, or who produce agricultural products and process,
refine, or treat them to or beyond the first form or state in which they
are customarily sold or in which they have an established market, the
Board is required to prescribe such regulations as may be necessary to
give the contractor or subcontractor a cost allowance substantially
equivalent
to the
amountin
which
haveorbeen
reali ed by him if he
had
sold such
products
theirwould
first form
state.
4. AGGREGATION OF CONTRACTS
The bill provides for the aggregation of all renegotiable amounts
received or accrued by a contractor or subcontractor under contracts
or subcontracts during his fiscal year for the purpose of determining
whether they may reflect excessive profits. Upon the request of the
contractor or subcontractor, however, the Board may determine such
excessiveorprofits
with respect to each contract or subcontract,
separately,
by groups.
83
III. RENEGOTIATION PROCEDURE
1. RENEGOTIATION AND REPRICING DEFINED
"Renegotiate" and "renegotiation." These terms are given new
definition in the bill and mean the determination by agreement or
order of the amount of profits considered to be excessive. In other
words, the terms indicate (as is set forth in detail in later sections of
the bill) that a determination may be by way of a bilateral agreement
between the Government and the contractor or, in case such an agreemeat cannot be reached, a unilateral determination of the amount of
excessive prof. ts may be made by order.
"Reprice" and "repricing. terms are newly defined in the
bill. They include determination by agreement or order of a fair price
for performance under a contract or subcontract.
2. NOTICE OF CONFERENCE
5. STANDARDS
The definition of excessive profits contained in the bill sets forth
certain factors to be taken into consideration in the determination of
excessive profits. The standards prescribed are: Efficiency, with
particular regard to quantity and quality of production, reduction of
costs, and economy in the use of raw materials, facilities, and manpower; reasonableness of costs and profits, with particular regard to
volume of production and normal pre-war earnings; amount and
source of public and private capital employed and net worth; risk
assumed, including the risk incident to reasonable pricing policies;
contribution to the war effort, including inventive and developmental
The renegotiation proceeding begins with a notice of conference
given the contractor or subcontractor by the Board. Such a notice
is to be given whenever, in the opinion of the Board, amounts received
or accrued under contracts or subcontracts may reflect excessive
profits. The mailing of the notice by registered mail constitutes the
commencement of the renegotiation proceeding.
3. AGREEMENT OR ORDER OF THE BOARD
The conference between the contractor or subcontractor and the
Board is for the purpose of arriving at a final or other agreement
contribution and cooperation in supplying technical assistance to the
Government and to other contractors character of business, including
between them with respect to the amount, if any, of excessive profits.
In the event an agreement is not arrived at, the Board is authorized
to determine the amount of the excess-profits taxes, if any, by order.
6. APPLICATION OF THE SECOND WAR POWERS ACT, 1943
notice thereof by registered mail to the contractor or subcontractor
Agreements of the Board with a contractor or subcontractor may
cover such past and future periods, may apply to such contract or
contracts, and may contain such terms and conditions as the Board
deems advisable Any such agreement is conclusive according to
complexity of manufacturing technique, character and extent of
subcontracting, and rate of turn-over; and such other factors the
consideration
of which the public interest and fair and equitable
dealing
may require.
The Board is granted by the bill, for the purposes of renegotiation,
the same powers with respect to any contractor or subcontractor that
any agency designated by the President to exercise the powers con-
ferred by title XIII of the Second War Powers Act, 1942, has with
title
respect to any contractor to whom that title is applicable. The
cited confers upon the Chairman of the War Production Board, or any
governmental agency or officer designated by the President, powers to
inspect the plant and audit the books of any contractor with whom
a defense contract has been placed at any time after the declaration
of emergency on September 8, 1939, and before the termination of the
present war. A defense contract is there defined to mean any contract,
subcontract, or order placed in furtherance of the defense or
war
effort.
If the determination is by order, the Board must forthwith give
its terms and in the absence of fraud or malfeasance or a willful
misrepresentation of a material fact shall not be reopened or modified
by the Government or be modified or set aside in any suit, action,
or proceeding.
4. STATEMENT OF THE DETERMINATION
Upon a determination of the Board, either by agreement or order,
of the amount of excessive profits, the Board is required, at the
request of the contractor or subcontractor, as the case may be, facts to
prepare and furnish a statement of the determination, of the
used as a basis therefor, and of the reasons underlying it.
5. ELIMINATION OF EXCESSIVE PROFITS
The next step in the renegotiation proceeding is the authorization excessive
and direction by the Board to the Secretary to eliminate the
profits by reducing the amounts otherwise payable to the contractor,
THE REVENUE BILL OF 1943
by withholding amounts otherwise due the contractor, by directing a
contractor to withhold from a subcontractor amounts otherwise due
him, by recovery from the contractor or subcontractor through
desirable.
ment, credit, or suit, or by any combination of these methods thought repay-
In the event the determination is made by the Tax Court, the same
method
is followed by the Secretary in eliminating the excessive
profits determined.
6. CURRENT PRICING
Whenever the price under any contract or subcontract exceeds a
fair price, in the opinion of the Secretary of the contracting department interested, the Secretary may require negotiation to fix a fair
price. If no agreement is reached, the Secretary may by order fix
the price which he determines to be fair for performance under the
contract or subcontract after the date of the order. The agreement
or order may prescribe the period during which the price fixed thereby
shall be effective and may contain such other terms and conditions as
the Secretary deems appropriate.
In determining the fair price, the Secretary is required to take into
consideration the same factors as are required to be considered in
determining excessive profits and the determination may be effectuated by withholding by or for the account of the United States from
amounts otherwise payable to the contractor or subcontractor.
This pricing authority may be exercised with respect to contracts
and subcontracts separately or as a group.
7. REVIEW BY THE BOARD
Any contractor aggrieved by the decision of a division of the Board
or of any officer or agency to whom it has delegated its powers,
functions, or duties, is entitled to a review thereof by the Board
upon request therefor made within a period to be specified by regulation of the Board. The Board is empowered to delegate any of its
powers, functions, or duties to the Secretary of a department, who in
turn may delegate to such officers or agencies of the United States as
he may designate: successive redelegations of such powers, functions,
and duties are also authorized. The Board may also, on its own
motion, review
a decision
delegation
has been
made. of any division, officer, or agency to whom
THE REVENUE BILL OF 1943
85
fair price, as the case may be, and its determination is not to be subject
to review or redetermination by any court or agency.
The court may determine an amount of excessive profits less than,
equal to, or greater than the amount determined by the Board, and
thefair
same
latitude is given the court with respect to its determination
of
price.
The bill expressly provides that the proceeding before the court
shall not be treated as a proceeding to review the determination
of the Board or the Secretary but as a proceeding de novo. The
powers and duties of the court are, in general, the same as those
possessed by it in the case of a proceeding to redetermine a tax
deficiency.
The filing of a petition with the court does not operate to stay the
execution of an order of the Board determining the amount of excessive
profits or an order of a Secretary fixing a fair price.
2. DETERMINATIONS OF A SECRETARY PRIOR TO ENACTMENT OF THE BILL
AND WITH RESPECT TO FISCAL YEARS ENDING BEFORE JULY 1, 1943
Any contractor or subcontractor aggrieved by a determination of
a Secretary made prior to the date of the enactment of the bill with
respect to any fiscal year ending before July 1, 1943, as to the existence
of excessive profits, whether or not the determination has been agreed
to by him, may, within 90 days after the enactment of the bill, file
petition with the court for a redetermination thereof.
In the case of a determination by a Secretary on or after the enactment of the bill, with respect to the existence of excessive profits for
any fiscal year ending before July 1, 1943, any contractor or subcontractor aggrieved thereby and who has not agreed thereto may file a
petition with the court for a redetermination
The jurisdiction, powers, and duties of the court im either case are
subject to the same provisions as in the case of a petition filed with the
court in respect of a fiscal year governed by the statute as proposed to
be amended (namely, fiscal years ending after June 30, 1943), except
that the other amendments made by the bill are not to be applicable
In the event the determination of the Secretary has been agreed to
by the contractor, neither the agreement nor the amount of excessive
profits agreed upon is to be taken into consideration by the court in
its determination of excessive profits.
a
84
V. PERIODS OF LIMITATION
IV. REDETERMINATION BY THE TAX COURT
1. ON COMMENCEMENT OF PROCEEDING
1. DETERMINATIONS OF THE BOARD OR OF A SECRETARY WITH RESPECT
TO FISCAL YEARS ENDING AFTER JUNE 30, 1943
Any contractor or subcontractor aggrieved by an order of the Board
determining the amount of his excessive profits or by an order of the
Secretary determining a fair price with respect to a fiscal year ending
after June 30, 1943, is permitted by the bill to file a petition for a
redetermination with The Tax Court of the United States within 90
days after the entry of the order. The court is given exclusive
jurisdiction to determine the amount of the excessive profits or the
The bill prohibits the commencement of any proceeding by the
Board to determine the amount of excessive profits more than 1 year
after the close of the fiscal year in which such profits were received or
accrued or more than 1 year after the statements of costs of production
and other financial statements required from the contractor or subcontractor have been filed with the Board, whichever date is the later,
and if the proceeding is not commenced within that period all liabilities
of the contractor or subcontractor for excessive profits received or
accrued during the fiscal year in question are thereupon discharged.
86
THE REVENUE BILL OF 1943
2. ON DETERMINATION OF EXCESSIVE PROFITS
THE REVENUE BILL OF 1943
If an agreement or order determining the amount of excessive profits
is not made within 1 year following the commencement of the renegotiation proceeding, all liabilities of the contractor for excessive profits
with respect to which the proceeding was commenced are thereupon
discharged, except that if an order is made within such 1 year by the
Secretary or by an officer or agency designated by him pursuant to
function, or duty, may be delegated in whole or in part by him to such
officers or agencies of the United States as he may designate. The
Secretary may also authorize successive redelegations.
87
3. DIVISIONS OF THE BOARD
The Board may be divided by its Chairman into divisions of one or
more members and in case a division is of more than one, the Chairman
is to designate the chief of it. The Board is also empowered to determine the character of cases to be heard and decided initially by the
Board through an officer of or utilized by it, the character of cases to
be heard and decided initially by the various officers and agencies authorized to exercise its powers, the character of cases to be heard and
decided initially by the various divisions of the Board and the character of cases to be heard and decided initially by the full Board.
his authority to delegate, such 1-year limitation shall not apply to
review of the order by the Board. Provision is made, further, for the
extension
of the 1-year period by mutual agreement between the Board
and
the contractor.
VI. DISPOSITION OF PROCEEDS OF RENEGOTIATION
1. EXCESSIVE PROFITS RECOVERED
As under existing law, all moneys recovered by way of repayment
or suit are to be covered into the Treasury as miscellaneous receipts.
4. REVIEW BY THE BOARD OF THE ORDERS OF A DIVISION, OFFICER, OR
AGENCY
2. EXCESSIVE PROFITS WITHHELD OR CREDITED
Any contractor aggrieved by a decision of an officer, agency, or
division of the Board, may request a review by the full Board. The
The bill provides that upon the withholding of any amount of
excessive profits or the crediting of any amount thereof against
Board may also review such a decision on its own motion or may provide, by regulations, that in the absence of a request for review within
the time prescribed, the decision of the officer, agency, or division shall
be deemed the decision of the Board.
amounts otherwise due a contractor the amount so withheld or credited
is to be transferred to the Treasury to the credit of miscellaneous
receipts, thus reducing the appropriations respectively available for
the contracts in question.
VIII. CONTRACT OBLIGATION FOR RENEGOTIATION
3. CREDIT FOR FEDERAL INCOME AND EXCESS PROFITS TAXES
The bill authorizes and directs the Secretary of each department
As under existing law, credit is to be allowed the contractor against
any
excessive profits to be recovered from him for taxes paid or accrued
thereon.
VII. ADMINISTRATION
1. ESTABLISHMENT OF THE WAR CONTRACTS PRICE ADJUSTMENT BOARD
A new Board named the War Contracts Price Adjustment Board
is created by the bill. It is to consist of five members of whom one is
to be an officer or employee of the War Department, one of the Navy
Department, one of the Treasury, one of the United States Maritime
Commission or the War Shipping Administration, and one of the
Reconstruction Finance Corporation. The Chairman of the Board
is to be elected from among its members and the Board is to have a
seal which shall be judicially noticed
The principal office of the Board will be in the District of Columbia
but the Board or any of its divisions may meet and exercise its powers
at any other place within the United States. Such number of field
officesby
asthe
it may
deem necessary to expedite its work may be established
Board.
)
to insert in each contract, made by it 30 days or more after the date of
enactment of the bill, a provision under which the contractor agrees to
repricing and to the elimination of excessive profits through renegotiation; also to the retention by the United States from amounts other-
wise due him or for the repayment to the United States, if paid to
him, of any excessive profits; also that he will insert similar provisions
in each subcontract made by him.
This provision may be incorporated by reference in any contract or
subcontract but whether or not the contract contains such a provision
it shall be construed to have been made subject to it.
Although such provision is required to be inserted in every contract
and subcontract, the contractor or subcontractor will be bound
thereby only if in any fiscal year the aggregate amounts received or
accrued total the applicable specific exemption.
IX. EFFECTIVE DATES OF AMENDMENTS
The bill applies to fiscal years ending after June 30, 1943. Exceptions are made with respect to the exemption of agricultural commodities, which is effective as of April 28, 1942, and the right to petition
The Tax Court of the United States, which applies to fiscal years
2. DELEGATION BY THE BOARD OF ITS POWERS, FUNCTIONS, AND DUTIES
The Board is authorized to delegate in whole or in part any of its
powers, functions, or duties (except to review determinations of excessive profits) to the Secretary of a Department, and any such power,
ending before July 1, 1943, as well as fiscal years ending on or after
that date.
88
THE REVENUE BILL OF 1943
X. TERMINATION OF RENEGOTIATION
Under existing law the renegotiation section will remain in force
during the present war and for 3 years after the end thereof. The
termination date under the bill is the date of the termination of
hostilities in the present war or the date specified in a current resolu-
RENEGOTIATION OF WAR CONTRACTS
tion of Congress as the date ending the war, whichever is the earlier.
XI. TECHNICAL AMENDMENTS
OUTLINE OF CHANGES MADE IN EXISTING STATUTE BY THE WAYS
AND MEANS COMMITTEE BILL, NOVEMBER 18, 1943
1. PROSECUTION OF CLAIMS AGAINST THE UNITED STATES
The bill liberalizes the existing prohibition upon any person leaving
the employ of the Government from acting as counsel, agent, or
attorney for prosecuting any claim against the United States. The
existing prohibition goes to the prosecution of any claim arising from
Renegotiation
Section 405 Act, L REDUCTION OF THE AREA OF RENEGOTIATION
(e) (1) (6)
(a) (5)
any matter directly connected with which the person is employed or to
such prosecution during the period such person is engaged in inter-
mittent and temporary employment in a Department The new
provision changes the period mentioned in the second test to the period
during which the person is employed in a Department.
The bill also adds a new subsection providing that nothing in the
section shall be construed to limit or restrict any authority or discretion
of a Secretary of a Department under the provisions of any other law
or with respect to the making of agreements or amendment or modification thereof by mutual agreement or in accordance with their terms.
(i) (1) (E)
2. Definition of subcontract
3. Subcontracts
under exempt prime contracts or subcontracts
(i) (1) (D)
(i) (1) (C)
(i) (4) (D)
4. Contracts with organizations exempt from income tax
5. Exemption of agricultural commodities
(i) (4) (E)
(i) (4) (F)
126
125
125
127
7. Exemption of competitively priced articles generally
127
8. Exemption of subcontracts where profits otherwise
128
IL DETERMINATION OF EXCESSIVE PROFITS
(c) (5) (A)
(a) (4) (B)
(1) (3)
(c) (1)
1. Mandatory statements of costs
2. Allowable costs
3. Costs allowed to certain processors
4. Aggregation of contracts
(a) (4) (A)
5. Standards
(c) (5) (B)
6. Application of the Second War Powers Act, 1942
The bill amends these paragraphs by inserting the words "chapter
114
103
126
110
102
115
III. RENEGOTIATION PROCEDURE
The effect of the amendment is to include declared value excess-profits
taxes
paid with those in respect of which a credit is allowed against
recoverable excessive profits.
(a) (3) (A) (B) 1. Renegotiate
defined and Renegotiation; Reprice and Repricing
(c) (1)
)
The amendment striking out the words "by the Revenue Act of
104
6. Exemption of standard commercial articles
2B" after the words "chapter 2A" wherever they appear therein.
1942" from this subparagraph has the effect of extending the application of the definition of the term "excessive profits" to a renegotiation
section as amended by the bill.
115
renegotiable cannot be segregated
2. CREDIT FOR DECLARED VALUE EXCESS PROFITS TAXES
3. AMENDMENT TO INTERNAL REVENUE CODE 3806 (A) (1) (B), (C)
Page
1. Increase of the specific exemption to $500,000
(e) (1) (4)
(c) (1)
(c) (2)
(f) (1)
(d) (5)
2.
101
Notice of conference
3. Final agreement or order of the Board
4. Statement of the determination
109
109, 113
111
5. Elimination of excessive profits
111
6. Current pricing
7. Review by the Board
122
119
IV. REDETERMINATION BY THE TAX COURT
(e) (1)
1. Determinations of the Board or of a Secretary with
119
respect to fiscal years ending after June 30, 1943
4. SHORT TITLE
(e) (2)
the bill and with respect to fiscal years ending before
121
July 1, 1943
The bill provides that the renegotiation section may be cited as the
v. PERIODS OF LIMITATION
Renegotiation Act. The purpose of this amendment is to obviate
the necessity of the long citation now necessary in documents pertaining to renegotiation; namely, section 403 of the Sixth Supplemental
National Defense Appropriation Act, 1942.
2. Determinations of a Secretary prior to enactment of
(e) (3)
(c) (3)
112
1. On commencement of proceedings
2. On determination of excessive profits
113
VI. DISPOSITION OF PROCEEDS OF RENEGOTIATION
(e) (4)
112
1. Excessive profits recovered
(e) (4)
2. Excessive profits withheld or credited
(e) (4)
3. Credit for Federal income and excess profits taxes
112
112
89
90
THE REVENUE BILL OF 1943
Renegotiation Acts,
Section 403
(d) (1)
VII, ADMINISTRATION
Page
1.
Establishment Board of the War Contracts Price Adjustment
(d) (4)
116
2.
Delegation duties. by the Board of its powers, functions, and
(d) (5)
(d) (5)
3. Divisions of the Board
118
118
APPENDIX
4. Review agency by the Board of the orders of a division, officer, or
119
(b)
VIII. CONTRACT OBLIGATION FOR RENEGOTIATION
107
IX. EFFECTIVE DATES OF AMENDMENTS
TABLE 16.-Amount of unforgiven far (assuming no change in net income)
(e) (6)
Bill section
701 (d)
701 (d)
701 (d)
701 (d)
701 (d)
701 (c) (1)
701 (c) (3)
701 (d)
1. Renegotiation
profits
ending afterofJune
30.received
1943 or accrued in fiscal years
2. Determinations of the Board or orders of a Secretary with
respect to fiscal years ending after June
3.
a Secretary prior to enactment the
fiscal
before
Determinationsrespect
1943 billtoand
withyears
of 30,ending
1943. July
of 1,
4. Contract obligation for renegotiation
5. Current pricing
6. Exemption of agricultural commodities
to I. R. C. 3806 (a) (B), (C)
declared value excess
7. 8
Clerical
9.
Short
titleCredit for amendment profits taxes (1)
Total unforgiven tax
115
129
Net Income before
personal exemption
Amount payable in 1944 and in 1945
Single
Married no
Married,
person
dependents
dependents
Single
person
Married
Married
no dependents
2 depend
ents
129
129
129
129
129
129
(h)
x. TERMINATION OF RENEGOTIATION
124
XL TECHNICAL AND CLERICAL AMENDMENTS
(j)
(c) (2)
(c) (1)
(1)
1. Prosecution of claims against the United States
2. Credit for declared value excess profits taxes
3. Short
Amendments
to I. R. C. 3806 (a) (1) (B), (C)
4.
title
128
129
129
129
91
92
THE REVENUE BILL OF 1943
TABLE Existing income-tax burden for 1944 and 1945, including net Victory
for and
one-half
of unforgiven 1948 tax (assuming no change in net income).
Single
person,
no dependents
THE REVENUE BILL OF 1943
93
TABLE 19.-Comparison of individual income tax rates and exemptions, taxable
years 1936-48 and under committee bill
tax
Income, net
Net Income
Victory, and
before personal
exemption
Personal exemption
one-half
Effective
unforgiven
rate
tax
1906-39
remaining
after tax
$1,000
Married person
2,500
$750
$800
63.23
$1,000
118.40
$1,200
Percent
2,833
$583.00
699.15
736.77
$25,000
11,840
881.60
$40,000
14.010
1,031.87
16,182
1,257.27
1,482.67
1,682.94
2,008.60
2,857.40
3,084.99
$50,000
$60,000
6,780
7,903
$2,500
$3,000
$4,000
$5,000
3,750.07
$6,000
4,452.65
$7,000
$8,000
$9,000
2,664.60
$10,000
3,082.02
5,813.35
$15,000
755
$20,000
$8,477.93
11,847.52
$30,000
$70,000
$80,000
$90,000
$100,000
$150,000
$200,000
$250,000
5,102.73
$500,000
5,730.32
6,335.40
6,917.98
$750,000
$1,000,000
$2,000,000
3,486.65
$5,000,000
Percent
42,389
47,390
15,439.46
51,454
23,067.15
31,283.00
39,922.62
48,898.82
58,212.49
67,863.68
66,537
75,404
77,745.49
77,745
$11,522.07
13,152.48
Committee
1943
1942
Percent
Normal tax
Burtax rates
$750
$500
$500
$500
1,500
1,200
1,200
1,200
400
400
Percent
350
350
Percent
Percent
Percent
850
Percent
57,667
62,567
Exceeding
69,855
Notexceeding
72,765
128,334.51
1,006,327.00
2,016,327.00
5,046,327.00
$800
2,000
400
4
$17.00
50.85
1941
BIII
Single person
Each dependent
$000
1940
Income
4
rate
Income
remaining
after tax
4
Effect
tive
6
exemption
one-half
unforgives
6
Net Income
before personal
Income, net
Victory, and
100 816
100.926
$2,000
$2,000
4,000
$4,000
6,000
19,971.44
17,699.31
$6,000
8,000
$8,000
10,000
$310.42
-3,827.00
$10,000
12,000
-6,327.00
-16,327.00
-46,327.00
$14,000
$10,000
$18,000
$20,000
$22,000
: Net Victory tax computed on a gross income equal to 196 of net income
$26,000
$32,000
TABLE 18. -Existing income tax burden for 1944 and 1945, including net Victory fax
and one-half of unforgiven 1942 tax (assuming no change in net income)
Married person, 2 dependents
$38,000
$44,000
$50,000
$56,000
$60,000
$62,000
$68,000
$70,000
Income. net
Net income
Victory and
before personal
exemption
one-half
live
unforgives
rate
Effec-
tax
Income
remaining
after tax
Net Income
Income, net
Victory, and
$74,000
Effect
Income
before personal
one-half
tive
exemption
unforgiven
remaining
rate
after tax
tax
$80,000
$90,000.
$100,000
100,000
150,000
$150,000
$200,000
$250,000
Precest
$000
$1.19
$750
5.86
$800
$1,000
744.14
792.59
966.36
$1,200
1,180.14
57.75
171.69
$4,000
$595.81
290.74
$6,000
$7,000
1,470.81
$60,000
$70,000
$80,000
128.1
$9,000
$10,000
6,919.47
$15,000
4,676.94
Percent
$7,453.75
10,676.06
14,164.99
21,547.85
7,588.11
10,323.06
$12,546.25
14,323.94
15,835.01
18,452.15
20,502.79
21,911.37
47,017.57
$2,000,000
1,000,000
2,000,000
5,000,000
Over
5,000,000
$1,000,000
1 For 1940 tax increased by 10 percent, but not more than 10 percent of the amount by which the net
THE
$200.000
$250,000
$500.000
the
$750,000
Net Victory tax computed on gross income equal to 10/9 of not Income.
$500,000
$750,000
24,261.76
$150,000
$1,000,000
$2,000,000
$5,000,000
$300,000
$400,000
22,982.42
$00,000
$100,000
5,602.69
6,281.34
$8,000
$25,000
$30,000
$40,000
$50,000
1,761.47
3,467.7
4,195.92
4,919.56
$5,000
$20,000
2,015,473.00
5,045,473.00
-5,473.00
-18,473.00
-45,473.00
Income For exceed 1943 . Victory such tax. tax of percent on gross Income in excess of $024. with post-war credits allowed.
10
94
96
1936-1939
$17.00
1935-39
1944 over
1936-39
1942
1938-39
50.85
$17.00
107.27
149.20
1930-39
1943 over
$1.28
1,286,163.00
$1.00
101.60
1912
1943 over
124,884.00
709,336.00
49.20
85.60
43.00
5,375.00
156.00$70,000
1941
1942 over
1941
Amount of increase in tax
451,492.00
Amount of Increase in tax
1940
1941 over
1940
566,153.00before personal
5,734.00
1936-39
1940 over
Includes 1234 percent of unforgiven tax.
1943 over
1944 over
50.85
$17.00
1944
1944
1943 over
1942 over
Existing law
1943
1963
10,914.63
114,933.13
1941 over
16,556.80
$15.40
43.00
16.60
$15.40
125.80
$17.00
181.00
112.00
236.20
206.10
138.40
273.00
263.00
365.00
920.00
680.00
1942
1,448.00
1,174.00
1940 over
9,626.00
3,914.00
1942
9,721.50
634,616.00
1,734,618.00
1,799,500.00
219,316.00
SINGLE PERSON, NO DEPENDENTS
MARRIED PERSON, NO DEPENDENTS
$3.00
97.80
117.00
165.00
220.50
472.00$80,000
8,403.10
346.50
648.50
824.50
1941
1,030.30
1941
50.85
1,742.00$3.00
1,517.80
4,929.00
6,816.00
1,372.00
7,224.00
53,214.00
46,421.50
10,200.00
Tax payable in taxable years
Tax payable in taxable years
Includes net Victory tax
1940
Includes net Victory tax.
- of individual income Tazable years 1936-44, and increases in tax since 1939
$3.20
1,246.50
2,056.00
560.00
2,390.00
TABLE 21 -Comparison
1,104.00
1936-39
2,994.00
4,366.00
1,834.00
15,076.50
9,334.00
0,881.50
12,631.00
4,374,616.00
4,499,500.00
64,854.00
342,326.00
2,914.00
70,040.10
$90,000
6,384.00
5,046,327.00
exemption
Net Income
exemption
Net Income
before personal
$7,000
$1,000,000
$150.000
$750,000
14,021.80
150,621.00
$250,000
$000,000
414,616.00
854,616.00
$2,000,000
$5,000,000
$200,000
$100 000
$60,000
$30,000
$40,000
$30,000
$25,000
$20,000
$15,000
$10,000
$9,000
$8,000
$6,000
$5,000
$4,000
$3,000
$2,500
$2,000
$1,800
$1,500
$750
$1,000
$1,200
$800
$600
TABLE 20 - Comparison of individual income tax-Taxable years 1936-44. and increases in tax since 1939Existing law
1940
1936-39
THE REVENUE BILL OF 1943
96
251
INDIVIDUAL VIEWS OF REPRESENTATIVE
WESLEY E. DISNEY
In recent years there has been much discussion of in
government Important economies have been accomplished. economy The
present bill provides no legislative means of operation to improve the
governmental machinery in the direction of economy. Up to the
time of the War between the States, the Ways and Means Committee
was the tax-raising and money-spending committee of the House.
levied the taxes and took the appropriation bills to the House. At It
that time the Appropriations Committee was created, and since then
each committee has gone its way. The Ways and Means Committee
has been the revenue committee of the House and the Appropriations
Committee has presented the appropriations bills to the House,
Neither had had power or jurisdiction over the other.
I
1945
In the legislative branch of the Government there is no committee
or organization which deals with the subject matter of the over-all
budget or the over-all revenues. The Bureau of the Budget, now in
the arm of the executive branch, performs this function that is entirely
separate and apart from the Congress. The Comptroller General in
the main looks to the legality of expenditures.
It is therefore necessary for a Member of Congress, if he desires to
get the over-all picture of expenditures and receipts, to go to the
Bureau of the Budget, which has no legislative authority Under
the rules, procedure, and traditions of both Houses, the Ways and
Means Committee and the House Appropriations Committee are
independent of each other on this subject, as are the Senate Finance
Committee (the revenue committee of the Senate) and the Senate
Appropriations Committee
I proposed in the Ways and Means Committee a provision to be
inserted in instant H. R. 3687 which would require the President to
furnish the Congress an estimate of expenses to be furnished to a
newly created Joint Committee on the Budget, composed of five
members of the Ways and Means Committee, five from the House
Appropriations Committee, five from the Senate Finance Committee,
and five from the Senate Appropriations Committee. This committee
would be required to make a joint report to the two Houses, which,
upon the adoption by each House, would create a statutory ceiling
for appropriations for each department or establishment of the Government. This statutory ceiling could not be exceeded except by
two-thirds of the votes of each House on a yea-and-nay vote and any
individual Member could raise the question on a point of order.
As a part of these views the provision is offered as follows:
97
THE REVENUE BILL OF 1943
98
THE REVENUE BILL OF 1943
TITLE II-BUDGET AND REVENUE CONTROL
PART 1
99
(h) Whenever any appropriation bill for any department or other establishment,
the ceiling for whose total appropriation is fixed pursuant to this Act, reaches
final vote in either House, if the total of such bill when moved to final passage is a
1. The
President
transmit
to the two Houses of Congress, on or before
June
1 of each
year, ashall
report
showing:
in excess of such celling, each such vote shall be by year and nays, and shall require
a two-thirds vote for passage. If the bill shall have failed to receive a two-thirds
(a) Hisyear
estimate
of the total revenues and receipts of the Government for the
calendar
next succeeding.
vote, it shall be considered as having been recommitted with instructions to report
(b) His estimate of the total of the expenditures by departments and inde-
the within
same the
back
with each
item proportionately reduced, to bring the total of the
bill
statutory
ceiling.
pendent establishments of the Government under obligations to be incurred during
the fiscal year beginning on the 1st of July of the calendar year next succeeding.
(i) Whenever any appropriation bill for any department or other establishment,
the ceiling for whose total appropriation is fixed pursuant to this Act, has passed
Congress in said report the manner in which the revenues and receipts shall be in-
increase the total of such bill above such statutory ceiling, concurrence in the
(c) If the total of his estimates of expenditures under (b) exceed the total of
his estimates of revenues and receipts under (a), he shall recommend to the
the Senate with Senate amendments the net total of which will increase or further
amendments to the extent which increases the total of the bill above the statutory
creased
sothe
that
theof
total
such revenues
and receipts, as estimated, shall equal
or
exceed
total
theof
obligations,
as estimated.
(d) Upon receipt of said report from the President, it shall be referred forthwith
ceiling, or adoption of any conference report the net effect of which is to increase
ortwo-thirds
further increase
a
vote. the total of such bill above the statutory ceiling, shall require
to the Joint Committee on the Budget created by part 2 hereof, and such reference
by either body to such joint committee shall confer jurisdiction to consider and
In my judgment, it is unfortunate that this provision was not
report as provided in part 2 hereof.
adopted as a part of H. R. 3687. It would be a special move in the
direction of governmental economy. Our appropriations have risen
PART 2
since 1913 from $700,000,000, when we had a population of 90,000,000,
to nearly $8,000,000,000 in 1940, when our population had only increased to 130,000,000. In my judgment, our economy cannot continue to function with such tremendous increases in expenditures and
consequent high rates of taxes.
This part is enacted by the Congress, with complete reservation of the constitutional rights of each House thereof, as follows:
(a) There is hereby created a joint committee of Congress to be known as the
Joint Committee on the Budget, hereinafter referred to as "the Budget Committee." The Budget Committee shall consist of ten Members of the Senate,
to be appointed by the President of the Senate (consisting of three members of
the majority party and two members of the minority party from each of the
committees on Appropriations and Finance): and ten Members of the House, to
be appointed by the Speaker of the House (consisting of three members of the
majority party and two members of the minority party from each of the committees on Appropriations and Ways and Means). The chairman shall
WESLEY E. DISNEY.
O
be
designated by the Speaker of the House.
(b) On or before June 15 of each year, following the transmission of the President's report as herein provided, the Budget Committee shall report its recommendations thereon to the respective Houses of Congress. Such report shall be
accompanied by a joint resolution or bill with the customary resolving or enacting
clause and the body thereof in following form:
That the Budget submitted by the President for the fiscal year beginning
July 1 of the calendar year next succeeding shall not exceed a grand total, for
all purposes, of $
The said total sum shall include all appropriations of every kind whatsoever- regular, annual appropriations, permanent
appropriations, reappropriations, indefinite appropriations, and authorizations
contract or commit, the amounts for which. if indefinite, shall be estimated.
to
The total of the estimated appropriations for each department or establish-
ment shall constitute the statutory ceiling of appropriations for such department
or establishment
(c) Consideration of the report of the Budget Committee shall be first on the
part of the House.
(d) If the Budget Committee fails to make a report within the time specified
herein, it shall be in order for any Member of the House to present the resolution
or bill set forth in (b) hereof and to call up the same for consideration at the
earliest date: if said resolution or bill has not been considered, it shall after three
days be considered as unfinished business of the highest privilege.
(e) Consideration of said resolution or bill shall not exceed ten hours in either
House, the control of which shall be equally divided in either House among the
chairmen and ranking minority members of the two committees of each of such
Houses from which the members of the Budget Committee are chosen. Upon
completion of consideration the resolution or bill shall be moved to final passage
with no intervening motion, except that amendments may be offered to change,
without qualification, the total amount.
(f) Upon passage by the House, the resolution or bill shall be transmitted forththree
with to the Senate, where it shall be considered at the earliest date and after
calendar days shall be considered unfinished business of the highest privilege.
(g) Consideration by either House of Senate amendments to such bill or resolu-
tion, or of conference reports thereon, shall likewise be of the highest privilege.
4
252
O
78TH CONGRESS
1st Session
HOUSE OF REPRESENTATIVES
REPT. 871
Part 2
THE REVENUE BILL OF 1943
NOVEMBER 18, 1943.-Committed to the Committee of the Whole House on the
state of the Union and ordered to be printed
Mr. KNUTSON, from the Committee on Ways and Means, submitted
the following
SUPPLEMENTAL VIEWS
[To accompany H. R. 3687)
The members of the Republican minority of the Ways and Means
Committee subscribe in general, to the report submitted by Chairman
Doughton for the full committee. The following statement is simply
submitted in amplification of our views.
I. PROPOSED TAX INCREASES
o
A. GENERAL STATEMENT
The pending bill is the seventeenth major tax measure since 1933
and the third since Pearl Harbor.
As a consequence of the past 16 measures, most of which were
enacted in a hopeless effort to keep pace with the extravagant and
wasteful spending of the past decade, Federal taxes have been in-
creased twentyfold-from 2 billions annually to more than 40
billions.
To this staggering and unprecedented burden now borne by the
American people, the administration is insisting upon the addition of
a further load of 101/2 billions, largely through sharp increases in the
already heavy personal income tax.
Though it is obvious that the Treasury needs every dollar of revenue
that can possibly be raised, in order to minimize the portion of the
war costs which must unavoidably be financed by borrowing upon the
public credit, the fact nevertheless remains that there is a limit to the
amount which can safely be taken from the people in taxes, even in
wartime. We believe that this limit has substantially been reachedcertainly so far as existing sources of revenue are concerned
1
92237-43
THE REVENUE BILL OF 1943
2
THE REVENUE BILL OF 1943
Furthermore, we desire to point out that recent developments
indicate that the Budget will be brought within the Treasury's goal
opinion that the Congress should go exceedingly slow, and exercise
discriminating judgment, in imposing further taxes.
The administration's program to increase taxes on the American
people by an additional 10% billions, if enacted, would become a prime
factor in the destruction of all that our armed forces are now battling
throughout the world to preserve and maintain
of $1 of receipts for each $2 of expenditure without the imposition of a
single dollar of additional taxes. The Administration has obviously
overestimated probable expenditures for the current year, since they
are running at the rate of 90 billions as compared with the 104 billions
estimated. The action of the War Department in turning back some
13 billions of its appropriations is abundant evidence of the fact that
the Government cannot spend the amount previously estimated. On
the other hand, it appears that the probable tax receipts for the year
have been underestimated, and will more likely come closer to 45
Congress is the steward of America's welfare and destiny. As
minority members, we believe we would be false to our trust were we
to saddle this heavy additional burden on the backs of taxpayers
already heavily burdened. It is our duty to contribute to the preservation of free enterprise and opportunity in America, not to their
billions than 40 billions. On this basis, it is clear that the 1 to 2
ratio of taxes to expenditures will be achieved without additional
destruction, as would result from the excessive taxation proposed by
the administration. We cannot do less for our fighting men than to
taxation of any kind.
Having unanimously opposed the drastic tax program advocated
by the administration, we are pleased to say that it is not embraced
in the revenue bill as reported to the House, which provides only for
certain limited tax increases involving a total of 2 billions, or one-fifth
the amount of the administration's request.
make sure the America to which they will return when the war ends is
the same land of liberty and opportunity from which they departed.
In proposing and insisting upon its 10%-billion-dollar tax program,
the administration has either failed to give recognition to, or deliberately ignored, these facts:
1. That Federal taxes are already at an all-time high, being roughly
Some may attempt to belittle the amount carried in the bill, but
we do not believe that the time has yet come when 2 billions of increased taxes can be regarded as inconsequential, even in these days
of astronomical spending. The increase represents $2 for every
minute since the dawn of the Christian Era.
While we of the Republican minority have cooperated with the
eight times the greatest annual amount collected during the First
World War.
2. That in addition to the more than 40 billions of Federal taxes,
taxpayers must pay annually nearly 10 billions in State and local
taxes.
3. That per capital taxes in the United States now exceed those
majority on a strictly nonpartisan basis in the preparation of the
levied in other countries, being $357 for every man, woman, and child,
as compared with $291 in the United Kingdom, which has always
pending bill, we believe that the time has come when henceforth the
administration, instead of insisting upon squeezing more and more
taxes out of the public, should at long last be giving some concern to
the elimination of unnecessary and wasteful expenditures. We shall
the
insist upon such action before we shall be willing to consider
imposition of further taxes upon the people and upon business.
For too long the overburdened taxpayer has been the "forgotten
been regarded as having the highest levies.
4. That under existing law. there will be two very substantial
increases in taxes next year, namely: (a) Most individuals subject to
income tax will have to pay in 1944, in addition to their regular income
tax for that year, 12% percent of their 1942 assessment, and will also
have to make a like payment in 1945; (b) beginning January 1, 1944,
the present 1 percent pay-roll tax under the Social Security Act will be
doubled on both employers and employees.
5. That under the operation of the 12% percent carry-over abovementioned, it will be impossible for any person, regardless of how
great his income, to have more than $24,000 left after taxes in 1944
and 1945, and that in the highest brackets taxpayers will have to pay
to the Treasury even more than their total income for these 2 years.
6. That, as Chairman Doughton has so aptly said, 'You can shear
man.'
For too long the watchword has been, "spend and spend, tax
and tax.'
tax proposals into operation.
The great Chief Justice, John Marshall, long ago pointed out that
the power to tax is the power to destroy. With this admonition in
mind, and in view of the tremendous tax load the people generally,
and business enterprises, are already called upon to bear, we are of the
a sheep We are indefinitely, reminded but that you it took can skin only it one but straw once." to finally break the
camel's back. Yet the administration, instead of diminishing its
a
In opposing the administration's 10%-billion-dollar tax program,
and in unanimously contributing to its defeat in committee, we took
the position that a tax increase of this magnitude would impose entirely too great a burden on taxpayers generally, and that it would
threaten the liquidation of the middle class in America, discourage
maximum production for the war effort, and undermine the ability of
private enterprise to provide jobs in the post-war period for the tens
of millions of persons now temporarily engaged in war activity, both
on the battle fronts and the home front.
It is a short-sighted and dangerous policy to "kill the goose" to get
few more "tax eggs" now, and thereby destroy its future productivity,
but this would be the practical effect of putting the administration's
3
demands for additional revenue as the tax load has been approaching
the limit, has in recent years virtually doubled each new request over
the previous one. For example, in 1940, Congress was asked to raise
$1,000,000,000 under the so-called defense tax bill. In 1941, the
Treasury's request was for 3% billions additional. Last year, it was
for 7.6 billions. This time, the ante has been raised to 10% billions.
In other words, the more the American taxpayer has become burdened
with increasing taxes, the more the administration has sought to pile
on ever greater increases.
THE REVENUE BILL OF 1943
4
THE REVENUE BILL OF 1943
Since 1940, Federal tax collections have risen approximately 700
percent, as shown in the following table:
Fiscal vear ending June 301940
Total collections
$5,925,000,000
1941
8,268,000,000
13,668,000,000
23,384,000,000
1942
1943
1944
40,350,000,000
It is apparent from the foregoing figures that the recent increases
have been sharp and substantial. Taxpayers have not had time to
adjust themselves to one increase before another even greater one
has been imposed, and it is no wonder that they have become "groggy"
under the load.
B. THE NEED FOR ECONOMY
The tremendous increase in taxes in recent years, coupled with the
extension of the income tax to the great masses of the people, has
resulted in increased interest on the part of the public in Government
spending Heretofore, the average person has been led to believe
that he need have no concern with how much the Government was
spending, since the "other fellow" was paying the bill. Now he knows
how cruelly he has been deceived. He is justifiably resentful when
he sees his hard-earned tax money wasted on every hand by the
administration, which has refused to concern itself with trying to
eliminate unnecessary expenditures, and has continued to spend and
spend as if there were no bottom to the bin.
After the President had failed to act in the matter of economizing
on nonmilitary expenditures, the Congress itself, upon recommendations made by the Byrd Economy Committee, made a number of
substantial reductions. That committee, which was created under
the Revenue Act of 1941, is continuing its good work. Only recently,
it pointed out that of the 3,000,000 Federal employees now on the
Federal pay roll, of whom 55 percent are said to be engaged in nonmilitary activity, a minimum of 300,000 could easily be removed
from the rolls without in any way impairing governmental functions.
There is no excuse for the administration's failure to take such action,
which it has full power to do under existing law. From that source
alone there would-b a saving of close to $1,000,000,000 annually.
At the same time the manpower shortage would thereby be greatly
relieved.
During the early days of our country's participation in the present
war, military appropriations had to be made quickly and on faith,
in whatever amounts requested by the military authorities. The
total war program has now reached the staggering sum of 345 billions,
or approximately the amount of this country's entire national wealth.
It is inevitable that in the expenditure of any such amount tremendous
waste and extravagance will occur. This country's experience in the
last World War proved this to be true.
We believe that from now on war expenditures should be examined
with more care by the Budget Bureau and by Congress, with a view
to eliminating all unnecessary outlays and all wasteful expenditures.
Even if a saving of only 10 percent could be made in the total
war program, it would result in lightening the future burden of
American taxpayers by approximately $35,000,000,000, which is no
small amount.
5
We feel that it would be money well spent if the Congress were to
equip itself with an adequate staff to make the necessary inquiry into
all Federal expenditures in order to establish their justification. We
further feel that it would be desirable for Congress to take such steps
as may be necessary to bring about the fullest possible coordination
between the spending and revenue-raising committees of each branch.
Both these suggested changes in procedure would be in the interest
of sound fiscal policy and economy and of distinct benefit to the American taxpayer.
c. COMMENTS ON SPECIFIC TAX PROVISIONS
1. Individual income -Under the bill as reported, the individual
income tax burden is left unchanged, except for such incidental increases or decreases as may result from the integration of the present
Victory tax with the regular income tax.
The freezing of the individual income tax rates and exemptions at
the existing level is in accord with the position taken by the Republican minority at the outset of the committee's deliberations, when
we publicly announced that we were opposed to further increases in
the personal income tax.
In taking this stand, we were not unmindful of the fact that many
persons are enjoying high wartime incomes and possibly are in a position to pay even higher taxes than are now levied. However, we
recognize that any general increase in the income tax would also fall
heavily on that large group whose incomes have not increased as a
result of the war, and which in many cases have actually decreased.
They are being ground between the upper millstone of rising living
costs and the nether millstone of unprecedentedly high taxes, in the
face of unchanged or lowered income out of which fixed commitments,
such as payments on the home, life-insurance premiums, and similar
outlays must also be met. To impose a general increase in the income
tax would unduly oppress this group, who probably make up a third
to a half of the total number of income recipients. It includes pensioners, so-called white-collar workers, school teachers, businessmen
adversely affected by wartime restrictions on the production of consumer goods, and others too numerous to mention.
It should be stated that the Ways and Means Committee gave
serious consideration to the imposition of a special wartime tax on
increased income, but after careful study this method of attempting
to reach swollen war incomes without burdening those who have enjoyed no such benefits was found to be administratively impracticable and to involve many insurmountable inequities as between
taxpayers.
The administration's case for increasing the individual income tax
by 61/2 billions was based almost entirely on the alleged need for
absorbing through taxation the so-called excess purchasing power of
the people as a means of helping to combat the threat of inflation.
The Treasury, however, in setting up its program, completely ignored
the fact that such excess purchasing power as may exist is not equally
distributed among all the people. Furthermore, its sincerity in
putting forward the anti-inflation argument as a justification for
increased personal income taxes became immediately questionable
when it developed that its tax proposals were not aimed at reaching this
so-called excess purchasing power in the hands of those who are
6
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
known to enjoy the great bulk of it. Hence, even if enacted, the
Treasury tax program would make little, if any, contribution to
to the fact is that the War and Navy Departments are vigorously opposed
any such rate for the reason that it would not only discourage
duction for the war effort but would also result in increased cost of promaterials to the Government as a result of taking away all incentive war
inflation control.
The Treasury's argument in favor of the use of the income tax for
anti-inflation purposes suggests this question: "After Congress has
increased personal income taxes to the limit of the people's ability to
pay in order to meet currently as much as possible of the war cost, is
is to hold down production costs. Thus the proposed 95-percent rate
of the absolute maximum to which Congress should go in the interest
maximum production and minimum costs.
there a still higher limit to their ability to pay taxes for purposes of
preventing inflation?' We think not. All tax dollars come out of
3. Estate and gift tazes.-No change is made in the rates or exemptions under the estate and gift taxes. The estate tax now reaches
maximum of 77 percent, which is perhaps as high as Congress can a
the courage to come forward with a tax proposal which will meet
effectively this specific problem, rather than continue to play politics
which is a policy that is totally foreign to fundamental American principles, although it has been embraced to a considerable extent by the
present administration. It must not be forgotten that the States,
too, make use of this form of taxation, and after all, they have sole
control, under the American form of government, of the right of devolution
of property at death.
4. Excise -Having different viewpoints among ourselves as to
the proposed increases in excise taxes under the bill, we refrain from
making any comment on these levies in this report.
the same pocket, whether levied for one purpose or another.
If the administration is really sincere in wanting to tax the so-called
excess purchasing power away from those who have it, then let it have
without bordering on actual confiscation of property through taxation, go
with the tax question as it has done ever since it has been in power.
The Congress and the country may wonder why a general con-
sumption tax was not included in the bill as a "last ditch" war measure.
There is need for plain speaking with regard to this matter. The fact
is that the administration flatly advised the committee that it would
rather have the bill fall short of the total requested than to have a tax
of this character included. There was even a suggestion of a Presidential veto. The committee had to face the practical situation that
it would be impossible to secure the enactment of such a tax in the face
D. THE NEED FOR REVISION OF THE WHOLE FEDERAL TAX STRUCTURE
of determined administration opposition. Furthermore, there are
The Federal tax system, like Topsy, just "growed" up. One tax
law has been piled on another until we now have a veritable hodge-
honest differences of opinion among the committee members, without
regard to party, over the merits and demerits of general consumption
taxes, even as a war measure. In addition, the committee was faced
with the fact that it would take considerable time to draft such a levy
podge which is steadily becoming more complex and incomprehensible.
The need for a thorough overhauling of our tax system has long been
acknowledged but nothing has ever been accomplished along this line.
It is one of our most pressing national problems, particularly if, in the
post-war period, we are to realize maximum revenues consistent with
the greatest encouragement to business and individual enterprise. We
so as to make it practical of administration, which time was not
available for that purpose in view of the need for enacting the new bill
by the end of the year, to make the proposed income tax readjustments
effective January 1
It appears that if further taxes are to be imposed, beyond those
carried in the pending bill, there is no place to which the Congress can
turn except to the field of general consumption taxes. This fact
must be faced, whether one is opposed to, or in favor of, such a levy.
2. Corporation bill makes no increase in the rate of tax
on normal corporate profits, which now stands at a maximum of 40
percent, but does increase the excess profits rate from 90 to 95 percent,
and makes a reduction in the invested capital credit in the case of
larger corporations. The impact of the proposed 95 percent excessprofits rate as applied to smaller corporations is cushioned to some
extent by increasing the specific exemption under the excess profits
tax from $5,000 to $10,000.
In our joint statement. issued at the outset of the committee's deliberations, we pointed out that in view of the already high corporate
rates, any drastic increase would threaten the future solvency of business and impair its ability to provide peacetime jobs to returningthe
servicemen and unemployed war workers. The retention of
maximum rate of 40 percent on normal corporate income is in accord
with our previously announced position.
If any increase is to be made in corporate taxes, it is desirable that
it be confined to excess profits, although even in such case it is possible
to go beyond the point of diminishing returns. While some may feel
that a 100-percent excess profits tax would be justified in time of war,
7
0
should develop as soon as possible a long-range, integrated, wellbalanced, equitable, and simplified scheme of taxation, and we of the
Republican minority propose to do all in our power to bring about
such a plan.
Aside from other shortcomings of the present tax system, there has
in recent years grown up a tendency to use taxes for other than revenue
purposes. Under the present administration, the taxing power has
been availed of for punitive purposes, for social experimentation, and
for effectuating otherwise unconstitutional Federal controls over the
people. This practice cannot be too severely condemned. It is
entirely contrary to the intent and purpose of the Constitution in
granting Congress the power to levy taxes solely for the raising of
revenue for the support of government. Any worth-while revision of
the tax laws must necessarily embrace a return to sound principles of
taxation, including taxation for revenue purposes only.
When the war ends, Congress will be faced with the problem of
financing a post-war budget which may exceed $20,000,000,000
annually. It is essential to the maintenance of sound fiscal policy,
including national solvency, that Federal revenues and expenditures
be brought into balance as soon as possible after peace comes. This
can only be done if the national income is maintained at a high level.
The adoption of a wise tax policy will have more to do than anything
else with whether that high level of national income is maintained,
8
THE REVENUE BILL OF 1943
THE REVENUE BILL OF 1943
since the responsibility will rest primarily on private business enterprise for its realization. Government spending will not do the job
but on the contrary will only take the country further along the road
to national bankruptcy.
If a sound, healthy, and expanding national economy is to be
achieved, Congress must not only permit American business to exist
until the war ends, but it must permit the setting aside of sufficient
funds to carry through the reconversion period. Moreover, if the
many potential new industries made possible by war developments are
to
become a reality, every encouragement must be offered under our
tax laws and other Government policies to so-called venture capital.
As no one knows when the day of peace may come, it would be the
part of wisdom to prepare now to put into effect immediately upon the
cessation of hostilities whatever tax reforms may be necessary or desir-
able. We, therefore, advocate prompt action in dealing with this
all-important problem, and shall do our part to be ready to meet it.
II. REVISION OF THE LAW RELATING TO THE RENEGOTIATION OF
WAR CONTRACTS
and their war work interfered with, by having to go through the
negotiation process
only
be given a clearance in the end, though re- at
considerable
expense
to to
themselves.
The proposed changes in the renegotiation law as carried in the bill
are intended to correct these abuses and assure contractors and subcontractors the fundamental American right to appeal to the courts
from the decisions of the renegotiation authorities Some of the
proposed changes, including the right of appeal, and the exemption
Others
are not.up to $500,000, are concurred in by the departments.
of contracts
The renegotiation provisions of the bill, as presented to the House,
represent the composite judgment of the committee. Some members
of the committee felt that the revisions made do not go far enough.
In order to agree upon any modifications at all, opposing viewpoints had to be compromised We dare say that neither side is fully
satisfied with the renegotiation provisions of the bill, but in view of
all Respectfully
the circumstances
they are the best that could be agreed upon.
submitted
ALLEN T. TREADWAY,
It is not our purpose, in this report, to go into any extended discussion of the proposed amendments to the law relating to the renegotiation of war contracts.
It is the settled policy of Congress, in which we join, that no one
should be permitted to make excessive profits out of the war. The
proposed amendments are in keeping with that purpose.
There are at present on the statute books a number of laws which
are intended to limit and control the making of war profits. As heretofore stated, we have an excess-profits tax running up to 90 percent,
which it is now proposed to increase to 95 percent, and a tax on individual incomes which reaches a maximum of 90 percent. Then there is
a wage and salary stabilization act which prevents the skyrocketing
of corporate salaries. Also, we have a war-contract-renegotiation law
which permits the recovery of excessive profits on war contracts.
Moreover, both the Bureau of Internal Revenue and the renegotiation
authorities have the power to disallow unreasonable salary allowances.
Thus Congress has made every possible effort to control war profits,
and to recapture them if realized.
In granting power to the various war agencies to renegotiate war
contacts when excessive profits are found to exist, Congress gave
these agencies broad and virtually unlimited authority. As a result
of public hearings on this subject, both before the Naval Affairs Committee and the Ways and Means Committee, it has developed that
there is need for limiting this authority in some respects. The testimony before both committees is replete with instances where those
administering the renegotiation law have been arrogant, high-handed
and even tyrannical in dealing with contractors and subcontractors.
The powers given them have, in a number of instances, been abused.
They have discriminated as between different contractors, allowing
one a greater percentage of profit than another under the same or
similar circumstances. Also they have used duress, direct and implied,
in order to secure the submission of contractors and subcontractors to
their findings. No review of their decisions by the courts has been
permitted. Countless numbers of contractors have been harassed,
HAROLD KNUTSON,
DANIEL A. REED,
Roy O. WOODRUFF,
THOMAS A. JENKINS,
DONALD H. McLEAN,
BERTRAND W. GEARHART,
FRANK CARLSON,
RICHARD M. SIMPSON,
CHARLES S. DEWEY.
9
253
NOV 18 1943
My dear Mr. Chairman:
Receipt is acknowledged of your letter of November 12,
in which you request my comments, suggestions and approval
of an additional report on Federal Personnel.
AS I stated in my letter of June 12, in connection with
the Committee's first report, I am in accord with the Committee's views that the tremendous expansion in Federal personnel
is a cause of serious concern, but it is my belief that it is
not an opportune time to undertake drastic and far-reaching
changes in Government personnel. While there may be some
organisations which could make substantial reductions at this
time, such reductions should only be made after a careful
study rather than in an arbitrary manner.
I do not agree with the general implications in the
report that the Civil Service Commission and the Bureau of
the Budget have failed to exercise properly their assigned
functions or that they are primarily responsible for many
of the unfavorable personnel conditions mentioned in the
report.
I am in sympathy with the Committee's objectives, and
except for the reservations made above, join in the Committee's
report.
Very truly yours,
(Signed) H. Morgenthau, Jr.
Secretary of the Treasury
Honorable Harry F. Byrd
Chairman, Joint Committee on Reduction
of Nonessential Federal Expenditures
Senate Office Building
Washington, D. C.
TFW:HNTsaja
Congress
of the United States
JOINT COMMITTEE ON REDUCTION OF NONESSENTIAL
FEDERAL EXPENDITURES
CREATED PURSUANT TO SEC 601. OF THE REVENUE
ACT OF 1941
November 12, 1943 m
Honorable Fenry Morgenthau, Jr.
The Secretary of the Treasury
Washington, D. C.
My dear Secretary:
I am enclosing a committee print on Federal
Personnel (additional report). I should appreciate
your corments, suggestions, and approval.
It is our hope that this can be presented to
Congress sometime next week.
with kindest regards, I am
Faithfully yours,
Anny a from
255
OFFICE
SECRETARY OF TREASURY
NOT TO BE RE-TRANSMITTED
U.S. SECRET
1943 NOV 19 PM 2 09
BRITISH MOST SECRET
OPTEL No. 378
COPY NO ) 2
TREASURY DEPARTMENT
Information received up to 10 A.M. 18th November, 1943.
1. NAVAL
Levant 16th/17th. KOS bombarded by three of H.M. Destroyers.
2. MILITARY
Italy Weather temains particularly bad on 8th Army Front,
Many rivers are in flood. Enem, counter attacks repulsed
in AIL n Area here we made a little progress.
One LEROS only isolated resistance continues.
During 15th/16th successful patrol raid on SYMI Island
ithout casualties. Main ammunition ump destroyed, Ibner Station and
Government House partially destroyed. O.C. enemy troops killed.
Russia Russians have captured CHERNOBIL on LOTER PRIPET but
have given up ground between ZHIPMAIR and KOROSTISHEV
(E. of ZH1TOMIR) in 1800 of German counter attack fr e south.
3. AIR OPERATIONS estern Front 17th/18th.
Aircraft despatched:- MANNHEL/A/LUD IGSHAFEN 83 (one missing),
BERLIN 7, DISBURG 8, BONN 4, BOCHUM 2,
Leaflets 4.
First reports indica.e good concentration on NANHHEIM.
Yugoslavia 14th. Railway and other targots attacked by
59 fighters.
Albania 15th. oil storage depot DURAZZO hit in attack
by fighters.
Greece On 15th and 16th escorted heavy and medium
dropped 155 tona on airfield ATHENS.
Dodecanese 16th. Siebel Ferry heavily escorted by aircraft
destroyed or Beaufighters off KALIMAS
10th/17th. Airfield at CALATO and HARITZA attacked by 16 bombers.
256
NOT TO BE RE-TRANSMITTED
U.S. SECRET
COPY NO
12
BRITISH AUT SECRET
UPT.L No. 379
Inform tion received up to 10 A.M. 19th November, 1943.
1. NAVAL
North Atlantic 18th One of H.M. Sloops escorting home-bound convoy
torpedoed N.E. Azores and taken in tow.
Dodecanese LEROS. An evacuation scheme by Caique is in operation
small parties have already 93 :ped in MGB's etc.
In SAMOS both Ports have been heavily attacked by sir and commun-
ications are difficult on 18th. Bulk of British Troops had been moved carlier
to LEADS, remainin Greeks and Italians are under British Command.
2. ILITARY Italy Patrolling continues. intry eather reported persisting
up to 17th/18th. RIVER TRIGNO has risen 7 feet.
Yugoslavia
Germans have captured DRYENIK ISLAND and TROGIR (Wost
of SPLIT) and Partisans have evacuated PELJESAC
PENIN&GLA,
3.
AIR OPERATIONS Western Front 17th/18th. 303 tons dropped on MANNHEIS/
LUDVIGSHAFFES.
18th. 203 tons dropped by liberators (B24) (9missing) on Air Frame and Engine
Repair FActories OSLO. Meather good, results reported "oxcollent". Enomy
Fighter casualties 8.8.15. 46 Typhoons bombers attacked Military objectivos
S.S. of GRIS NEZ. Results reported "very good".
18th/19th. Aircraft despatched: BERLIN 440 Heavies (9missing) thick cloud.
395 heavies (22 missing). Meathor fair, bembing scattered; targets in
German 26, Sea-mining 16, Leaflets 13, Intruders 28 (1 missing),
three enemy aircraft crossed South Coast, bombed scattered points, danage
slight, one fatal casualty.
South France. 16th. Portresses (B17) dropped 179 tons on
ISTRKS is rube Airfield (27 miles N.
SHOULLES) and 43 Marauders (826) boabed SALON Airfield (same Arec).
in
Yugoslavia 16th. Hitchells (B25) dropped 20 tons on docks
at SIBINIK (32 miles d. . SPLIT)
Greece 17th. 41 Fortresse (3 17) and 36 Mitchells (B 25)
bombed 2 dirfields ATHENS.
22
ADV
1941
China
15th and 16th. A total of 47 heavy bombors attacked
shipping KO LOCK. 3 ship were sunk.
257
UNITED STATES OF AMERICA
TREASURY SAVINGS NOTES
Series C
1943
TREASURY DEPARTMENT,
Department Circular No. 696
First Revision
OFFICE OF THE SECRETARY,
Fiscal Service
Washington, November 20, 1943.
Bareau of the Public Debt
I. OFFERING OF NOTES
1. The Secretary of the Treasury, pursuant to the authority of the Second Liberty Bond Act, as
amended, offers for sale to the people of the United States, at par, an issue of notes of the United
States, designated Treasury Savings Notes, Series C, which notes, if inscribed in the name of a
Federal taxpayer, will be receivable as hereinafter provided at par and accrued interest in payment
of Federal income, estate and gift taxes.
2. The term Treasury Savings Notes, Series C, as used in this circular shall include Treasury
Notes of Tax Series C, issued under this circular as originally published and Treasury Savings
Notes, Series C, issued under this circular as originally published and amended.
3. The sale of the notes will continue until terminated by the Secretary of the Treasury.
II. DESCRIPTION OF NOTES
1. General.-Treasury Savings Notes, Series C, will in each instance be dated as of the first day
of the month in which payment, at par, is received and credited by an agent authorized to issue the
notes. They will mature three years from that date, and may not be called by the Secretary of the
Treasury for redemption before maturity. All notes issued during any one calendar year shall constitute a separate series indicated by the letter "C" followed by the year of maturity. At the time
of issue the authorized issuing agent will inscribe on the face of each note the name and address of
the owner, will enter the date as of which the note is issued and will imprint his dating stamp (with
current date). The notes will be issued in denominations of $100, $500, $1,000, $5,000, $10,000,
$100,000, $500,000 and $1,000,000. Exchange of authorized denominations from higher to lower,
but not from lower to higher, may be arranged at the office of the agent that issued the note.
2. Acceptance for Taxes or Cash Redemption.-If inscribed in the name of an individual, corporation, or other entity paying Federal estate, income or gift taxes, the notes will be receivable, subject to the provisions of Section IV of this circular, at par and accrued interest, in payment of such
Federal taxes assessed against the owner or his estate. If not presented in payment of taxes, or if
not inscribed in the name of a Federal taxpayer, and subject to the provisions of Section V of this
circular, the notes will be payable at maturity or, at the owner's option and request, they will be
redeemable before maturity, at par and accrued interest.
3. Interest.-Interest on each $1,000 principal amount of Savings Notes, Series C, will accrue
each month from the month of issue, on a graduated scale, as follows:
$0.50 each month.
First to Sixth months, inclusive
.80 each month.
Seventh to Twelfth months, inclusive
.90 each month.
Thirteenth to Eighteenth months, inclusive
1.00
each month.
Nineteenth to Twenty-fourth months, inclusive
1.10 each month.
Twenty-fifth to Thirty-sixth months, inclusive
The table appended to this circular shows for notes of each denomination, for each consecutive calendar month from month of issue to month of maturity, (a) the amount of interest accrual, (b) the
principal amount of the note with accrued interest (cumulative) added, and (c) the approximate
investment yields. In no case shall interest accrue beyond the month in which the note is presented
in payment of taxes, or for redemption before maturity as provided in Section V of this circular, or
beyond its maturity. Interest will be paid only with the principal amount.
4. Forms of Inscription.-Treasury Savings Notes, Series C, may be inscribed in the name of
an individual, association or society, or a fiduciary (including trustees
a established notes would not be held as security
under duly corporation, trust unincorporated where the Federal for taxation. the performance They may of
also be inscribed
or State or other
in the name of or a town, city, county governmental in body and of in the
a duty or obligation). whether not the inscribed owner is subject to
name of a partnership, but notes in the name of a partnership are not acceptable payment taxes,
since a partnership is not a Federal taxpaying entity. The notes will not be inscribed in the names
of two or more persons as joint owners or coowners; or in the name of a public officer, whether
not named as trustee, where the notes would in effect be held as security.
16-37499-1
or
5. Nontransferability.-The notes may not be transferred in ordinary course: except that
(1) if inscribed in the name of a married man they may be reissued in the name of his wife, or if
inscribed in the name of a married woman they may be reissued in the name of her husband, upon
request of the person in whose name the notes are inscribed and the surrender of the notes to the
agent that issued them: (2) if inscribed in the name of a corporation owning more than 50 percent
of the stock, with voting power, of another corporation, the notes may be reissued in the name of
the subsidiary upon request of the corporation and surrender of the notes to the agent that issued
them: (3) upon the death or disability of an individual inscribed owner or the dissolution, consolidation or merger of a corporation or unincorporated association named as owner, reissue or payment may be made in accordance with Section VI hereof; and (4) payment but not reissue, may
be made as a result of legal proceedings as set forth in said Section VI. The notes may not be
hypothecated and no attempted hypothecation or pledge as security will be recognized by the Treasury Department: Provided, however, that the notes may be pledged as collateral for loans from
banking institutions and if title thereto is acquired by a bank because of the failure of a loan to be
paid, the notes will be redeemed at par and accrued interest to the month in which acquired on surrender to the agent who issued them, accompanied by proof of the date of acquisition and by request
of the pledgee under power of attorney given by the pledgor in whose name the notes are inscribed
The notes
will not be transferred to a pledgee. The notes will not be acceptable to secure deposits of
public
moneys.
6. Taxation.-Income derived from the notes shall be subject to all Federal taxes, now or here
after imposed. The notes shall be subject to estate, inheritance, gift or other excise taxes, whether
Federal or State, but shall be exempt from all taxation now or hereafter imposed on the principal
or
thereof by any State, or any of the possessions of the United States, or by any local taxinginterest
authority.
III. PURCHASE OF NOTES
1. Official Agencies.-In addition to the Treasury Department, the Federal Reserve Banks and
their Branches are hereby designated agencies for the issue and redemption of Treasury Savings
Notes, Series C. The Secretary of the Treasury, from time to time, in his discretion, may designate
other agencies for the issue of the notes, or for accepting applications therefor, or for making payments on account of the redemption thereof.
2. Applications and payment.-Applications will be received by the Federal Reserve Banks and
Branches, and by the Treasurer of the United States, Washington, D. C. Banking institutions and
security dealers generally may submit applications for account of customers, but only the Federal
Reserve Banks and their Branches and the Treasury Department are authorized to act as official
agencies. The use of an official application form is desirable but not necessary. Appropriate
forms may be obtained on application to any Federal Reserve Bank or Branch, or the Treasurer of
the United States, Washington, D. C. Every application must be accompanied by payment in full,
at par. Any form of exchange, including personal checks, will be accepted subject to collection, and
should be drawn to the order of the Federal Reserve Bank or of the Treasurer of the United States,
as payee, as the case may be. The date funds are made available on collection of exchange will govern the issue date of the notes. Any depositary, qualified pursuant to the provisions of Treasury
Department Circular No. 92, Revised, as amended, will be permitted to make payment by credit for
notes
applied
for ondeposits.
behalf of itself or its customers up to any amount for which it shall be qualified
in
excess
of existing
3. Reservations.-The Secretary of the Treasury reserves the right to reject any application in
whole or in part, and to refuse to issue or permit to be issued hereunder any notes in any case or in
any class or classes of cases if he deems such action to be in the public interest, and his action in any
such respect
be final. If an application is rejected, in whole or in part, any payment received
therefor
will beshall
refunded.
4. Delivery of notes.-Upon acceptance of full-paid applications, notes will be duly inscribed
and, unless delivered in person, will be delivered, at the risk and expense of the United States at the
address given by the purchaser, by mail, but only within the United States, its territories and insular possessions and the Canal Zone. No deliveries elsewhere will be made.
IV. PRESENTATION IN PAYMENT OF TAXES
1. During and after the second calendar month after the month of purchase (as shown by the
issue date on each note), during such time, and under such rules and regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe,
notes issued hereunder in the name of a taxpayer (individual, corporation, or other entity) may be
presented and surrendered by such taxpayer, his agent, or his estate, to the Collector of Internal
Revenue to whom the tax return is made, and will be receivable by the Collector at par and accrued
interest from the month of issue to the month, inclusive (but no accrual beyond maturity), in which
presented, in payment of any Federal income taxes (current and back personal and corporation
taxes, and excess-profits taxes), or any Federal estate or gift taxes (current and back) assessed
against the inscribed owner or his estate. The notes must be forwarded to the Collector at the risk
and expense of the owner, and, for the owner's protection, should be forwarded by registered mail,
if not presented in person.
V. CASH REDEMPTION AT OR PRIOR TO MATURITY
will
or on par to
1. General.-(a) Any Treasury Savings Note of Series C not presented in payment of taxes,
be paid at maturity, or, at the option and request of the owner and without advance notice, will
before maturity, but the notes may be redeemed before maturity only during and after
on each note).
ment the be redeemed sixth at maturity calendar month redemption after the month before of maturity issue (as will shown be made the at face and of accrued interest (b) Pay- the
month of payment, except, if a note is inscribed in the name of a bank that accepts demand deposits,
payment at maturity or on redemption before maturity will be made only at the issue price, or par,
the note. However, if a note is acquired by any such bank through forfeiture of a loan, payment
will be made at the redemption value for the month in which so acquired.
of
2. Execution of request for payment.-The owner in whose name the note is inscribed must
appear before one of the officers authorized by the Secretary of the Treasury to witness and certify
requests for payment, establish his identity, and in the presence of such officer sign the request for
payment appearing on the back of the note, adding the address to which check is to be mailed. After
the request for payment has been so signed, the witnessing officer should complete and sign the certificate provided for his use.
3. Officers authorized to witness and certify requests for payment.-All officers authorized to
witness and certify requests for payment of United States Savings Bonds, as set forth in Treasury
Department Circular No. 530, Fifth Revision, as amended, are hereby authorized to witness and
certify requests for cash redemption of Treasury notes issued under this circular. Such officers include, among others, United States postmasters, certain other post office officials, officers of all banks
and trust companies incorporated in the United States or its organized territories, including officers
at branches thereof, and commissioned officers of the Army, Navy, Marine Corps and Coast Guard.
4. Presentation and surrender.-Note bearing properly executed requests for payment must
be presented and surrendered to the agent that issued the notes (as shown by the agent's dating
stamp), at the expense and risk of the owner. For the owner's protection, notes should be forwarded by registered mail, if not presented in person.
5. Partial redemption.-Partial cash redemption of a note, corresponding to an authorized denomination, may be made in the same manner as for full cash redemption, appropriate changes being
made in the request for payment. In case of partial redemption of a note, the remainder will be
reissued in the same name and with the same date of issue as the note surrendered.
6. Payment.-Payment of any note, either at maturity or on redemption before maturity, will
made only by the Federal Reserve Bank or Branch or the Treasury Department, as the case may
be, that issued the note, and will be made by check drawn to the order of the owner, and mailed to
be
the address given in his request for payment.
VL PAYMENT OR REISSUE TO OTHER THAN INSCRIBED OWNER
Death or Disability.-In case of the death or disability of an individual owner and the notes
not to be presented in payment of taxes, payment will be made to the duly constituted representative of his estate, or they may be reissued to one or more of his heirs or legatees upon satisfactory
proof of their right; but no reissue will be made in two names jointly or as coowners.
1.
are
2. Dissolution or Merger of Corporations, a corporation or unincorporated body, in
whose names notes are inscribed, is dissolved, consolidated, merged or otherwise changes its lawfully organi-
zation, the notes may be paid to, or reissued in the name of those persons or organizations
but
entitled to the assets of such corporation or body by reason of such changes in organization.
3. Bankruptcy.-If an inscribed owner of notes is declared bankrupt or insolvent, payment, notes
not reissue. will be made to the duly qualified trustee, receiver or similar representative if the
are submitted with satisfactory proof of his appointment and qualification.
4. Creditors' ghts.-Pavment but not reissue, will be made as a result of judicial proceedings
in a court of competent jurisdiction, if the notes are submitted with proper proof of such proceedings
and their finality.
5. Instructions and Information.-Before executing the request for payment or submitting the or
notes under the of this section, instructions should be obtained from the issuing agent
from the Treasury provisions Department, Division of Loans and Currency, Washington 25, D. C.
VII. GENERAL PROVISIONS
1. Regulations.-Except as provided in this circular, the notes issued hereunder will be governing subject
to the general regulations of the Treasury Department, now or hereafter prescribed. in Departbonds and notes of the United States: the regulations currently in force are contained
ment Circular No. 300, as amended.
16-87499-1
Loss, Theft or Destruction.-In case of the loss, theft or destruction of a savings note immediate 2. notice (which should include a full description of the note) should be given the agency which
issued the note and instructions should be requested as to the procedure necessary to secure a
duplicate. 3. Fiscal Agents.-Federal Reserve Banks and their Branches, as fiscal agents of the United
authorized to perform such services or acts as may be appropriate and necessary under
the States, provisions are of this circular and under any instructions given by the Secretary of the Treasury.
Amendments.-The Secretary of the Treasury may at any time or from time to time supple4. or amend the terms of this circular, or of any amendments or supplements thereto, and may at
ment time or from time to time prescribe amendatory rules and regulations governing the offering
of any the notes, information as to which will promptly be furnished to the Federal Reserve Banks.
D. W. BELL,
Acting Secretary of the Treasury.
(Filed with the Division of the Federal Register, November 23, 1943)
TREASURY SAVINGS NOTES-SERIES c
TABLE OF TAX-PAYMENT OR REDEMPTION VALUES AND INVESTMENT YIELDS
The table below shows for each month from date of issue to date of maturity the amount of interest accrual: the principal
with accrued interest added, for notes of each denomination; the approximate investment yield on the par amount from
issue amount date to the beginning of each month following the month of issue: and the approximate investment yield on the current
redemption value from the beginning of the month indicated to the month of maturity.
Accession
Approximate
Par value (issue price during
month issue)
$500.00
$100.
$1,000.00
$5,000.00
$10,000.00
$100,000.00
$500,000.00
$1,000,000.00
Investment
yield pm
Investment
tax -
yield
amount from
Amount of interest accrual each
month after month of issue
Tax-payment or redemption values during each monthly period after month of issue
redemption
or
Issue date to
beginning of
each monthly
period there-
values
beginning
each month
after
reried
maturity
Interest accrupt at rate of $0.50 per
Percent
Percent
month per .000 par amount
First month
$500
$100
Second month
500.50
100
Third month
Fourth month
5,000.00
5,012.50
5,015.00
501.90
502.20
502.70
503.10
503.50
1,003.80
503.
1,007.80
5,019.00
5,023.00
5,027.00
5,031.00
5,035.00
5,039.00
504.
1,008.70
1,009.00
1,010.50
1,011.40
1,012.30
1,013.20
501.00
501.25
Sixth month
$5,002.50
1,001.00
1,001.50
1,002.00
1,002.50
1,003.00
500.75
Fifth month
$1,000.30
501.50
5,007.50
5,000.00
Interest accrues at rate of $0.80 per
month per $1 000 DM amount:
Seventh month
Eighth month
100.38
Ninth mont
Tenth mont
Eleventh month
Twelth month
1,004.00
1,005.40
1,005.20
1007.00
Interest accrues at rate of $0.90 per
$10,005.00
20,010.00
10.015.00
$100,050.00
$500,250.00
100,100.00
500,500.00
10,025.00
10,000.00
100,150.00
100,200.00
100,250.00
100,300.00
500,750.00
501,000.00
501,250.00
501,500.00
10,038.00
10,046.00
10,054.00
10,062.00
10,070.00
10,078.00
100,380.00
100,460.00
100,540.00
100,620.00
100,700.00
100,780.00
10,087.0
100,870.00
100,960.00
101,050.00
101,140.00
101,230.00
104,320.00
10,020.00
501,900.00
502,300.00
502,700.00
503,100.00
503,500.00
503,900.00
$1,000,500.00
1,001,000.00
1,001,500.00
1,002,000.00
1,002,500.00
1,003,000.00
1,003,800.00
1,004,600.00
1,005,400.00
1,006,200.00
1,007,000.00
1,007,800.00
month per $1 1,000 for amount
Thirteenth month
ten
Fourteenth month
504.1
Fifteenth month
505.25
Sixteenth month
Seventeenth month
505.1
505
Eighteenth month
Interest aportars at rate of $1 00 per
month per $1,000 par amount:
Nineteenth
506.4
month
month
507.
first month
509
second month
month
month
Interest secrues rate of 10 per
1,000 par amount
-fifth month
510
month
510.70
month
month
month
511.25
511.80
512.35
024.7
512.90
513.45
514.00
514.10
1,026.90
1,028.00
103.
515.10
515.65
1,030.20
1,031.30
103.24
516.20
1,032.40
first month
Thirty-second month
y-third month
Thirth-fourth month
Thirty-sirth month
(MATURITY)
1,020.30
1,021.40
1,022.50
1,023.60
month
-01th month
1,014.2
1,015.29
1,015.20
1,017.20
1,014.20
1,019.20
1,025.80
1,029
5,013
5,018.00
10,096.00
5,052.50
10, 105.00
5.057.
ML 114.00
10,123.00
0,132.00
5,051.50
5,056.00
5,071.00
5,076.00
5,051.00
5,086.00
5,091.00
5,096.00
5,101.50
107.00
112.50
5,118.00
1.123.50
142.00
152.00
162.00
172.00
182.00
192.00
10,203.00
0,214.00
101,420.00
101,530.00
101,620.00
101,720.00
504,350.00
504,800.00
505,250.00
505,700.00
506,150.00
506,600.00
1,014,200.00
1,015,200.00
1,016,200.00
1,017,200.00
101,820.00
920.00
567,100.00
507,600.00
508,100.00
508,000.00
509,100.00
509,660.00
102,030.00
510,150.00
1,030,300.00
5,145.50
5,151.00
5,156.50
10,258.00
10,269.00
10,250.00
10,291.00
10,302.00
10,313.00
102,580.00
102,690.00
102,800.00
102,910.00
103,020.00
100,130.00
5,162.00
10,324.00
100,240.00
515,200.00
5,140.00
LOIK 200.00
1,019,200.00
1.00
2,247.00
512,350.00
512,900.00
513,450.00
514,000.00
$14,550.00
$15,100.00
515,650.00
5,129.00
5,134.50
1,008,700.00
1,009,000.00
1,010,500.00
1,011,400.00
1,012,300.00
1,013,200.00
1.40
1.00
1,026,900.00
1,028,000.00
1,029,100.00
1.030.200.00
1,031,300.00
1,032,400.00
1.00
1.04
1.05
1.64
1.06
1.07
and
month
after
month
Issue
the sixth Not calendar
accentable
in payment
of taxes
until during and after the second calendar month after the month of issue, and not redeemable for cash until during
Approximate Investment yield for entire period from Insurance to maturity.
the
of
. GOVERNMENT PRINTING OFFICE
16 97499-1
258
INTERDEPARTMENTAL WAR SAVINGS BOND COMMITTEE
WASHINGTON
OFFICE OF CHAIRMAN
TREASURY DEPARTMENT
November 19, 1943
TO THE SECRETARY:
During the Third War Loan Drive, you wrote to the
Secretary of State asking that embassies, legations, and
foreign missions in Washington be contacted with a view
to stimulating the interest of American employees in the
purchase of War Savings Bonds.
We followed this up as best we could, with the
following results:
Australian Legation
Belgian Embassy
Czechoslovakian Embassy
Cuban Embassy
Nicaraguan Embassy
Norwegian Embassy
Veneguelan Embassy
Yugoslavian Embassy
Total
1 bond
20 bonds
31 bonds
6 bonds
7 bonds
17 bonds
14 bonds
$18.75
2,081.25
10,450.00
1,256.25
206.25
881.25
693.75
1,781.25
$17,368.75
The British Embassy, which I understand employs a large
number of American citizens in various missions, did not receive the memorandum of the Department of State in sufficient
time to arrange for the sale of bonds during the Third War
Loan Drive. However, the American citizens employed there
have a Pay-roll Savings Plan; and Mr. William Chase of the
Embassy informally advised that a number of bonds were pur-
chased for cash in addition to those regularly bought through
the Pay-roll Plan.
Mr. Reuben J. Gordon, Chancellor of the Chilean Embassy,
did not receive the memorandum in sufficient time to arrange
for the sale of bonds. However, he informally advised that
four American citizens employed at the Embassy purchased bonds,
but he did not know the value of the bonds.
The Department of State advised that the Russian Embassy
had not replied to the memorandum.
WAR
BONDS
259
-2Now that we have the contacts with the foreign
embassies and legations, we may be able to do a better
job in the future.
260
December 1, 1943
The
this Secretary
letter. decided not to answer
261
HEADQUARTERS
NORTH AFRICAN THEATER OF OPERATIONS
UNITED STATES ARMY
19 November
br
mplo
1943
Mr. Henry Morgenthau
Secretary of the Treasury
Washington, D. C.
My dear Mr. Secretary:
I have just received a report which indicates a truly
remarkable compliance with your request to ship to the United States
items for display in connection with the next War Bond Drive.
I am attaching a carbon copy of the report which lists the
items now in transit to the United States in the hope that they will
reach there by the 1st of December.
I do not know whether the shipment of the three Mark VI
tanks was an ordinary or an extraordinary effort on the part of the
NATOUSA organization. I suspect that it was extraordinary and as a
result of special effort on the part of several of the special friends
of Mrs. Prismall. I know that General Patton and General Stewart
took unusual steps as soon as they realized the full implications of
your promise to call her to the United States if three Mark VIS were
shipped. At any rate they are on their way.
Yours sincerely
E.S. HUGHES,
Major General, USA,
Deputy Theater Commander.
1 Incl: copy memo CG SOS to DTC
Report on shipments of
items for War Bond Drive
26
The carbon copy attachment (of which
this is a photostat) was given to
Mr. Smith today 12/1/43
SECRET
SECRET
1 & NOV W
HEADQUARTERS SERVICES OF SUPPLY
NORTH AFRICAN THEATER OF OPERATIONS
UNITED STATES ARMY
ARMY POST OFFICE 750
18 November 1943
93 (SSQMC)
ANDUMS
I
TO
Deputy Theater Commander.
1. Reference is made to your Memorandum of 22 October pertaining
to the shipment of at least a thousand pieces of selected Air Corps Salvage items to the United States for the purpose of promoting the December
War Bond Drive. In connection therewith, the following information is
furnished covering shipments of selected sorap items individually identified as "For War Bond Drive".
a. Left BIZERTE on the JOHN L. SULLIVAN on 3 November:
20 Airplane Wings
2 Mark IV Tanks
3 Half-Tracks Personnel Carriers
11 Anti-tank 75 mm guns
2 AA 88 mm Guns
5 AA 50 man Guns
6 Miscellaneous Artillery pieces
1 Mark II Tank
15 Fuselages
6 Howitzer 105 mm
4 Howitser 107 mon
1 Light Half-Track
3000 German Helmets
1200 Smell pieces German Planes
1 AA 20 - Oun
b. Loaded on the JOEL POINSETT which sailed from NAPLES on
3 November
2 Cases fuselages for FOCKE WOULFE
1 Case Wings for FOCKE WOULFE
Total weight 10 tons
2 Mark IV Medium Tanks
2 Mark III Tanks
1 Self-propelled 7.5 Gun on Mark III
1 Self-propelled 10.5 - Howitser on Mark III
SECRET
-1-
G.
Loaded on JOHN JAY which sailed on 8 November from NAPLES,
Landing Goar Struts Elbows and Compression Chambers
Propellers
Housing for Control Wires for Stabilisers and
Wing Flaps
Turret Machine un and Control Panel
Spandeau Gun Mounts Machine
Stabilizers
20 Cannon and Machine Jun and Mounts
Landing Dear and Wheel with Tires
Aircraft Tires
Shipped in 25 Crates-Total weight 6 tons
d. Laft BIZERTE on the SS HARRISON on 2 November:
4 Boxes of Small Parts
Weigh Total of 500 lbs.
From German airplanes-parts identified
as to nomenclature and type of plane from
which they came.
e. Laft LICATA on 8 November on an LST:
3 Mark VI Tanks
Mark IV Tanks
2
2. It will be noted that these shipments are composed of selected
Air Corps items in excess of the desired 1000 pieces and also tanks, guns,
and artillery pieces recently evacuated from battle areas in ITALY. Apparently during the Secretary of The Treasury's tour, he requested shipment
of items other than Air Corps because of their publicity value in promoting
the December War Bond Drive.
3. These ships are scheduled to leave the theater with UGS-21 in a
few days.
T. B. LARKIN
Major General, USA
Commanding
265
At
MEMORANDUM FOR THE SECRETARY.
November 19, 1943.
Mail Report
Although the routine mail of the Treasury Department is heavy, this is a period when the fan mail is
noticeably slack. Not only have the receipts fallen
off, but the topics covered are so scattered that any
unified report on the mail is impossible to make.
The only positive conclusion drawn from the week's
receipts is that business firms prefer a short term
security for the Fourth Drive. Of 185 replies received
up to Friday morning, from those to whom the telegram
asking preference was sent, 150 voted for a 1-year
offering, 15 for a 5-year note, and the others for tax
certificates, etc.
There were a few requests for special Christmas
Bonds and Stamps, and the usual inquiries about redeem-
ing or re-inscribing Bonds. A total of 62 were submitted directly for redemption. Two or three letters
spoke of instances of excessive cashing of Bonds.
Complaints about undelivered Bonds from War Department
personnel now stay at about the 25 mark. Not many
months ago they were three or four times above this.
Reports of failure to receive interest on Bonds dropped
to 10.
There were few comments on taxes. Several associa-
tions submitted resolutions asking simplification of
taxes and forms. One resolved that a sales tax be
adopted, and another that Social Security taxes be
maintained at their present level. The proposed increase in taxes on liquor brought a few strong objections on the basis that bootlegging will be the inevit-
able result. Occasionally a correspondent advances the
idea that tax refunds be made in the form of War Bonds.
In the miscellaneous mail were 5 Congressionally
transmitted protests against the Salary Stabilization
266
-Memorandum for the Secretary.
November 19, 1943.
Amendment concerning commissions. There were 5 plans
for a national lottery, comments and questions about
the International Stabilization Fund, and recent gold
exportations, and quite a number of Foreign Funds
communications. After all the opposition, now comes
a letter protesting the discontinuance of the steel
pennies. It was signed by officers of the Union of the
company where the zinc coating of these pennies is done.
267
General Comments
J. M. Jones, Acting Secretary, National Wool Growers
Association, Salt Lake City, Utah. The wool growers
of this country are very much interested in the work
done and that that is being done by the Treasury Department in the testing of shrinkages and in the testing
for fineness of wool. Many of us feel that Mr. Herbert
Wollner has done a remarkable job in this field. We
also feel that as citizens we should know more about
how and what these methods of testing of wool have meant
to our Government. Wool growers are naturally interested in this shrinkage work because of the tariff
duty. We feel that for the first time you are now col-
lecting the full amount of duty as provided by law.
Therefore, we have a great amount of interest in this
work. We feel, too, that the methods now in use by
your Department have very definite application to the
problems of the domestic wool grower.
John Conrad Mrozinski, Wilkes-Barre, Pa. I as a private
citizen of this great nation am in full accord with
your leadership as head of the Treasury Department.
Continue your splendid work.
Melchor Leon, El Dragon de Oro, S.A., Mexico City,
Mexico. * I take the pleasure to inclose herewith
New York draft in the amount of $72.99, equivalent of
$354.00 Mexican pesos (at the rate of exchange of $4.85
pesos for $1.00), to which amounted the 25% of all purchases made by American citizens in this store during
the month of October, 1943, that is donated to the U.S.
Government for "National Defense".
268
-2Favorable Comments on Bonds
Webb G. Welborne, Daytona Beach, Florida. May I presume to make the following suggestion in possible
furtherance of the sale of War Bonds? Early in
December the banks of the nation will mail to their
Christmas Savings Club depositors checks amounting to
approximately $400, 000,000. This vast sum is new
wealth for which those receiving it will have no
urgent need. Much of it will be needlessly and foolishly squandered with the inevitable disastrous result -another inflation boost. Why not, then, through the
good offices of your Department have the banks mail
to all depositors two-way post cards, one asking for
authority to withhold a specified percentage (10, 20
or 25%) of the value of the check in payment for a War
Bond or Bonds, to be delivered with the savings check
before Christmas, the return card to bear a form to be
filled in giving withholding authority and signature
of the depositor. Big job, yes, and the time is short,
but you have successfully put over bigger ones.
269
-3Unfavorable Comments on Bonds
Floyd M. Jones, Jr., Harrisburg, Pa. I was employed
at the Middletown Air Service Depot from November 4,
1942, until January 11, 1943. I subscribed to the War
Savings Bond Plan, having the sum of $6.25 deducted
from my earnings every pay period, which was semi-
monthly. After a period of six months I called the War
Bond Unit at Middletown Air Service Depot and al so made
several trips, trying to get some information why I had
not received my Bond. I wrote to the office in Washington,
as instructed, and received a letter from Lieut. Colonel
J. H. Rees, Chicago, Ill., stating that civilian pay-
roll deductions made prior to January 1, 1943, have
not been applied to the purchase of Bonds as authorized
by individual subscribers, and referred me to the
Personnel Officer at Middletown Air Service Company.
I have again written to the Personnel Officer at
Middletown several times. In my last letter to them
I cancelled my subscription to the Bond Plan, and asked
for the refunding of my money. I received a reply requesting me to make no further inquiries for another
three months or more, from George E. Boudreau, First
Lieutenant, Air Corps Certifying Officer, Middletown
Air Service Command. In view of the facts as stated,
I feel that I am justified in making this appeal to you,
after waiting over eleven months for that which I paid
in all good faith, and having exhausted every conceivable source of redress, I am asking you to please
advise the responsible authorities of the Air Service
Command to send me a $25 War Bond or refund my money,
$18.75, immediately. Allow me to thank you in advance
for the prompt attention that I know you will give this
most important matter.
Dorothy Bergh, Seattle, Washington. During 1942, War
Bond deductions were taken from my wages each month
for most of the year, in return for which I have received
only one $50 paper Bond. The balance purchased prior
270
-4to the time the Seattle Quartermaster Depot commenced
issuing the paper Bonds from their own Department,
were not received by me. I have terminated employment
at the Seattle Army Service Forces Depot, and they have
informed me that the Government has initiated an office
at Chicago for taking care of these delinquent Bonds,
but over a year has passed and nothing has been done
regarding the matter which I have taken up with the
Depot repeatedly. As you know, there is no incentive
to purchase more Bonds, with this sort of matter in
suspense. * * As I have mentioned, the only answer
I can obtain from the Seattle Army Service Depot is
that an office is being established at Chicago to take
care of such business. This only, however, without any
further action from Chicago, does not furnish me any
assurance that the money is credited to my account.
John 0. W. Coss, Salt Lake City, Utah. In August or
September of 1942, while employed at the Quartermaster
Market Center, San Francisco, Calif., I authorized a
deduction from my pay for the purchase of Series "E"
Bonds. I was transferred to the Chicago Office of the
Quartermaster Market Center in October, 1942, where the
pay deduction was continued. Throughout this more than
a year, I have received but three $25 Bonds. I have
written to the Bond Officer, Oakland, Calif., Quarter-
master Depot, and to the Bond Officer, Chicago Quarter-
master Depot, asking for a reason for the delay in the
delivery of these Bonds. Their replies were all based
on the same excuse -- that there had been a rearrangement of the Issuing Office and that my Bonds would be
forthcoming when this reorganization was complete. That
was some time in the early summer, and I am still without my Bonds. I have notified the Bond Officer of this
office to discontinue deduction from my pay to cover
Bond purchases. I shall continue to buy more than the
10% asked of the average person, but through my bank.
*
271
-5Unfavorable Comments on Taxation
Mrs. J. W. Howard, Kansas City, Mo. I'd like to know
how any sane person can expect people to estimate their
year's income in advance. That may be simple if you
have a fixed income. For the most part, our income
comes from dividends. * * # I have had to pay a tax
man twice this year -- and will have to pay again in
December, because I can't figure out all conglomeration
on the returns. Of course I'm not so happy at having
to pay out 28% of my income in taxes, but I wouldn't
object so much, since the War must be won, except I'm
nearly crazy trying to follow all the cock-eyed things
demanded of us. In the name of humanity, won't you
see if you can't find a more sane method of computing
and collecting taxes? I'm just one of many who feel
this way, but I'm one of the few who is willing to take
time to write about it -- and contribute a 3-cent stamp -and I hear it will soon be 4-cents! Yours for simpler
taxes.
272
PORVICTORY
BUY
TREASURY DEPARTMENT
WASHINGTON 25
OFFICE O
MISSIONER OF INTERNAL REVENUE
ADDRESS REPLY TO
OF INTERNAL REVENUE
AND REFER TO
NOV 19 1943
Memorandum for Mr. Sullivan,
Assistant to the Secretary.
This is with further reference to the survey which the
Bureau has been conducting as to the current liquor shortage,
and the black market in taxpaid domestic whiskies which has
resulted therefrom.
The survey indicates that the distillers now are marketing
only about sixty-five per cent of the quantity of whiskey with-
drawn for taxpayment a year ago. There now are approximately
400,000,000 gallons of whiskey in warehouses, which is a four-
year supply at the present reduced rate of withdrawals. In
light of the existing demand brought about by increased
purchasing power, it is safe to assume that the demand now
exceeds by more than fifty per cent the supply being made
available by distillers. While the survey indicated the trade
was satisfied that industry-imposed rationing was necessary
in order that an adequate post-war supply of whiskey might be
available, yet it is not unlikely that other factors influenced
the distillers.
The fact that all distillers are now engaged in the production of alcohol on a twenty-four hour basis has undoubtedly
increased their profits to the place where their corporate
income taxes are such, from their point of view, as to no
longer furnish an incentive to risk the hazard of an inadequate
post-war supply in order to meet more nearly the current demand
for domestic whiskies.
As was pointed out in the Bureau's memorandum of November 9,
1943, interviews had with wholesalers and retailers in Washington,
D. C., and Baltimore, Maryland, in connection with the survey,
indicate that in license states wholesalers are supplying fully
the requirements of hotels and bars, and discriminating against
package stores, with the result that this type of outlet can
273
Memorandum for Mr. Sullivan,
Page two.
Assistant to the Secretary.
supply only a small fraction of the demand. While the inquiry
made in Washington, D. C., disclosed that some of the hotels and
bars had been offered large quantities of liquor at black market
prices, yet no evidence was disclosed indicating that either
wholesale or retail dealers were selling liquor in the black
market. This condition probably can be attributed to the close
supervision exercised over the liquor business in the District
of Columbia by the Alcoholic Beverage Board.
The survey made in Baltimore disclosed the liquor shortage
to be almost as severe as in Washington, D. C. It was determined
that package stores, probably acting as "fronts" for wholesalers,
were selling large quantities of liquor in the monopoly States of
Virginia and West Virginia. Inasmuch as investigation disclosed
the alleged purchasers to be fictitious, as reflected by 52-B
Records, there can be no question but that this liquor was
disposed of at black market prices. Some evidence of so-called
"back door" sales by package stores and local bars at bonus
prices was also developed. A number of the dealers interviewed
had been offered liquor at black market prices by individuals
giving New York or New Jersey addresses.
The Baltimore Wholesale Liquor Dealers Association, as
the result of the facts disclosed by the survey, has taken
steps to police dealers in that area with a view of cutting
off any black market operator's source of supply.
As you were previously advised, the Bureau, regardless of
its lack of basic jurisdiction, has formulated an extensive
investigative program for combating the black market in liquor.
Attached is a communication directed to all District Supervisors
which outlines the investigative approach. It will be noted,
where violations of the liquor laws are not involved, that
arrangements have been effected with the OPA to handle price
ceiling cases through joint investigations.
Commissioner.
Attachment
274
AT:E:DEA
November 13, 1943
District Supervisor,
New York, New York.
In the last sixty days an extensive black market in
taxpaid domestic whiskies has developed, due to distillers,
under an industry-imposed rationing system, marketing only
about sixty-five per cent of the quantity of whiskey bottled
a year ago.
The black market is created by the current liquor shortage
and the control of prices through OPA ceilings. This situation
has been taken advantage of by racketeers outside the industry
and by unscrupulous dealers within the industry to make exorbi-
tant profits reminiscent of the prohibition era. Black market
prices range from $10 to more than $30 a case above ceiling
prices in different sections of the country, depending largely
on the supply in a particular locality. Conditions are particularly bad in the monopoly states, due to the inability of the
state store systems to supply either the consumer or the retail
outlet dispensing by the drink.
As the existing shortage becomes more acute, it is apparent
that the distribution and of the liquor business will deteriorate
into a racket if drastic steps are not taken to restrict this
traffic. Because of the ultimate effect of black market operations on the revenue and law enforcement generally, the Unit
has concluded, regardless of its lack of basic jurisdiction,
in combating this traffic to make use not only of the applicable
provisions of the revenue laws and the Criminal Code, but of the
Emergency Price Control Act, consistent with the investigative
personnel available for this purpose.
The statutes which appear to have application, depending
upon the facts in each case, are as follows:
275
Supervisor - New York
Page two
(1) Section 3253, Internal Revenue Code. (Failure to
pay special tax as rectifier, wholesale or retail liquor
dealer.)
This statute will have application only where the black
market operator has failed to qualify as a wholesale or
retail liquor dealer. This section contains both criminal
and forfeiture provisions.
Particular attention is called to the fact that the
liquor sold or possessed by such unqualified dealers is
subject to forfeiture "wherever found." (See AT-Circular,
A. T. No. 706.) Attention is also called to the forfeiture
provisions of Section 3116, Internal Revenue Code. It is
problematical to what extent black market operations will
be carried on by unqualified dealers. Some large scale
operations of this character, conducted on a strictly
clandestine basis, have already been detected. From the
black market operator's point of view the advantage of
this type of operation is that it aids in concealing his
identity, avoids compliance with the internal revenue laws,
keeping of records, et cetera. The disadvantage is, of
course, that the unqualified dealer subjects himself to
both the criminal and forfeiture provisions of the internal
revenue laws.
(2) Section 2657 (a), Internal Revenue Code. (Falsifica-
tion of 52-A and B Records.)
This statute has application where the black market
operator is a qualified wholesale liquor dealer, and
falsifies his records relative to the receipt and sale of
liquors in order to conceal black market transactions.
This section contains only criminal provisions.
It would appear that the forfeiture provisions of
Section 3793 (a), Internal Revenue Code, are applicable
to the liquor which is the subject of the false entries
in the 52-A or B Record, but not until such time as the
52-A or B Record is incorporated in Form 338 and certified
to by the wholesaler as being correct. Inasauch as Form
338 is a monthly report and is not required to be submitted
to your office until the tenth of the succeeding month, it
is problematical how effectively the forfeiture provisions
276
Supervisor - New York
Page three
of this section can be utilized, since considerable difficulty would undoubtedly be encountered in tracing and
identifying the liquor which was the subject of the false
entry. Nevertheless, it is felt that the enforcement of
this provision will tend to restrict black market operations materially.
(3) Section 240, Criminal Code; Section 390, U.S.C.A.
18. (Shipment of liquor not plainly marked in interstate
connerce.)
This section has application to the black market
operator who is operating either as & qualified or an
unqualified dealer who ships liquor by common carrier
under fictitious billing from one state into another.
This type of operation has been resorted to by black
market operators shipping liquor by truck either into
or through monopoly states in order to avoid state
officers seising such shipments. The fictitious billing
is usually to a state monopoly who never ordered the
liquor, and consequently is wholly unacquainted with
the shipment.
This section contains both criminal and forfeiture
provisions. The forfeiture provisions have application
to the liquor, but not to the conveyance used in transporting it into interstate commerce. (See AT-Circular,
A. T. No. 706.)
(4) Section 2 (a), Emergency Price Control Act.
(Authority under which price regulations covering liquor,
MPR 193 and 445, are predicated.)
Section 205, Emergency Price Control Act. (Covers
penalties for violation of regulations establishing price
ceilings.)
Price ceilings are, of course, established by regulations promulgated under the Emergency Price Control Act,
and have the effect of law. In the investigation of
black market cases, it is desired to rely, where possible,
primarily on violations of the revenue laws and Section 240
of the Criminal Code. The price ceiling violations, however,
should be developed fully, if possible, to show active and
277
Supervisor - New York
Page four
to enable the United States Attorney to also charge a violation of the Emergency Price Control Act. Where the black
market operator has scrupulously complied with Internal
revenue and other liquor laws, you will, however, have to
depend upon the provisions of the Emergency Price Control
Act, and the regulations promulgated thereunder, for a
basis of either administrative or prosecutive action.
Cases of this character will involve sales invoiced and
paid for at the ceiling price, with large cash payments
made direct or through third persons representing the
difference between the black market and invoice price of
liquor. Where cash bonuses are paid, no difficulty will
be encountered in establishing the black market aspect
thereof. Such transactions should be reported to the
Intelligence Unit for future income tax inquiry.
In maintaining accurate records and complying with
the internal revenue laws, the black market operator
necessarily takes the chance that, due to the very
character of certain transactions, investigative leads
may be secured, resulting in the establishment of price
ceiling violations. Nevertheless, this method will
probably be adopted by black market operators selling
to outlets in license states as the least hasardous.
(5) Section 4 (d), Federal Alcohol Administration Act.
(Basic permits conditioned upon compliance with Federal
laws relating to distilled spirits, wines, and malt
beverages, including taxes with respect thereto.)
Suspension proceedings may be instituted under this
section where violations of the statutes listed under (1),
(2), (3), and (4) above are involved. Inasauch as the
OPA regulations relative to ceiling prices on liquor are
promulgated under the Emergency Price Control Act and
have the effect of law, such regulations are considered
to be "Federal laws" relating to distilled spirits and
within the purview of this section. In cases involving
violations of price ceilings only, advantage should not
be taken of this section unless the evidence is quite
conclusive.
(6) Section 7, Federal Alcohol Administration Act;
207 U.S.C.A. (Penalties for failure to obtain a permit
as required by Section 3 of the Federal Alcohol Adminis-
tration Act.)
278
Supervisor - New York
Page five
This section is particularly applicable where retail
liquor dealers engage in black market operations and sell
large quantities at wholesale for resale. Some evidence
has been secured indicating that wholesalers, in connivance
with package stores, are supplying such outlets with large
quantities of liquor, which outlets are disposing of it in
25 to 100 case lots in the black market. Obviously, in
such cases the package store is nothing more than a front
or cover house for the wholesaler, who is the real black
market operator. In some instances, these retailers have
paid special tax as wholesalers, but have not qualified
under the Federal Alcohol Administration Act.
As already indicated, the modus operandi is different,
depending upon whether the liquor is destined for monopoly or
license states. Consequently, different schemes are being used
by black market operators in various sections of the country
in order to circumvent the Federal and state laws which are
being violated incident to the black market operations. Heretofore the Unit, as a matter of policy, has not enforced the
criminal and forfeiture provisions of the revenue laws or
Section 240 of the Criminal Code, where the basic tax had been
paid on the liquor and only technical violations were involved.
Such technical violations include failure to pay special tax,
falsification of 52-B records, fietitious interstate shipments,
et cetera. It is now considered necessary to temporarily
suspend this policy in order to effectively combat the current
black market. It is not believed that any purpose will be
served by enforcing these provisions as to sales being made
by dealers located in dry states or local option counties.
These statutes should be enforced, however, against wholesalers
supplying dealers in dry states or local option counties where
black market operations are involved. Obviously, the Unit cannot be concerned with black market sales by retailers to consumers.
It is believed that much can be accomplished in combating
this traffic by working closely with state officers and taking
advantage of state liquor control laws, particularly in monopoly
states. there no forfeiture provision is contained in any
Federal law, arrangements can, of course, be made for state
officers to seise the liquor where state laws are involved.
In several of the monopoly states liquor control boards have
solicited the cooperation of local officers with the result
that a substantial number of seisures are being made.
279
Supervisor - New York
Page six
It will be the Unit's purpose to report and submit to
the United States Attorney for prosecution black market cases
involving violations of the internal revenue laws, the Criminal
Code, and the Emergency Price Control Act.
In cases involving violations of the internal revenue laws
or Section 240 of the Criminal Code, as well as the Emergency
Price Control Act, the assistance of an OPA investigator, if
available, should be secured in developing the price ceiling
violation. In such cases, where the price ceiling angle is
developed, a copy of the report should be furnished the proper
office of Price Administration. In cases where the preliminary
investigation indicates that only a price ceiling violation is
involved, arrangements should be made for an OPA investigator
to be assigned so that a joint investigation may be conducted.
In such cases, the report should be submitted to the United
States Attorney through the proper Office of Price Administration.
The procedure outlined will permit the OPA to take any administrative action which may be warranted. The Price Administrator
is advising OPA field offices of the Unit's program and instructing
them to assign the necessary investigative personnel, on request.
The applicable statutes in combating black market operations having been discussed, the question of the investigative
approach necessarily arises. A survey just completed in
Baltimore, Maryland, and Washington, D. C., which had as its
primary objective a determination of the reason for the current
liquor shortage, has furnished a great deal of tangible infornation relative to black market conditions in this area. This
survey included an examination of the merchandising methods of
distillers and wholesale and retail liquor dealers. There is
no doubt that the data obtained relative to the black market
operations were made available to the Investigators on the
assumption that the Unit had no jurisdistion in the matter and
was only incidentally interested in this condition.
Insanach as this traffic cannot be effectively combated
in any district without a knowledge of conditions, it is suggested
that a similar survey be made before any large scale investige
tions are undertaken. It is possible that in certain supervisory
districts, made up wholly of monopoly states, no purpose would
be served by such a survey. The number of wholesalers and
retailers to be surveyed and interviewed will be left to your
280
Supervisor - New York
Page seven
discretion, inasmuch as conditions vary throughout the country.
The surveys, however, should be sufficiently complete to deter-
ine the existing situation. It is not unlikely that you will
desire the Investigators in Charge to assist in making these
surveys, since some of the cases investigated will be handled
by these offices. This matter, however, will be left to your
determination.
Attached is an agendum used in the Baltimore district in
making this survey. There will be forwarded to you, under
separate cover, a twelve page summary of the report covering
the Baltimore survey so you may appreciate fully the advantages
to be derived therefrom.
The survey disclosed generally, in license states, that
wholesalers were supplying fully the requirements of hotels,
cocktail rooms, and bars, and discriminating against the
package stores, with the result that these outlets were able
to supply only a fraction of the demand. It was determined
that the majority of retail outlets, including package stores,
were backlogging as much whisky as possible and storing it off
the premises, particularly in private dwellings. The explanation
furnished for off-premises storage was that the merchandise was
irreplaceable. Inasmuch as the Unit will be confronted in the
immediate future with another floor stocks tax, it is suggested
that particular attention be given in making this survey to the
approximate quantity of liquor on hand at the time of the interview and to the point of storage.
It will not be necessary, at the conclusion of the survey,
that you submit to this office a formal report. Black market
conditions found as the result of the survey, together with any
other interesting date, should be dealt with extensively in the
weekly enforcement report.
There are also attached copies of the Emergency Price
Control Act and OPA Regulations 103, 193, and 445. Regulations
445 apply to wholesale and retail transactions. These regulations
are intricate and are not readily understandable. Ceiling prices
for each distiller's brand must be computed as provided in the
regulations. Certain basis data are required which must be
secured from the OPA. It is for this reason that the assignment
of a price expert by the OPA is deemed essential in cases where
violations of price ceilings alone are involved. The difficulty
281
Supervisor - New York
Page eight
here is not as formidable as might appear, as in most black
market cases the very character of the transactions will indicate
that price ceilings have been violated. The black market price
will be established by the investigations, and the seiling price
computed by the OPA. It will be noted that wholesalers' prices
are based on a fifteen per cent mark-up over the distillers'
prices, and retail prices computed on a thirty-three and onethird per cent mark-up over wholesale prices.
The Unit's sole objective in combating the black market
in liquor is to avoid the development of a lawless condition
in an industry over which it must exercise supervision. In
combating this traffic, you should utilise only such personnel
as can be made available without jeopardising the revenue, or
other major investigative work in your district. After the
surveys are completed, and it becomes generally known that the
Alcohol Tax Unit is attacking this problem, it is believed that
this factor alone will have a very definite preventive effect.
The industry can, of course, do a great deal toward policing
itself. It is simply a question of keeping the liquor out of
the hands of the unserupulous dealer who is supplying the black
market. It is not unlikely that after the surveys are completed
and some cases perfected, the Unit will want to formulate some
means by which it can cooperate with the industry in such a
program.
You should perfect your organisation immediately and have
Investigators in the field within two days after receiving this
letter.
This communication is being directed to all districts.
Stewart Berkshire,
Deputy Commissioner.
Attachments
282
Examine Forms 338 on file in the office of the District
Supervisor submitted by wholesale liquor dealers in Baltimore,
Maryland, and obtain information as to approxi-
mately six of the months of May 1942
to September 1943. to whisky only.
(1) (a) same
(This
item will be
as hand end of month
(b) on
largest On Data Received for the the hand the following should wholesalers first April be premises. the of reports.") restricted item month. for "On the
(c) Sent out from premises.
(d) On hand end of month.
(e) Note special upward or downward trends
as to each item.
(2) Make a spot check of commercial records of the wholesalers selected for the survey and make note of substantial
decrease or increase of sales to particular customers. (Not more
than 12 customers of any one wholesaler to be interviewed, con-
sisting of four hotels, night clubs, or leading cocktail rooms,
four package stores, and four medium or small bars.) In other
words, ascertain whether the commercial records indicate that the
self-imposed rationing of the industry has resulted in preference
being given to certain customers. Make notes of names and addresses
of such customers, amounts of liquor involved, etc. (If wholesalers
refuse to submit to examination of commercial records, data can be
secured from Records 52-B, but this will entail a great deal more
work. No difficulty was encountered in the Baltimore survey in
securing access to commercial records.)
(3) Examine Forms 52-A of wholesalers to determine principal
sources of purchases and note any particular changes.
(4) Call upon the wholesalers, show them the figures taken
from Forms 338, and question them as to the reasons for upward
or downward trends in purchases, sales, and stocks generally.
If an examination of the commercial records discloses preference
being given to certain customers at the expense of others, ques-
tion the wholesalers as to the reason therefor. If Forms 52-A
show changes in sources of purchase, question the wholesaler as
to the reasons therefor.
(5) Call upon the customers of the wholesalers which appear
to be favored, as well as those which appear to be discriminated
against, and question them as to why they are able to receive more
or less whisky, as the case may be.
283
-2-
(6) Call on the leading hotels and a number of
prominent cocktail bars where large quantities of whisky are
sold over the bar. Examine their purchase records to see
whether their purchases have increased, decreased, or have
remained stable. Here again obtain the proprietors' view
with respect to any material increase or decrease in purchases.
Determine the approximate quantity of whisky in cases on hand
at the time of interview.
(7) Interview a number of representative package
stores and obtain their views with respect to experiences had
in purchasing whisky, and any discrimination or favoritism
shown by wholesalers. Determine whether whisky is concealed
under counters or in back rooms and sold to preferred retail
customers, or placed on shelves; also determine whether the
quantity sold each day is restricted. Indicate approximate
quantity of case goods on hand at the time of interview.
(8) Determine whether warehouse receipts are held by
wholesalers or retailers, and if so, determine the quantity of
whisky involved, and reasons why they are not being placed on
the market.
(9) Throughout the investigation question wholesalers,
as well as retailers generally, with respect to what is known as
"self-imposed" rationing imposed by distillers, and the effect
it is having upon the industry generally.
(10) Watch for evidence of black market in whisky and
any evidence of distillers or wholesalers quoting prices above
the O.P.A. ceiling, or offering to sell at the ceiling price,
plus a premium.
(11) Examination of records, etc., should be confined
to whisky. Any general information, however, that might be of
interest with respect to gin, run, and brandy may be included
in the report.
(12) If prominent hotels and cocktail bars are able
obtain sufficient supplies of liquors, whereas package stores
are ourtailed or rationed, this fact, together with the ways and
to
means it was accomplished, should be shown in the report.
(13) All persons interviewed should be questioned as
to the reasons for distillers rationing whisky.
284
-(14) The purpose of this survey is to determine conditions in the city of Baltimore as typical of any metropolitan
area operating under the license system. The report of the investigation should be complete but concise, showing pertinent
information with respect to each wholesaler or retailer. Condi-
tions found to exist should be summarised in the concluding
paragraph of the report.
285
November 20, 1943
MEMORANDUM FOR THE SECRETARY
From: Mr. Paul
In accordance with your request of November 19,
1943, there is attached a brief statement explaining
why reduction in government expenditures does not
reduce the revenue needs below the amount of $10.5
billion recommended by the Treasury in its statement
to the Weys and Means Committee October 4, 1943.
286
Reply to contention that reduction in government
expenditures reduces revenue needs below
amount recommended by the Treasury
1. Unspent appropriations
It has been announced that the Army and Navy will turn
back unspent appropriations amounting to $13 billion and
4 billion, respectively. Some people suggest that this
will reduce revenue needs. The Treasury disagrees.
Appropriations affect revenue needs only as they affect
expenditures. For the current fiscal year the amount which
the armed forces are allowed to spend under appropriation
already passed is enormously more than they plan to spend.
Unexpended balances of appropriations from previous years
plus new appropriations voted since the present fiscal year
began in July 1943 amount to $197 billion. This is more
than Gouble the $97 billion of war excenditures budgeted for
the fiscal year 1944. The $197 billion total of available
war appropriations could be reduced far more than the $17 billion just announced without the slightest effect on actual
spending.
2. Expenditures and revenue goals
The Treasury cannot conscientiously accept revenue goals
lower than the $10.5 billion goal which was presented to
the Committee on Ways and Means in light of prospects for
actual expenditures.
a) Expenditures are not likely to fall far short of
budget estimates
Total federal government expenditures for the fiscal
year 1944 are budgeted at $104 billion. Through November 15,
total expenditures were $34 billion. If the same rate of
expenditures continued till the end of the fiscal year next
June 30, expenditures would come out at $90 billion, or
$14 billion below estimates. But there are many reasons
for believing the rate of expenditures will continue to rise.
There are more soldiers and sailors drawing pay every month,
and the Congress has just increased allowances to their de-
pendents. For many items the first few months of the fiscal
year happen to be months of low expenditure. Further increases are scheduled in many lines of war production.
Whether or not it reaches the budgeted $104 billion, expenditure is sure to go above the $90 billion average level of
recent months.
287
-2"Cut-backs" in some war production programe must be
expected. But since other programs will be expanded and
many production programs are behind schedule for lack of
men and materials, what we save in one direction will be
spent in another. It is not prudent to count on expenditures falling far below the budget estimates.
b) Any reduction in expenditure will only slightly
reduce inflation pressure
Even though expenditures are held below estimates,
we cannot conscientiously lower our revenue goals.
One of the most important reasons for recommending
a heavy revenue program is the fact that consumers have
so much more spending power than consumption goods sup-
plies can absorb. From this standpoint any reduction in
government expenditures will be an improvement. But per
billion of reduction, the gain against inflation will be
only slight. Economy programe are aimed largely to eliminate excessive war profits taxed at a 90 percent rate.
Furthermore, a large part of the profits and other incomes
affected would be invested in war bonds. Only a fraction
would be money which people are trying to spend on consumption.
c) Any reduction in expenditure will only slightly
reduce government borrowing
Another of our major reasons for asking the Congress
to strengthen the tax structure is to reduce our reliance
upon bank financing. With the aid of an able and energetic
volunteer staff throughout the nation, the Treasury has
been doing its utmost to borrow money from non-banking
sources. The total amount raised through month-to-month
sales of War Savings Bonds and through our periodic drives
has been most gratifying; but it still falls far short of
the amounts we are obliged to borrow.
As was just mentioned, the effect of reduced expenditures 18 apt to be chiefly upon income that goes into war
bonds and into excess profits and other taxes. The combined
reduction of tax revenue and of bond sales to individuale
and corporations other than banks will be a large fraction
of the reduction in expenditure, and the reduction in bank
borrowing will accordingly be relatively small.
288
-3 d) Any reduction in expenditure does not reduce
the amount that taxpayers can bear
The Treasury did not propose more than a $10.5 billion
revenue program only because of its desire to avoid undue
hardship on those taxpayers in the lower and middle income
brackets who have not shared in the wartime growth of money
incomes. In general, these taxpayers will not have their
taxpaying capacity reduced by a cut in government expenditures. The amount of taxes we can levy with due consideration for the fixed-income groups is unchanged by any
moderate curtailment of expenditures. If expenditures
can be reduced, $10.5 billion of taxes will become somewhat more adequate from the standpoints of reducing inflationary pressure and of avoiding bank financing.
Such an improvement in the situation will be most
welcome to the Treasury. It is a matter of record that
the Treasury has stood for economy when economy was un-
popular, as well 8.6 when it was popular; and the Treasury
stands for economy now. But no cut in expenditures which
is compatible with energetic conduct of the war can justify
cutting our revenue proposals to a still lower level. The
$10.5 billion is a minimum program which stands unaffected
by any foreseeable reduction in government expenditures.
289
November 19, 1943.
MEMORANDUL FOR THE SECRETARY'S FILES:
with the Secretary's approval Mr. White asked Mr. Sullivan to
arrange with Speaker Rayburn a meeting of the committee which
Speaker Rayburn had appointed to confer with the Treasury informally
on postwar monetary problems. Mr. Sullivan arranged with Mr. Doughton
a meeting for Friday morning, November 19, 1943.
Present: Honorable Andrew L. Somers,
Chairman, Coinage, Weights and Measures Committee
Honorable Robert L. Doughton,
Chairman, ways and Means Committee
Honorable John M. Vorys,
Committee on Foreign Affairs
Honorable Jesse P. Wolcott,
Committee on Banking and Currency
Honorable Chauncey W. Reed,
Committee on Ways and Means
Honorable Harold Knutson,
Committee on Ways and Means
lr. Sullivan and Mr. White
Mr. White said that Secretary Morgenthau was pleased at the
formation of a Congressional committee of this character to keep in
touch with the Treasury officials and confer on developments in the
discussions going forward on postwar monetary problems. Mr. White
distributed copies of the proposed draft outline of the international
bank for development and reconstruction. Several of the Congressmen
wanted to know the status of the discussions on the Fund and
Mr. White outlined the situation bringing them up to date on the
discussions with the British. The various Congressmen asked a number
of questions on the Bank proposal and all indicated sympathic interest
in the settlement of postwar monetary problems.
Mr. Sullivan said that they might find it helpful in arranging
the meetings if there is a chairman of the committee. Mr. Doughton
agreed and the group approved the selection of Mr. Steagall as chair-
man of this committee.
230
-2The meeting adjourned with Mr. White informing them that we
would come before them again as soon as there were any new developments and that in the meantime any of the committee could feel free
to call on the Treasury staff for further information or discussion
of the proposals.
291
TREASURY DEPARTMENT
OFFICE OF THE SECRETARY
November 20, 1943
CONFIDENTIAL
Received this date from the Federal Reserve Bank
of New York, for the confidential information of the
Secretary of the Treasury, compilation for the week
ended November 10, 1943, showing dollar disbursements
out of the British Empire and French accounts at the
Federal Reserve Bank of New York and the means by
which these expenditures were financed.
EMB
292
FEDERAL RESERVE BANK
OF NEW YORK
November 18, 1943.
CONFIDENTIAL
Attention: Mr. H. D. White
Dear Mr. Secretary:
I an enclosing our compilation for the week ended November 10, 1943,
showing dollar disbursements out of the British Empire and French accounts
at this bank and the means by which these expenditures were financed.
Faithfully yours,
/s/ L. W. Knoke
L. W. Knoke,
Vice President.
The Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D.C.
Enclosure
COPY
Strictly
ANALYSIS OF BRITISH AND FRENCH ACCOUNTS
(In Millions of Dollars)
Expendi-
Total
tures
Transformation
official
Canadian
Debite
(a)
First year of var(n)
1,793.2
605.6
20.9
December 1940
2,782.3
.25.6
14 A.
20.9
War period through
Second year of ward
Third year of war(1)
Fourth year of w
2,203.0
1,235.6
Account
764.0
904.8
312.7
46.3
15.5
CREDITS
BANK OF FRANCE
Other
Total
Dobita
1,166.7
Credits
1,828.2
1,356.1
1,335.8
2,793.1
2,109.5
3.4
407P4
2,189.8
7.7
1.361.5
170.4
223.1
280.9
1,072.3
10.6
20.2
78.1
0.1
24.1
128.4
4.3
6.4
5.0
Gold
1,193.7
21.8
(official)
(b)
official
Autralian
Account
Other
or Daor. (-)
Credits
in $ Funds
(e)
(d)
(c)
Total
Debits
Total
Net Incr. (+)
or Decr. (-)
Credits
in $ Funds
(e)
(d)
+299.0
52.0
3.9
416.2
35.0
866,3(f)
1,095.3(0)
108.0
274.0
14.5
10.8
13.2
878.3
38.9
1,098.4
16.7
561.1
705.4
8.8
- 0.1
5.5
57.4
1,276.8
18.5
4.4
- 14.1
10.3
1.0
9.3
0.5
-
Not Incel
Transfers
+
Gov't
Week Ended November 10. 1943
BANK OF ENGLAND (BRITISH GOVERNMENT
DEBITS
PERIOD
Confidential
155.J
916.7
125.9
308.3
14.0
64.1
31.8
+220.1
1943
Sept. 2 Sept. 29
Nov.
3
Dec
59.5
35.3
9.2
4.9
0.8
41.5
68.9
86.9
1
Sept. 30 Nov.
Dec. Ni Dec. 29
-
12.1
5.7
6.1
26.5(k)
-
32.4
29.2
-
24.5
1.2
-
November 10
19.9
0.1
17.5
+
November 3
5.8
21.2
2.3
6.4
32.4
11.7
26.5CM
-
Week Ended:
October 20
October 27
26.6
8.0
2.0
See attached sheet for footnotes.
Average Weekly Expenditures Since Outbreak of War
France (through June 19. 1940) 19.6 nation
England (through June 19. 1940) $27.6 million
England (June 20. 1940 to March 12, 1941) $54.9 million
England (since March 12, 1941)
$20.7
million
merchandise exports, and 32.0 million to be held for credit of U. S. armed forces acroad.
(k) Includes $ 19.5 million apparently representing current and accumulated dollar proceeds of sterling area services and
() For monthly breakdown see tabulations prior to September 29, 1943.
(i) For monthly breakdown see tabulations prior to October 14, 1942.
(h) For monthly breakdown see tabulations prior to October 8, 1941.
(g) For monthly breakdown see tabulations prior to April 23, 1941.
(f) Adjusted to eliminate the effect of $20 million paid out on June 26, 1940 and returned the following day.
(e) For breakdown by types of debits and credits see tabulations prior to March 10, 1943.
(d) Reflects net change in all dollar holdings payable on demand or maturing in one year.
receipts. See (k) below.
1939 apparently represent current acquisitions of proceeds of exports from the sterling area and other accruing dollar
presumably reflecting the requisitioning of private dollar balances. Other large transfers from such accounts since October,
Includes about $85 million received during October, 1939 from the accounts of British authorized banks with New York banks,
(c)
of our securities through December, 1940 amounted to $334 million.
Co data supplied by the British Treasury and released by Secretary Morgenthau, total official and private British liquidation
early months of the war, although the receipt of the proceeds at this Bank cannot be identified with any accuracy. According
to the official selling, substantial liquidation of securi ties for private British account occurred, particularly during the
proceeds of official British sales of American securities, including those effected through direct negotiation. In addition
(b) Estimated figures based on transfers from the New York Agency of the Bank of Montreal, which apparently represent the
Control, and Ministry of Shipping.
(a) Includes payments for account of British Ministry of Supply Mission, British Supply Board, Ministry of Supply Timber
received from Now York accounts of Canadian Chartered Banks.
(g) Includes $ 17.0 million deposited by War Supplies, Ltd. and $24.3 million
(f) Does not reflect transactions in short term U. S. securities,
(e) Reflects changes in all dollar holdings payable on demand or maturing in one year.
(d) For monthly breakdown see tabulations prior to September 29, 1943.
(c) For monthly breakdown see tabulations prior to October 14, 1942.
(b) For monthly breakdown see tabulations prior to October 8, 1941.
(a) For monthly breakdown see tabulations prior to April 23, 1941.
3.7
3.8
2,C
15.5
-
15.5
0.7
3.8
17.5
42.2
19.5
9.6
-
-
0.1
0.1
-
0.1
-
41.5(g)
16.7
+
15.5
-
0.1
13.6
8.4
+
0.7
1.0
+
5.7
-
0.3
-
21.6
-
13.5
47.2(f)
5.0
5.0(f)
November 10
16.8
7.2
7.2
November 3
21.6
8.0
8.0
13.5
5.1
5.1
-
18.8
-
First year of war
-
10
Second year of war
Average Weekly Expenditures for
-
0.9
-
Fifth year of war (through November 10, 1943)
Fourth year of war
Third year of war
8.3 million.
13.9 million.
10.1 million.
8.9 million.
6.2 million.
-
October 27
October 20
Ended
Dec. Dec. 29
NOT. 4-Dec
3.2
41.7
11.0
-
4.8
41.7
3.4
41.5
44.9
52.4
4.8
1.8
14.0
15.8
18.7
83.8
83.9
0.1
10.6
54.5
65.1
31.5
31.5
-
46.4
46.4
Sept. 30 Nov.
Sept. 2 - Sept. 29
3
1943
3.4
REDITS
Strictly
110.7
20.9
534.8
707.4
460.6
16.6
32.4
38.7
20.9
412.7
Sales
504.7
306.4
16.6
Credits
Debits
14.5
57.9
230.2
36.1
27.3
3.9
31.2
+ 181.7
Credits
Debits
Total
Other
A/C
British
Official
Debits
InSunds(e)
Total
per.(-)
to
Transfers
DEBITS
COMMONWEALTH BANK OF AUSTRALIA (and Australian Government)
Confidential
41.0
43.4
30.0
of
462,0
62.4
6.1
Proceeds
246.2
88.5
4.9
(+) or
Net Incr.
3.4
+ 1.6
50.1
Gold
0.3
123.9
525.5
460.4
72.2
12.3
Sales
723.6
566.3
16.7
4.5
Other Decr.(-)
958.8
55.5
112,2
81.2
Credits in $Rinds(e)
47.1
198.6
741.3
360.0
49.8
17.2
62.9
Week Ended November 10, 1943
(+) or
Net Incr.
723.6
170.4
7.7
+ 235.2
+ 40.5
197.0
107.2
9.0
1.50
4.9
155.1
57.4
200.4
200.4
95.0
18,3
Credits
Other
-
A/C
For French
A/C
For Own
Gold
Total
Others
of
British A/C
Transfers from Official
Proceeds
(In Millions of Dollars)
460.4
A/C
British
Official
to
Transfers
CREDITS
CANADA (and Canadian Government)
DEBITS
OF
ANALYSIS OF CANADIAN AND AUSTRALIAN ACCOUNTS
BANK
525.8
477.2
323.0
Debits
Total
Fourth year of war(d)
Third year of war (c)
Second year of war(b)
December, 1940
ar period through
First year of war (a)
PERIOD
All
296
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO
FROM
NOV 20 1943
Secretary Morgenthau
Randolph Paul
You will recall that on October 28 the Banco de la
Provincia and the Banco de la Nacion were designated
Special Blocked Nationals with the concurrence of the
State Department. You will be interested to know that
the result of this action by Foreign Funds Control was
the blocking in New York banks of balances aggregating
$8,692,000 in the name of the Banco de la Provincia and
$3,389,000 in the name of the Banco de la Nacion.
11/20/93
MATERIAL ON ARGENTINA
Copy for Secretary Morgenthau
298
INDEX
Memorandum to Stettinius of November 2
summarizing Treasury's position.
1
Summary of significant transactions in
Argentine accounts
Significant cables from Armour.
2
3
Memoranda sent to the President
4
Exchange of cables with Hull in Moscow.
5
Letter from Cong. Schiffler and proposed reply.
Also H. R. 3696, a bill introduced by Cong.
Schiffler authorizing the seizure of property being used or about to be used to aid
any nation at war with the United States
6
299
THE SECRETARY OF THE TREASURY
WASHINGTON
VEMO RANDUM FOR THE ACTING SECRETARY OF STATE
Since my return to Washington I have carefully reviewed the
Argentine situation and I want to call your attention to the
following points:
(1) Argentina subscribed to Resolution V of the Rio
Conference (January 28, 1942) and to the Final Act of the
Washington Conference on Systems of Economic and Financial
Controls (July 10, 1942). Thus for two years she has been
obligated to cut off all commercial and financial intercourse,
direct or indirect, between Argentina and the Axis nations and
to eliminate all other Axis financial and commercial activities
inimical to the security of the Western Hemisphere.
(2) Notwithstanding the observance of these commitments
by the other American Republics, Argentina has not only repeatedly
refused to take effective measures to fulfill her obligations, but
is now affirmatively promoting Axis interests. Specifically:
(a) Argentina is the Agency for the Transfer of Axis
Funds to Europe.
Large transfers have been made to the Axis countries
from Argentina and by way of Argentina. Not only are
remittances of Axis funds permitted to Germany and Japan,
but Argentina itself is a source of a large volume of the
funds remitted to these co untries.
(b) The Argentine Government has been giving di rect
material assistance to enemy firms. This is exemplified
by the following points, contained in Despatch No. 12448
of October 19, 1943, from our Embassy in Argentina:
(i) From January 31, 1942, to March 31, 1943,
certain Argentine Government departments awarded to
enemy firms contracts totalling 34,000,000 pesos.
(ii) Since such firms are classified as unsatisfactory consignees and would therefore be unable to
obtain certain materials for the execution of their
-2contracts, the Argentine Government has often acted
as an intermediary in purchasing such materials for
them.
(iii) Firms which refuse to deal with enemy
entities are often threatened with legal proceedings
by Government agencies.
(iv) Firms are often instructed by the Argentine
Government departments to accept sub-contracts on
projects on which the main contractor is an enemy firm.
(v) Vicious anti-United States and pro-Axis newspapers and periodicals which cannot obtain newsprint
supplies otherwise, are provided with their require-
ments by the Argentine Government at less than current
market prices.
(vi) Despite the relatively strong financial
position of most German firms, they often find themselves
in need of additional finances. They encounter very
little difficulty in obtaining financial assistance
from the Banco de la Nacion and the Banco de la
Provincia. An equally important source of financial
assistance is the Banco Germanico which, on August 31,
1943, had outstanding loans and discounts totalling
over 52,000,000 pesos, of which it is presumed that a
large portion represents credits to German nationals.
(c) Argentina is a Refuge for Axis Funds.
In the weeks preceding the extension of our freezing
order to the Axis, large sums were transferred to Argentina
on behalf of Axis countries in the form of bank transfers
and currency shipments. In this way, a large part of the
funds which we had hoped to prevent being used for Axis
activities escaped our control. This accumulation of Axis
funds in Argentina has resulted in the Axis using Buenos
Aires as the center point from which to transmit funds to
Axis agents in all the other American Republics.
-3(d) Argentina is the Base for Axis Financial
Operations in the United States and Elsewhere in the
estern Hemisphere.
Argentina has not only permitted Axis funds to move
into Argentina but has actually fostered the accumulation
of funds which can be used to finance subversive activities
in all the other American Republics. Buenos Aires has
become the center point through which funds are transferred
for subversive activities throughout the Western Hemisphere.
This is possible since this country and the other American
Republics have failed to impose control measures on
Argentine transactions.
(e) Argentine Institutions are a Cloak for Axis
Financial Transactions.
Absence of effective legislation and enforcement has
created in Argentina an ideal environment for the setting
up of financial institutions--particularly holding companies--
which can cloak Axis operations and provide a refuge for
Axis assets. There are numerous Argentine holding companies
disclosed in TFR-300 reports which can readily cloak Axis
assets. After closely watching the account of one such
Argentine holding company, believed to be concealing funds
for a blocked national, we discovered that the funds in the
account, amounting to over $1,000,000 did in fact belong to
a Swiss national on the Proclaimed List acting for the Axis.
(f) Commercial and Payment Agreements with Axis
Countries.
Argentina has been contributing to the economy of Axis
Europe by the export of strategic materials through the
European neutrals. For example, skins and hides have been for
from to Portugal, doubtless intended
to the Axis
powersisasnormally
PortugalGovernment an
re-export shipped
Argentina
exporter of skins and hides. The Argentine has
concluded various financial and commercial agreements which
have brought her into closer cooperation with Axis Europe.
-4(g) Argentina is the Fence for Looted Currency and
Securities.
Despite the efforts that have been made to prevent Germany
from realizing on the looted currency and securities seized
in the invaded countries, the Axis has succeeded in realizing
upon this stolen property by disposing of it through Argentina.
(h) The Proclaimed List and Cloaking.
Despatches received from American Missions indicate not
only that the Argentine Government has refused to recognize
our Proclaimed List policy, but also that Argentine facilities
are being us ed to destroy the effectiveness of our Proclaimed
List policy in other countries. The Argentine Government's
failure to recognize our Proclaimed List makes it impossible
for us to prevent delivery of shipments to persons in
Argentina who are placed on the Proclaimed List after goods
leave our shores. In many cases, the Germans have defeated the
British and American Black List by reorganizing their companies
into Argentine firms and the Argentine Government has, if
anything, encouraged the practice.
(i) Argentina permits German nationals within its
borders to finance Nazi subversive activities.
The following points are brought out in Despatch No.
12448 of October 19, 1943 from our Embassy in Argentina:
(i) The German Government, being a totalitarian
state, expects financial and moral assistance from its
nationals, wherever they may be located. Consequently,
German business interests in Latin America have
maintained a close relationship with the Fatherland by
frequent and continuing exchanges of employees,
executives, and correspondence with the home offices.
(ii) As is well known, the large German industrial
companies such as I. G. Farben, Thyssen, and Siemens in
controlled by the National Socialist Party
Germany, are which uses their Latin American branches as
a channel through which to exert influence in the
Western Hemisphere.
-(iii) A large part of the financial burden for
financing Axis subversive activities has been placed
upon the German business community. All other American
Republics have taken some form of action to eliminate
similar communities from their own countries and the
German community is now centered in Argentina.
Mathematical support for this conclusion is provided by
the fact that the German Embassy in one year spent
approximately 5,200,000 pesos, of which amount only
800,000 pesos were received directly from Germany, the
balance of 80 percent being contributed by German
entities or nationals residing in Argentina.
,
(3) In view of Argentina's failure to take effective
measures to observe her commitments for economic cooperation and
in view of Ambassador Armour's statement on October 27, 1943 that
"Mounting evidences show that the Government (Argentine) is
Papidly passing from control to the promotion of such activities
(i.e. financing totalItarian activities)", I want to strongly
urge that Argentine assets should be frozen at once, thus
according to Argentina the same treatment as that accorded the
neutrals in Europe.
(4) At the suggestion of the President and with what we
regarded as the tacit approval of the State Department, Treasury
did arrange for an unofficial news story that this Government
was considering the freezing of Argentine assets. In so doing,
Treasury was not unmindful, as we presune the President and
your Department were not unmindful, that this action would have
financial repercussions in Argentina and that some flight of
Argentine undercover assets might ensue. We felt, of course,
that there would be full cooperation to obviate any adverse
financial or economic effects proceeding from this action.
Indeed, State Department did cooperate in halting the early
transfers of Argentine funds, although it has more recently
advised that we should not interfere with such transfers in
other than very exceptional circumstances and has instructed
the Treasury Department to release many of the transactions
previously stopped.
(5) The current situation with respect to Argentine
transfers of dollar assets that are not related to normal
commercial transactions is as follows:
)
-6Since the appearance of the stories in the press the following
transactions, many or all of which are detrimental to our war effort,
have occurred. Some of such transactions involve the flight of
funds out of Argentine accounts to Uruguay, Panama and Sweden.
Others Involve the transfer of assets to the general account of
the Central Bank where the ownership of such assets can no longer
be traced.
On Wednesday, October 27, $460,000 was transferred from
Argentine accounts to other countries, of which $230,000 was from
the accounts of Benco de la Provincia and Banco de la Nacion. The
same day $2,000,000 was transferred to the general account of the
Central Bank from the accounts of other Argentine banks.
On Thursday, October 23, there was a flight from Argentine
accounts of 3455,000 and 14,250,000 was transferred to the Central
Bank account. An additional nine million and e half would have
been transferred to the Central Fank from the accounts of Provincia
and Nacion were it not for Treasury's ad hoc action approved by
State Department.
On Friday, October 29, no substantial transfers were effected
in view of Treasury's action in holding u of transactions with the
State Department's approval.
On Saturday, October 30, there was a flight of $402,000 from
Argentina to the accounts of other countries and the transfer of
$6,000,000 to the Argentine Central Bank.
On Monday, November 1, there was S flight of $3,808,000 out of
Argentine accounts to the accounts of other countries, including
Sweden, Uruguey and Panama. On the same day there was transferred
$6,500,000 to the Argentine Central Bank. The transactions effected
on Monday included certain of the transactions previously attempted
to be effected the Previous Friday and held until Monday, at which
time the transactions were allowed to go forward at State Department's
request.
In addition, and unrelated to the news story, the following
hapments of cold have been made or are about to be made pursuant
lans of the Argentine Government going back several months.
first shipment of Central Bank gold back to Argentina
250,000) is leaving November 2 or 3 on the Argentine boat
Parana" from New Orleans. The second shipment of $1,250,000
New York for New Orleans Monday at 3:00 p.m.
-7This shipment is scheduled to sail on November 5 on the Argentine
vessel "Rio Atuel." The third shipment of $1,250,000 is scheduled
to sail from New Orleans on November 10 on the "Rio Iguazu". This
gold will be shipped from New York on November 5 or 6.
(6) From the fall of France in June 1940 until the freezing
of Axis in June 1941, the Axis moved over $100,000,000 out of the
U. S. and I have no doubt but that substantial Axis funds are
cloaked in Argentine names. Accordingly, it is patent that among
the Argentine assets now going undercover are enemy assets and we
cannot act without your approval.
)
I recognize that freezing Argentine assets involves political
as well as economic questions and that decision on the political
aspects is clearly your responsibility. However, I sincerely
hope that you will again review the Argentine situation and on
economic warfare grounds, I again strongly recommend that
Argentine assets be frozen.
than,
307
NOV 23 1943
308
MEMORANDUM
Ambassador Armour's first cable recommending the freezing of
Argentina was received by the Treasury on Saturday afternoon,
October 23, 1943. Since that time substantial Argentine transactions
in dollar accounts have been observed by the Treasury Department.
During the period from October 25, 1943, to November 20, 1943,
inclusive, the following transfers of Argentine funds, apparently
not of a normal commercial nature, were effected in our markets:
1. $9,695,000 was transferred from Argentine accounts to
other countries, mostly to Uruguay, but also to other
countries, such as Sweden, Panama, Mexico, Chile,
Colombia, and Brazil.
2. $29,485,000 was transferred from Argentine accounts to
the Argentine Central Bank.
The following shipments of gold, formerly held by the Federal
Reserve Bank of New York for the account of the Argentine Central Bank,
were made on Argentine vessels to the Argentine on the dates indicated:
$1,250,000
1,250,000
1,250,000
1,250,000
1,250,000
November 4
November 6
November 15
November 17
November 20
$6,250,000
Total shipped to date
We are informed by the Federal Reserve Bank of New York that the
following shipments of $1,250,000 each of Central Bank gold are
scheduled to be made on the boats and dates indicated:
November 29
SS Lujon
November
30
SS Gualequay
$1,250,000
1,250,000
1,250,000
1,250,000
1,250,000
SS Teuco
$6,250,000
Total scheduled to be shipped
SS Gallejos
SS Chubut
December 5
December 7
December 9
$ 6,250,000
6,250,000
Already shipped
Scheduled to be shipped
$13,500,000
Efflux of Argentine gold by December 9
309
3
COPY
310
This telegram must be
( paraphrased before being
communicated to anyone
other than a Governmental
agency.
Rec'd. 5:30
11/6/43
Buenos Aires
November 5, 1943
Rec'd. 5:56 p.m.
Secretary of State,
Washington.
U. S. URGENT
2620, November 5, 2 p.m.
Text of aide-memoire mentioned in my November 5,
1 p.m. number 2619, follows:
(
As requested by their Excellencies, the Ministers of
Foreign Affairs and Worship and of Finance, The Ambassador
of the United States of America telegraphed his Government
on October 29 for additional details regarding the designation by the United States Treasury Department of the Banco
de la Nacion Argentina and the Banco de la Provincia de
Buenos Aires as special blocked nationals.
(
The Ambassador has now received a reply from his
Government in which he is informed that the immediate
reason for the action taken by the Treasury Department was
the unusual movement of funds during the period October 25
(
to October 28 inclusive. During the first three days of
that period, debits to the accounts of the two banks
amounted to $4,184,000 as compared to $989,000 for the full
week ending October 11. Of the three-day total, almost
$1,000,000 was transferred to countries other than the
United States. On October 28 transfer orders amounted to
almost $10,000,000, at which time the Treasury Department,
as a precautionary measure, blocked further operations.
While the foregoing explains the immediate reason for
the action of the Treasury Department, the Ambassador understands that the fundamental causes are more far-reaching
and disturbing. For almost two years the United States
Treasury Department has been calling attention to operations
carried on by these two institutions which had the effect
(
311
-2-
COPY
of benefiting the Axis or Axis-occupied countries or
nationals of such countries resident therein. Likewise,
the Treasury has pointed out on many occasions that the
institutions in question have granted credits and overdrafts to persons and firms whose activities are deemed to
be inimical to the security and defense of the hemisphere.
The Embassy, in accordance with the provisions of Resolution Eight of the Inter-American Conference on Systems
of Economic and Financial Control held in Washington in
1942, brought those observations to the attention of the
appropriate agencies of the Argentine Government.
During the course of the present year, informal conversations have been held, as the Ministry of Foreign
Affairs is aware, between officers of the Embassy and those
agencies. The latter have invariably taken the position that
the remittances to Axis or Axis-occupied territory were
made in accordance with the established policies of the
Argentine Government. With respect to credits and overdrafts, the appropriate agencies, although courteously
receiving the Embassy's observations, stated, presumably
following directives of the Argentine Government, that they
were unable to take corrective measures or alter existing
policies.
The United States Treasury Department has maintained
that even though the operations carried on by the Banco
ie la Nacion Argentina and the Banco de la Provincia de
Buenos Aires were authorized or condoned by the Argentine
authorities, this did not free those institutions from the
responsibility of effecting such operations, since, in so
far as the use of the financial facilities of the United
States was concerned, the Treasury Department was obligated
to apply its controls on the basis of the wartime financial
regulations of the United States and the recommendations
adopted at the Rio de Janeiro and Washington conferences.
Accordingly, after more than one year of patient waiting,
following the Inter-American Conference on Systems of
Economic and Financial Control, the Treasury Department
felt that the two banks in question had definitely elected
to continue operations and transactions which had the
( effect of benefiting the Axis Powers and which were inimical
312
43-
COPY
to the security of the hemisphere. Therefore, it was
decided that the institutions in question were not entitled
to the free and unrestricted use of the financial facilities
of the United States. Accordingly, the Treasury has taken
action to require that specific licenses be obtained for
further transactions by the two institutions, to the end
that it may request and obtain information as to the nature
of such operations in order to preclude the possibility of
the financial facilities of the United States being used
in contravention of the existing wartime financial controls
and the recommendation of the above-mentioned conference.
The Foreign Minister /is advised that this Government has not attempted to list in detail the /many/ transactions which /this/ Government considers inimical to
hemispheric interests since the views of /this/ Government
concerning such transactions have been made clear to the
appropriate agencies of the Argentine Government. It is
understood those agencies have access to the detailed
records of the transactions to which reference has been
made.
The Ambassador desires to make clear that the Treasury
Department will, of course, be pleased to consider applications for specific licenses made on behalf of the above
mentioned banks.
Buenos Aires November 5, 1943.
ARMOUR
312
43-
COPY
to the security of the hemisphere. Therefore, it was
decided that the institutions in question were not entitled
to the free and unrestricted use of the financial facilities
of the United States. Accordingly, the Treasury has taken
action to require that specific licenses be obtained for
further transactions by the two institutions, to the end
that it may request and obtain information as to the nature
of such operations in order to preclude the possibility of
the financial facilities of the United States being used
in contravention of the existing wartime financial controls
and the recommendation of the above-mentioned conference.
(
The Foreign Minister /is advised that this Government has not attempted to list in detail the /many7 transactions which /this/ Government considers inimical to
hemispheric interests since the views of /this/ Government
concerning such transactions have been made clear to the
appropriate agencies of the Argentine Government. It is
understood those agencies have access to the detailed
records of the transactions to which reference has been
made.
The Ambassador desires to make clear that the Treasury
Department will, of course, be pleased to consider applications for specific licenses made on behalf of the above
mentioned banks.
Buenos Aires November 5, 1943.
ARMOUR
313
PARAPHRASE OF TELEGRAM RECEIVED
FROM
AMEMBASSY, BUENOS AIRES
TO
SECRETARY OF STATE, WASHINGTON, D. C.
NUMBER
2530
DATE
OCTOBER 27, 1943
The following is in reference to #1644 of October 24
from the Department and also Department's #1647, dated
the 29th October.
It would seem that action along one of the three
following lines is precipitated by what would appear to
be an unfortunate leak reported in telegram #2526 of
October 27 from the Embassy (a) the immediate freezing
of Argentina, (b) the issuance of an announcement which
denies the press story and the following of a policy of
inaction, or (c) neither the confirmation or denial by
Washington of the United Press story, while reaction here
is observed. Since this latter course would provide time
for the liquidation of any Axis dollar assets cloaked via
the Argentine, it is dangerous. In addition it is
doubtful if the censor will release the United Press
despatch so that it will be difficult to determine the
true reaction. Since the following message covers the
situation in all its aspects, no changes are being made
even though it was prepared before the Embassy had
knowledge of the United Press story.
The considered judgment of the Embassy with regard
to the situation is represented as follows:
(first) Economic warfare was the immediate objective
of the Embassy in making its recommendation for freezing.
We have been convinced by recent events that the exercise
of any control on the part of the Argentine Government
over totalitarian activities or their financing has
practically ceased. Mounting evidences show that the
Government is rapidly passing from control to the promotion
of such activities. Naturally, the extent of the effectiveness of the measures of the Treasury depends on the degree
to which our Government desires its controls to be imposed.
It is realized by the Department that of course the
measures could be used to the extent of imposing an embargo
314
-2on finances and merchandise. The following would be the
minimum aims of the Embassy:
A beneficial ownership breakdown of assets held
through local banks and financial institutions in the
United States, through the use of the licensing procedure,
and supervision of a large percentage of the international
financial transactions of Argentina; the elimination on
the part of generally licensed banks of credit to Axis
firms; the certification by such banks that no transactions
handled by them involved any direct or indirect Proclaimed
List interest; and possibly a disclosure of funds held
locally by such banks for European account.
(second) It was never believed by the Embassy that
the extreme political effect mentioned by the Department
could result from the measure recommended. The Mission
hoped first to choose an appropriate moment to announce
freezing in order that the measure would be interpreted
as directed against the government and (not?) the people
of Argentina, It must be remembered, in recognizing the
super-sensitivity of the Argentines, that a strong and
widespread feeling against the present government now exists
within Argentina. Our thought was that proper action by the
United States at this time, when the cumulative effect of
the unpopular and totalitarian acts of the Government is
at a peak, would receive the interpretation of an alignment with the Argentine people against a government already
unpopular. There may or may not arise a better occasion.
Although the foregoing does represent our considered judgment, it should be emphasized that it is merely a matter
of opinion. The Embassy hoped that after the freezing was
imposed our Government would be given an opportunity by
the Argentine Government to disclose publicly the extent
to which those firms which could be universally defined as
inimical to the security of the Western Hemisphere were
being aided and abetted by the previous and present government. On the basis that nothing should be done to
strengthen the present government but that risks should be
taken to weaken it, the Embassy predicates its recommendations. In these recommendations risk is inherent.
(third) So that Argentina and the American Republics
may clearly understand the American point of view it is
the opinion of the Embassy that the publication of a
statement by the President could not be prevented by even
press censorship in this country. For this reason, it is
respectfully suggested by the Embassy that the President
consider issuing a statement along the following lines if
315
-3freezing is decided upon:
(Paraphrased quote) It was proposed by the Treasury
Department a year and a half ago that those financial
controls applicable to neutral countries, under the provisions of Executive Order #8389, be extended to include
Argentina. The effect of subjecting all commercial
and financial transactions to prior license by the Treasury would have been produced by that action, if approved.
There would have been, in other words, a recognition of
the self proclaimed status of neutrality of Argentina,
and the same treatment given neutral countries under the
above mentioned order would have been accorded Argentina
by the United States.
Since I had every confidence at that time that the
Rio de Janeiro resolutions would be complied with by
Argentina, I disapproved the proposal of the Treasury even
though I recognized that I was in a sense giving countenance to a measure of discrimination against other neutral
countries to which application of this measure had been
made. For reasons of continental security and in view of
recent events, however, such action has again been proposed
by the Treasury After a year and a half of keen disappointment walting for Argentina to join her sister
republics my present reaction to the proposal of the
Treasury is one of reluctant and sad agreement. I feel
forced to approve the action. I feel In doing 80 that
I must repeat that it is nothing more than a recognition
of the oft-avowed position of neutrality taken by Argentina,
a position which that country of course has every right
to adopt, as a sovereign nation. (End paraphrased quote)
(fourth) The Department's statement regarding
potential dangers is commented on as follows:
(a) The attitude of the British would not be a
new one and as the major brunt of onus for economic
warfare measures has been borne constantly by the
United States, it should not be too greatly Yeared
if there is a slight intensification. The British,
however, might agree to announce simultaneously or
shortly thereafter that developments in Argentina
recently, including instructions to the press that
they were no longer to publish the Statutory and
Proclaimed Lists, made it necessary to intensify
British controls in regard to shipments to Argentina
316
-4from Great Britain and neutral countries.
(b) There is no doubt that attempts to impede
the shipment of essential materials needed by
the United Nations might be made by the Argentine
Government. Nevertheless, as this country has as
great a need of selling as the United Nations has
of buying such measures would lead to the elimination of the present government or would only be
temporary. Other than temporary, the only real
danger foreseen by the Embassy is that some export
such as beryl, which in Argentina economy is
unimportant, might be affected. However, on the
basis of straight trading for essential materials,
such as oilfield equipment, these questions could
be worked out.
(c) It is believed that there would be a favorable
reaction among the American Republics should the
suggested statement be issued by the President.
(d) There might be withdrawn nonbelligerent rights.
(e) Welch and Wilcox, respectively of the National
City and Boston Banks, were consulted confidentially.
Due to the character of the present government they
feared dire results, possibly including prohibition
of exports, intervention of American firms, and even
deportation of Americans. These fears cannot be
fully shared by the Embassy. If such reprisals
should result from action taken on the basis of
neutrality, it would be such a definite
with
the Axis that
we well approval be
Argentina's
alignment
would
exposed to the criticism rather than the
of the American Republics if we fail to recognize
this and to accept the challenge implied by such a
situation, since even at the present time, what the the world
United Nations are fighting in other parts of
is, in the opinion of the Embassy, represented by
this government.
(fifth) The Mission does not wish to influence unwise the by
into recommending action considered than
Department the The Embassy desires to do no more
state Department. its position. The Mission must express make the opinion, public
however, that an opportune moment has come to
the United States' attitude concerning the present
Argentine government.
-5-
317
(sixth) Therefore, the Mission would like to repeat
its recommendation that an announcement be made of the
amendment to Executive Order 8389. We believe further that
no immediate provision for the issuance of Argentine
general licenses should be made. Only after the Treasury
has made a full study and only after the influence of
repercussions produced in Argentina by this action can be
calculated by the Embassy with reasonable certainty,
should such licenses be given. The Treasury, naturally,
may desire to allow small and unimportant transactions
to continue undisturbed, to which no objection could be
seen by the Embassy.
ARMOUR
COPY
PARAPHRASE OF TELEGRAU RECEIVED
FROM
AMEXBASSY, BUENOS AIRES
TO
SECRETARY OF STATE. WASHINGTON, D. C.
NUMBER
2483
DATE
OCTOBER 20, 1943
The following is in reference to telegram #1586 of
October 12 from the Department.
It is the opinion of the Embassy that no useful purpose
would be served by ad hoc blocking action or Proclaimed List
action against Banco de la Nacion or Banco de la Provincia.
Such action would be a step that would be ineffective, disturbing, and unwise. Whether or not the time has arrived
to consider the generál blocking of Argentina is the real
question.
Evidence which is more than enough to justify this step
is contained in the draft statement on the financial position
of German companies in Argentina and the aid extended to them
by the Government of Argentina. This S tatement was submitted
as an enclosure to despatch #12448 of October 19 which was
forwarded on the same date by courier. Careful consideration,
however, on a broader basis than economic warfare, must be
given any contemplated action. Bitter opposition to the
present Argentine administration from influential and important sectors of the Argentine public, including elements
in the armed services, has been brought about by the letter
of the Secretary of August 30, together with other events.
Rather than dispel this opposition through creating a "my
country right for wrong" reaction, any further action on the
part of the American Government must help to increase the
Opposition.
Despatch #12436 of October 19 fully described the thoughts
of the Embassy with regard to procedure, but action may be advisable, since events are moving so rapidly, even before
Washington receives the despatches under reference.
16
2-
Since we could have no further confidence with respect
to the implementation of such control measures as now exist
in Argentina, action on our part would be more than Justi-
ffed if Prebisch is forced out of the Central Bank, as appears to be inevitable, this occurrence being in addition
to their resignations of the principal officials of the
Ministry of Finance. It is the opinion of the Embassy that
the Argentines would interpret blocking as directed against
have their understanding generally. The Mission therefore
recommends that Argentina be blocked if the bank is interthe Government and not against the people and that it would
vened or if Prebisch is forced to resign and that the fol-
lowing statement be issued by the Treasury Department,
(Paraphrased quote) It was announced today by the Treasury
Department that for reasons of continental security and in
view of recent financial developments in Argentina, executive order #8389 as amended, had been amended further to.
include Argentina as a foreign country designated in such
October of the year 1943. (End
order, effective as of
paraphrased quote)
Reference is made to continental solidarity for the
express purpose of giving the opportunity for the Argentine
Government to request reasons of the American Government and
this request, in turn, could allow the material contained
in despatch #12448 of October 19 to be used in much the same
manner as the letter of August 30 from the Secretary. The
information given in despatch #1226 of October 5 is fully
substantiated by the material forwarded under cover of that
despatch.
Since developments in the Central Bank case may be
expected within the next forty-eight hours and also since
the action recommended herein, to be timed properly, should
be taken immediately following information rom the, Embassy
that adverse changes have occurred in the Central Bank, the
immediate consideration of the Department is requested.
The Embassy respectfully urges that no action be taken.
until the Department is further advised by the Mission.
ARMOUR
COPY
17
320
4,
321
MEMORANDUM FOR THE PRESIDENT
ARGENTINE FREEZING
Developments since your decision of October 25
against a Argentine
general
freezing OI
assets.
ecretary Hull has telegraphed his concurrence in the
department's position as stated to you contrary to
blocking Argentina. A copy of this telegram is attached.
Ambassador Armour has cabled renewing his recommendation
o-block Argentina and stating that the Argentine govern-
ent is progressing to assisting Axis activities and
that while blocking involves risks, he is willing to
recommend immediate blocking action. A copy of this
cable is attached.
Transfers and attemoted transfers of Argentine funds since
October 25:
$1,000,000 transferred largely to Uruguay.
Yesterday the Argentine Centrel Bank-ordered
private banks to transfer their funds to
As a result, attempted transfers of $29,500,000
were ordered from Argentine bank accounts in
New York to Argentine Central Bank accounts at
Federal Of these $7.000, 000 have been made
$9,500,000 have been definitely blocked; $13,000,000
are now pending. No serious disadventage is
discerned were such transactions to occur, except
where individual accounts upon the evidence should
be blocked.
Now pending:
Transfers of $250,000 to Uruguay; $1,000,000 to
Swedish Riksbank, These transfers if accompl ished
would remove funds from United States control.
Department recommendations:
(a) That there should be no general blooking at
this time for reasons previously given;
(b) If contrary decision is made, general blocking should be preceded by attempt to get
British and some major American Republics
to take collateral action.
322
-2
(c) Since transfers effected or pending from
Argentina to foreign account total only
$2,500,000 or the current week, take no
action beyond existing ad hoc blocking
continuing present scrutiny of transactions
to prevent sudden flight of capital.
Signed by Mr. Stettinius
CO
OCT 29, 1943
NDUM FOR THE PRESIDENT
Freezing Argentina
Mr. Stettinius advised me this afternoon that he was
sending you a short memorandum regarding the freezing of
tina and suggested that I do likewise. We in the Treasury
that Ambassador Armour's cable of October 27, again
strongly urging the freezing of Argentina, is the best stateof the reasons for freezing. As the Ambassador states:
think
11
The Mission must express the opinion, however, that
an opportune moment has come to make public the United
States' attitude concerning the present Argentine
government. Therefore, the Mission would like to
repeat its recommendation that an announcement be
made of the amendment to Executive Order 8389 (freezing
Argentina)."
A copy of this cable is attached.
For your information the Treasury Department, with the
State Department's approval, has taken the following provisional action:
(a) Treasury has specially blocked the assets of the
two largest banks in Argentina, who for over a year and with
the Argentine Government's approval have been openly aiding
the Axis. These banks were trying to transfer out of their
names over $10,000,000 of assets before this Government could
act
(b) The Treasury has temporarily stopped transactions
in Argentine accounts amounting to over $5,000,000 and
involving the flight of funds from the Argentine or the trans-
fer of substantial Argentine funds to new accounts where such
funds could no longer be readily identified.
The Treasury has advance notice of additional transfers of
similar character within the next twenty-four hours amounting
$10,000,000. Moreover, the Argentine Central Bank has given
anding instructions-for the shipment of substantial amounts
its gold to Argentina on each Argentine ship henceforth
lea
ing the United States.
37
324
-2-
ould you decide to take action in this matter, the
necessary papers are ready for your signature.
(Signed) D.W.Bell
EXHIBIT 2
325
OPY
OCT 25 1943
MEMORANDUM FOR THE PRESIDENT:
Action Proposed by the Treasury:
Treasury proposes that Argentina be added to the 35
countries already subject to the freezing control. Essentially,
these controls would follow the pattern already in effect with
regard to Portugal, Spain, Sweden and Switzerland. This is
in general the proposal made by Ambassador Armour. In view of
the flexibility of these controls, additional exemptions or
restrictions can be added as desirable.
Treasury Department's Position:
The Treasury, on economic warfare grounds, has repeatedly
urged that the freezing control be extended to Argentina--as it
has been to the neutral countries in Europe. Argentina is
recognized as the base from which the Axis conducts its financial
perations throughout the Western Hemisphere. On political
grounds, the State Department and Ambassador Armour have
consistently opposed freezing Argentina. However, last Wednesday,
Ambassador Armour recommended the freezing of Argentina, stating
in his cable:
"The Secretary's letter of August 30, together with other
events, has brought about bitter opposition to the present
Argentine administration from important and influential
sectors of the Argentine public, including elements in
the armed services. Any further action on the part of the
American Government must help to increase this opposition
rather than dispel it through creating a 'my country right
or wrong' reaction The Embassy believes that blocking
would be interpreted in Argentina as directed against the
Government and not against the people and would be gener-
ally understood."
The freezing of Argentina at this time is the natural follow-up Lend-
to Secretary Hull's letter to Foreign Minister Storni on
Lease and your criticism of the closing of the Jewish newspapers. Any delay in acting not only gives Argentina a chance
'o move substantial assets out of the United States but may
afford the present pro-Axis government time to strengthen its
326
-2position. Thus the present government might very well go through
the motions of breaking with the Axis, which would have no real
effect other than to bolster the Ramirez government. A dramatic
step by us at this time should crystallize the opposition and
might give Argentina a genuinely pro-Allied government.
State Department's Position:
I. The State Department continues to oppose this proposal,
which you declined to approve last year, primarily because we
believe it will retard, rather than hasten, a change of government. The Treasury's proposal, although suggested on economic
warfare grounds, has as a major purpose the political objective
of upsetting the present Argentine government. In the Departent's judgment, contrary to the views of Ambassador Armour,
it is more likely that blocking Argentina would strengthen the
grip of the present government. Because of the sensitiveness
of Argentines to outside pressure, the government undoubtedly
would appeal to all Argentines to "defend" their country against
United States invasion of Argentine sovereignty. Past experience with Argentina indicates that this type of flag-waving
rouses popular patriotic fervor. We believe in this case the
growing opposition to the government would be temporarily
confused if not divided.
II. We consider the proposal would not directly attain
important economic warfare objectives.
III. The proposal runs the risk of (a) frightening the
ther American republics, because they would figure that if the
United States used strong-arm tactics against Argentina it
might do the same to them; and (b) producing Argentine retaliatory action which might endanger United Nations procurement of
such vitally needed materials as zinc, hides and foodstuffs and
jeopardize the advantageous arrangements under which the
Argentine merchant marine carries to the United States a minimum
of 40,000 tons a month of cargo selected by us.
IV. The Argentine political pot is seething. The
universities are now on strike and attempts are being made at
this moment to organize a general strike with the specific
objective of overthrowing the government. We recommend that
Argentina be left to stew in its own juice at least until the
resent confused movements take form.
(Signed) Randolph Paul
(Signed) E. R. Stettinius, Jr.
327
5.
(
328
SECRET
PARAPHRASE OF TELEGRAM NO. 1769 OF OCTOBER 28 FROM
SECRETARY HULL AT MOSCOW TO MR. STETTINIUS:
I am in accord with your stand and reasoning
concerning the blocking of Argentine accounts, as
stated in your telegram to me.
This message should have no distribution.
COPY
PARAPHRASE OF TELEGRAI SENT
TO
FROM
AMEMBASSY, MOSCOW
SECRETARY OF STATE, WASHINGTON, D.C.
NUMBER
1644
DATE
OCTOBER 24, 1943
For the Secretary.
The inclusion of Argentina among the list of
locked countries is again being proposed by the
reasury Assets, bank accounts, and securities in
the United States of Argentine residents, citizens,
r entities will thus be blocked and financial
communications and transactions with Argentina
permitted only by license. General License 53 would
be made applicable to Argentina by the Treasury thus
general licensing all transactions incident to commerce
and all commercial transactions.
A blocking proposal has also been recommended
by Ambassador Armour, but a. general license of
somewhat different character is contained in this
proposal.
There is a political objective in the proposale
This
of both Ambassedor Armour and the Treasury
objective is not an economic warfare purpose, but
rather the upsetting of the present Argentine Government.
We have given the proposal careful thought and
think that the opposite effect will probably DE produced
by it, that is, that the Government will be strengthened
and a change in Government will be postponed rather than
hastened.
The supersensitivity of the Argentines to any
suggestion of outside pressure is our reason it the
our opinion that blocking would be seized upon by
Government to be presented to the Argentine people as
an invasion of Argentine sovereignty by the United
States The flag would be waved by the Government,
and Wall patriotic Argentinee" would be urged to
relly to "their country's defenge and to forget their
Internal differences.
-
-2Furthermore, we do not believe that any important
economic werfare objective would be attained by the
proposal Argentine private individuals, concerns, and
banks will b'e unlikely to seek to withdraw any important
assets from the United States, and no substantial effect
on Axis activities in Argentina would result from our
blocking here. Argentine blocking in addition
(first) would cause the friendly feeling in the
other countries to be chilled because they would
igure that if the United States used strong arm tactics
of this character against Argentina, the same tactics
would be used against them;
(second) probably would not have the support of the
British, and action on our part would be unwise from
both the immediate and long-term point of view without
such support; and
(third) might cause retaliatory action which would
(a) endanger procurement by the United States
of such vitally needed materials as beryl,
edible oils, foodstuffs, hides, and zinc;
(b) jeopardize the advantageous shipping
arrangements under which a minimum of
forty thousand tons a month of cargo
selected by us is carried to the United
States by the Argentine Merchant Marine,
Therefore, we recommend that Argentina be left for
the time being to stew in its own juice. Since the
political pot is seething, it may boil over by itself.
Buenos Aires has also been sent this message.
Since I know of your interest in the subject, I
am passing the foregoing on to you. I am taking the
latter up with the President at the earliest moment in
as much as it is being pressed vigorously by Treasury.
STETTINIUS
ACTING)
(W-DM)
331
332
COPY
11/12/43
MEMORANDUM FOR THE SECRETARY OF STATE
I am forwarding to you herewith for your
consideration a copy of a letter from Congressman
A. C. Schiffler suggesting that the Argentine gold
in this country be frozen. There is also attached
a reply to this letter which we propose to send,
unless you perceive some objection.
As you have already been informed, Argentina
is moving gold out of this country on each Argentine
ship leaving the United States and by December 9
the
total contemplated withdrawals will aggregate
$10, 000,000.
(s) H. Morgenthau, Jr.
Secretary of the Treasury.
Enclosures.
333
My dear Mr. Schiffler:
Reference is made to your letter of November 8,
1943
suggesting that the Argentine gold in this country
be
frozen.
For your information the question of the freezing
of Argentine assets in this country, including the
gold held by the Argentine Central Bank and the other
dollar assets held in this country by Argentina and
her nationals, has been and still is the subject of
careful consideration by the State and Treasury Departments.
Although there are cogent reasons for the freezing
of Argentina on economic warfare grounds since Argentina
is recognized as the base from which the Axis conducts
its financial operations throughout the Western Hemisphere,
you will appreciate that there are important political
considerations involved in any such action by this
Government. Since the evaluation of these political
considerations is the responsibility of the State
Department, I have referred your letter to the Secre-
tary of State for his consideration.
I appreciate your interest in this matter and
will
keep you informed of any developments in connection
therewith.
Very truly yours,
Secretary of the Treasury.
Hon. A. C. Schiffler
House of Representatives.
334
CONGRESS OF THE UNITED STATES
P
HOUSE OF REPRESENTATIVES
Y
Washington, D. C.
November 8, 1943
The Honorable Henry Morgenthau, Jr.
Secretary of the Treasury
Washington, D. C.
My dear Mr. Morgenthau:-
I am intensely interested in winning the
war, and also equally interested that nothing
in this country that would be helpful to the
Axis Powers reaches them.
In view of the attitude of Argentine
towards the United Nations and its present
efforts to remove its gold from this country
which will undoubtedly be used to aid the Axis
Powers, I urge that such gold be frozen in the
possession of its present custodians, in that
it shall not in any manner be of aid to the
Axis Powers and their war against the United
Nations.
Most Respectfully Yours,
/s/ A. C. Schiffler
A. 0. Schiffler, M.C.
S:L
335
78TH CONGRESS
1ST SESSION
H. R. 3696
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 19,1943
Mr. SCHIFFLER introduced the following bill: which was referred to the Committee on Interstate and Foreign Commerce
A BILL
To authorize the seizure of certain propery which is being used, or
which is about to be used, to aid any nation at war with the
United States, and for other purposes.
Be it enacted by the Senate and House of Representa-
1
2 tives of the United States of America in Congress assembled,
3 That during the present war the President, the Secretary of
4 the Treasury, the Secretary of State, or any other officer of
5 the United States, whenever he deems it expedient or neces-
6 sary for the welfare of the United States or of any of the
7 United Nations, shall seize and take possession of any property
8 of any kind or character belonging to any government of any
9 nation (excluding the United Nations and other nations as10 sociated therewith), , or belonging to any subject or citizen of
2
1 any such nation (whether or not such subject or citizen be
2 domiciled in the United States or in any place under the
3 jurisdiction of the Government of the United States), that
4 may be found in the United States, or at any of the places
5 under the jurisdiction of the President or of any other officer
6 of the United States, whenever, in the judgment of such
7 officer, reasonable grounds exist to believe that such property
8 is being used or is about to be used to aid either directly or
9 indirectly any of the nations at war with the United States
10 and the United Nations.
11
12
SEC. 2. All property of every character seized and pos-
sessed under and by virtue of authority vested by this Act
13 shall be taken, held, and dealt with, for and during the
14 period of the present war, by the Alien Property Custodian
15 in accordance with the best interest of the Government of
16 the United States and in pursuance of the objectives and
17 purposes of the United States and of the United Nations in
18 the present war, and shall not be released to any such gov19 ernment, or subject or citizen thereof, until it is established
20 beyond reasonable doubt that such property or assets so
21 seized and possessed cannot become available to any of the
22 enemies, in the present war, of the United States and the
23 United Nations.
24
SEC. 3. This Act shall apply also in the case of the
3
1 property or assets of any person or persons residing in any
2 of the now Axis-occupied countries of Europe or Asia and
3 who may be giving aid to our enemies.
336
MEMORANDUM FOR THE FILE
November 19, 1943
Meeting in Mr. White's Office
November 19, 1943
2:15 P.M.
Present: Mr. White
Mr. Hsi
Mr. Soong
Mr. Friedman
Subject: China - 1941 Agreement; Exchange Rate
1941 Agreement
Mr. Hsi and Mr. Soong called at their request to discuss the
1941 Agreement. Mr. Hsi gave to Mr. White copy of cable from Dr.
Kung, attached hereto, which indicated that Dr. Kung agreed to the
termination of the 1941 Agreement and suggested that announcement
be made simultaneously regarding termination. Mr. White indicated
that he did not feel that the U. S. Treasury would want to make any
announcement but that if the Chinese Government wished to make any
announcement, it was a matter for their decision.
The Chinese representatives then pointed out that they had been
discussing with the British the questions of the Sino-British
Stabilization Agreement and the future status of the Stabilisation
Board. They indicated to Mr. White that the British had been opposed
to the abolition of the Stabilization Board. Mr. White said that
Treasury knew the British attitude when we had made our decision and
that the question of the Stabilization Agreement between Great
Britain and China was a matter of decision by the two governments
involved. With regard to the Stabilisation Board, it was up to the
Chinese to determine whether or not it should continue in existence.
If the Chinese wished to have an American member on the Board, it
would be given consideration by the Treasury, but it was a matter
to be decided by the Chinese Government.
The Chinese representatives requested that the Treasury not
inform the British of the action being taken with regard to the
U.S.-Chinese Stabilization Agreement until they had had an opportunity
to cable Treasury's reaction to Dr. Kung's cable and also until they
had received reply from Dr. Kung regarding British Treasury's attitude.
The Chinese were assured that the Treasury would not discuss this
matter with the British.
337
-2-
Division of Monetary
Research
The question of the obli ations of the Stabilization Board were
discussed and the point was made that the Stabilization Board had
sterling obligations amounting to at least 5 5 million. Some discussion
was held regarding the possible sources from which the Chinese Government
could obtain the needed sterling. The Chinese representatives agreed
that before this sterling was obtained by the sale of U. S. dollars, the
U. S. Treasury would be informed and the problem discussed with it. The
Chinese representatives agreed that the U. S. Treasury had an interest
in this matter since the U. S. dollars which would be used to purchase
sterling would in effect be coming from American financial assistance to
China. The question was raised as to the status of Chinese-British
negotiations on the b 50 million loan announced nearly two years ago.
The Chinese representatives indicated that discussions were still going
on.
Appreciation was expressed by the Chinese representatives for the
attitude taken by the U. S. Treasury with regard to the 1941 Agreement
and the status of the Stabilization Board.
Exchange Rate
Mr. White informed the Chinese representatives that the Treasury
was thinking about raising with Dr. Kung the question of U. S. governmental expenditures in China. Mr. White pointed out that the U. S.
Government was spending from US$15 to 20 million per month at the official
rate of exchange and that because of the magnitude of the problem the
U. S. Treasury could no longer refrain from taking up with Dr. Kung the
necessity of some steps to offset the artificiality of the exchange rate.
Some discussion was held regarding desirability of reducing the exchange
rate and Mr. White said that in his opinion there was no question about
the desirability of reducing the rate but that it was rather a question
of timing. He indicated to the Chinese representatives that in his
opinion, if the rate was reduced, it should be reduced to a level that
could be maintained for the next five or ten years. He indicated that,
whereas there might be some advantage to China during the immediate postwar years to have an over-valued exchange rate, at the same time, it was
more important to China to achieve monetary stability as a basis for
attracting the foreign capital which China would need. This could not
be accomplished if there was the constant fear of future reduction in
the exchange rate because the exchange rate was too high while any
actual reduction in the postwar period might have serious disturbing
effects on the monetary situation. People expected inflation and other
monetary disturbances during war but not in normal times.
Mr. White indicated that there was increasing public and Congressional interest in the problem of U. S. expenditures in China at the
artificially high rate of exchange and that the Treasury could no longer
refrain from requesting China to take some steps to remedy the situation.
338
-3-
Division of Monetary
Research
Mr. White pointed out that this was in the best interests of China
since it was in China's benefit to keep the good reputation and good
will she enjoyed in the United States. Mr. White went on to say that
many Americans felt that the Treasury was being fooled or even cheated
and that it was the responsibility of the Treasury to take steps to
have the situation changed. Some discussion was held regarding
different techniques that night be used. It was agreed that the
simplest way would be a reduction of the exchange rate or the granting
of a special rate to the U. S. Government. Among the other suggestions
discussed was the possibility of using U. S. dollar currency and the
sale of gold for U. S. Government account. Mr. Hsi suggested the
possibility of a Chinese Government loan to the United States to meet
U. S. government expenditures, which loan would be repaid at a rate of
exchange which would be fixed by China in the future when China felt
that the time was propitious for reducing the exchange rate.
It was agreed by all that these discussions regarding this problem
should be considered informal. The Chinese representatives requested
Mr. White's permission to inform Dr. Kung that they had been discussing
this problem with Mr. White. Mr. White indicated that he would have
no objection to their so informing Dr. Kung. Mr. White indicated to
the Chinese that the Treasury would take up the matter direct with
Dr. Kung.
The Chinese representatives indicated that they appreciated the
Treasury's position in this matter and the reasons why the Treasury
would have to take steps to obtain some solution to the problem of
the unwarrantedly high level U. S. government expenditures resulting
from the exchange rate.
Mr. Soong indicated that according to latest information from
Chungking, prices were not rising and attributed this to the gold
sales which were beginning to take place.
I. S. Friedman
339
COPY
INCOMING TELEGRAM
From
His Excellency Dr. H. H. Kung
For
Mr. Hsi Te-Mou Mr. T. L. Soong
Rec'd November 17, 1943
Your telegram Number 24 received. With reference to
paragraph One:
Since Treasury agree terminate 1941 Agreement please
inform Secretary Morgenthau and Dr. White that we agree and
express to them our appreciation of the Treasury's assistance
and friendly attitude towards welfare of China. State that
action to be taken in view of termination is receiving our careful consideration. Announcement in this regard should be
made simultaneously.
EAK
This telegram must be
paraphrased before being
Friedmant 340
communicated to anyone
other than a Governmental
agency. (sc-00)
Treasury Dept.
(Mr. White)
most
SECRET
temporary
November 20, 1943
people SECURITY
3 p.m.
AMERICAN EMBASSY,
CHUNGKING.
1672
FROM THE SECRETARY OF THE TREASURY FOR ADLER.
You are requested to discuss with Dr. Kung the
following urgent and secret matter:
1. You are instructed hereby to obtain a quotation
from Dr. Kung on the price at which the Chinese Government
would be willing to make CN$400 million per month available
to the United States Government to meet United States
military and civilian governmental expenditures. Expenditures of the United States Government in China are at
present around United States $15 to 20 million per month.
It is to be expected that the equivalent amount of Chinese
national currency expenditures could be met at considerably
less cost in United States dollars at the new price.
2. In your discussions of this price with Dr. Kung,
you should emphasize the fact that the price at which gold
is selling in Free China is about CN$8,000 to 10,000 per
ounce which at the official rate of exchange is the equivalent of United States $400 to 500 per ounce.
341
-23. For this 400 million yuan per month the United
States Treasury would be willing to pay either with
(e) United States dollars, or (b) gold on earmark at the
Federal Reserve Bank at New York, or (c) by having one-half
of the shipments of gold currently being made to China for
sale in China be for the account of the United States
Government.
HULL
(TL)
FD:FL:mco
11/20/43
FE
A.S.
FA
Treasury Depart
Division of Monetary Search
Date Nov. 22, 1943
To:
Secretary Morgenthau
The appended summary is from
material on France sent to us by
Mr. Wood, our man in Lisbon. I think
you will be interested in reading it.
H.D.W.
MR. WHITE
Branch 2058 - Room 214)
342
TREASURY DEPARTMENT
AT
343
INTER OFFICE COMMUNICATION
DATE Nov. 20, 1943
TO
Mr. White - For your information.
FROM
Mr. Fisher Fr.
Subject: Political Conditions in France in Mid-1943
The following points are included in a confidential report on conditions in France in August 1943, and should be considered as representing the opinions of one, albeit apparently well-informed, observer:
(1) The number of draft-dodgers from the labor-draft of the classes
of 1940-42 was much greater than on the occasion of previous
calls, and Vichy administration of the orders was lax. Nevertheless, at least 50 percent of those called have been deported.
(2) It is alleged that a true provisory French government established
in Algiers and recognized as such by the Allies would have been able
to introduce into metropolitan France a state of duality of power
which would have rendered almost ineffective the Nazi system of
persecution and exploitation.
(3) It is possible that a Doriot government may be imposed upon
France at the last moment. This might result in a mass revolt
of public officials against Vichy.
(4) While manifestations of hostility to German rule in France are
more widespread and more vocal, such hostility has not passed
beyond the verbal stage, and nothing like a mass uprising is
to be expected. Active resistance is confined to small groups,
chiefly in the mountainous regions, which engage in sabotage,
espionage, and establishment of munitions depots.
(5) The intrigues in North Africa of certain middle class and re-
actionary French circles, have created in popular French opinion
very serious doubts as to the sincerity of the war aims of the
Allies, particularly those of the Americans. The belief is ex-
pressed that an attempt to impose, either on France or other
liberated areas, regimes allied to Fascism will result in a
swing toward Soviet Russia "who though it will not give them
the democracy they hope for promises them at least social
progress in a workers' republic."
Source: Pouch materials from Mr. Wood
344
NOT TO BE RE-TRANSMITTED
U.S. SECRET
BRITISH MOST SECRET
COPY NO.
12
OPTEL NO. 380
Information received up to 10 A.M. 20th Nov. 1943.
1,
Mediterranean. Some troops reached Kastelorizo on 18th in
small craft from Leros. 175 men have also landed in Turkey.
Small craft were attempting during 19th/20th to withdraw balance
of our garrison from Samos, 27 JU.88 unsuccessfully attacked one
of H.M.S. cruisers and 2 French destroyers off Cyprus 19th.
MILITARY.
2.
Italy. Weather continues to interfere with operations.
Fighting patrols North of River Sangro have cinflicted casualties
on enemy.
Burma. In Arakan Japanese attack on our troops North East of
Maungdaw was repulsed, in Chin Hills Japanese have not advanced in
Haka Area (20 miles South of Falam).
AIR OPERATIONS.
3.
Western Front. 18th/19th. 1553 tons dropped on Berlin and
785 tons on Mannheim.
19th. Escorted Fortresses (B17) dropped 245 tons on
unidentified targets in West Germany and Holland. 48 Escorted
Typhoon Bombers (1 missing) attacked 2 airfields in Northern
France and Military objectives near Gris Nez. A Sunderland
operating West of Bay of Biscay damaged three out of four JU 88.
19th/20th. Aircraft despatched Leverkusen 268 (5 missing and
3 crashed) Seamining 25, Duisberg 6, Rheinhause 2. Leaflets 17.
At Leverkusen weather cloudy, results not estimated. 4 Enemy
aircraft operated over South East England. Damage and casualties
slight.
Greece and Crete. 18th/19th. 12 heavy Bombers (1 missing)
laid Sea Mines at Candia and Khalkis (Greece).
1/
=
1995
345
SECRETARY OFFICE OF TREASURY
NOT 10 BE RE-TRANSALTYES 2
15
22
1943 NOV
U.S. SECRET
or
12
TREASURY DEPARTMENT
BRITISH MOST SECRET
OPTEL NO. 381
Information received up. to 10 A.M. 21st November, 1943.
1. NAVAL
One of H.M. Submarines torpodoed EL tanker off TOULON on 12th. Two of
11.00. Destroyers sank landing craft and probable a lighter in the ADRIATIC
on 19th. A Polish Submarine on patrol in the AEGEAN has sunk three schooners,
one E-boat and one Caique, accounting for about 200 Gernans in these operations.
2. MILITARY Italy 20th. 8th Indian Division captured ARCHI immediately South
Most of PENARO. Active patrolling by Canadians. Cn 5th Army
Front evidence that enemy is strengthening his defences or mining and field
constructions.
3.
AIR OPERATIONS Hostern Front 19th/20th. LEVERRUSEN. 612 tons dropped of
which about two-thirds incendiary. Complete
cloud conditions nd marker bombs ap, eared videly scattered. Fairly heavy A/A
fire out littlo fighter opposition.
20th. Tota, of 88 escorted Typhoons (one missing) in seven formations hombed
military constructions near CAPE GRIS dez. Fighters over the BAY of BISCAY
destroyed one JU 290 (four ongine transport Aircraft used for reconnaisance),
one FY200 and two JU88.
2)th/21st. Enery aircraft operated as follows:SOUTH LONDON 4; SUSSEX Coast 6, ABERDEON 1.
Mosquitoes destroyed two an damaged another. one board ut BATTERSEA
killed 4 per ons.
Yugo slavia 18th. 38 Warbawka attacked the railway centre
at KNIN and SINJ Airfield near SPLIT.
Greece 18th. 50 excorted Fortresses bombed ELUESIS hirfield
destroying 10 grounded aircraft, one Fortress missing
Escorted kitchells dropped 49 tons at LARISSA destroying two aircraft on the
airfield.
1. NAVAI ADD. DUM
5th Secort Group escortin hoae are convey made promising attack
on U-boat off CAPE FINISTERR 19th/20th.