View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


Washington, D.C.

April 29, 19U2

Chairman Marriner S. Eccles
Board of Governors of tho
Federal Reserve System
Washington, D. C.
Dear Chairman:
A conversation with the Norwegian head of several
shipping companies drew my attention again to a familiar and
long established tax loophole which needs to he closed,
particularly in view of the high domestic corporate profit taxes
which are in prospect. The ships are under Panamanian registry
and the companies are Panama corporations. The earnings of these
corporations - fabulously high at present - are not subject to
United States taxation, and the Republic of Panama leaves them untaxed, I am told. The companies in question are closely held, and
no more is distributed to stockholders than they require for current
living expenses. The ships operate from United States ports and are
subject to Maritime Commission control, while the companies receive
various subsidies and benefits from the United States Government.
It should be possible to bring their income, largely derived from
sources within the United States, under our tax structure.
I don f t know whether anything can be done with the suggestion, but it seems to me that these profits ought not to be overlooked if the problem of war profits is to be comprehensively dealt
with. With warmest regards, I am

Sincerely yours,


Emile Despres


Hay 6, 19l£

Mr. Bnile Dospres,
Office of the
Coordinator of Inforaation,
Washington, D.
Dear Smiles
I havo just returned from a brief visit
to the West and, therefore, I am somewhat delinquent
in replying to your thoughtful letter of April 29
in regard to the conspicuous tax loophole available
to Panama corporations operating ships under that
country's registry. Ity understanding is that the
Maritime Consols s ion has now ordered these ships
under American registry*
X am passing your letter on to Randolph
Paul who is, I suppose, the best loophole expert
in the country.
I hope you are finding your work and
prospects agreeable and to your liking, and I want
to take this opportunity to reciprocate your kind

Sincerely yours.

H. S* Socles,


Hay 6, 19142

Mr* Randolph
Assistant to the
Secretary of the Treasury,
Treasury Department,
Washington, D. C.
Dear Randolph:
The attached from Emile Despres, who
was on our economic staff before he was drafted
by Bill Donovan to head up the economic section
in the Office of Coordinator of Information,
speaks for itself*
This particular loophole had not occurred to me, though it may have to you# Anyway, I thought you ought to see this comunicaiion.

Sincerely yours »

I :b





MAY 2 8 1942

Dear Marriner:
Your letter of May 6, 1942f enclosing a letter dated
April 29, received by you from Mr. Emile Despres of the
Office of Coordinator of Information, has been carefully
The question raised is whether shipping companies
which are subject to the control of the Maritime Commission,
and which receive subsidies and benefits from the United
States Government, can escape Federal taxation by incorporating under the laws of a foreign country and by operating
ships under a foreign flag.
The Internal Hevenue Code and the several Revenue
Acts since the Revenue Act of 1921 have contained a paragraph exempting from federal taxation the income of a
foreign corporation n which consists exclusively of earnings
derived from the operation of a ship or ships documented
under the laws of a foreign country which grants an
equivalent exemption to citizens of the United States and
to corporations organized in the United States*11 The Report
of the Finance Committee of the Senate on the Revenue Bill
of 1921 states the purpose of this provision to be to
encourage the international adoption of uniform tax laws
affecting shipping companies in order to prevent double
taxation. This legislative device has been effective in
eliminating the complicated problem of allocating income
among the several countries between which a corporation or
an individual is engaged in shipping. Foreign corporations
are not taxed by the United States and domestic corporations are not taxed by foreign countries with which trade
is maintained, provided the terms of section 231 (d) of the
Internal Revenue Code are met.
Mr* Despres suggests that corporations organized under
the laws of Panama, operating ships in the Panamanian
registry, receive subsidies and benefits from the United
States Government, yet pay no Federal taxes. I am advised

by employees of the Maritime Commission that it is impossible
under existing law to transfer to a foreign registry vessels
with respect to which the benefit of a subsidy has been
received, and that no direct subsidy or benefit can be paid
to foreign shipping concerns.
It is possible, of course, for a domestic corporation
subsidised by the Federal Government to set up a foreign
subsidiary, the income from which wo"uld not be subject to
Federal taxation until distributed as dividends to the
domestic corporation or United States citizen. In some cases
this may result in an unwarranted tax benefit, but I doubt
the advisability at this time, when shipping facilities are
so essential, of turning again to a program which encourages
international double taxation of income derived from shipping.
Thanks, nevertheless, for bringing this matter to our
Sincerely yours

Honorable Marriner S. Eccles,
Chairman, Board of Governors of
the Federal Reserve System,
Washington, D. C.