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March 11, 1956.


X m Exempt t
a. Income devoted to "reasonable* retirement of debt outstanding om
•arch 1, 1955. "Reasonable* Is to be interpreted as the
animal rate of retirement provided in any bond indenture or
other loan contract outstanding. In the absence of such
contract "reasonable* should be interpreted as a rate of
annual peynents sufficient to retire outstanding debt at
b. Income devoted to retirement of preferred stock outstanding on
larch 1, 1955, provided a corporation has contracted to retire
such stock or to set up a sinking fund for this purpose*
c. Income devoted to payment of delinquent taxes*
Unless exemption,, such as these are allowed, injustice will be done to
borrower* who either entered into contractual obligations to retire debt or
expected at the tine of borrowing to retire debt out of current earnings.
For the future It would be understood that debt retirements would be handled
either by (a) using depreciation reserves, or (b) issuing new stock. For
the nost part the exemption would benefit corporations in straightened circumstances, such as small corporations heavily in debt to banks, real estate
corporations#and railroads and public utilities, lost of the vorf large and
profitable manufacturing corporations are out of debt. The agitation for
exemption of 'reasonable* reserves might be met by granting exemptions for
the purposes mentioned above and the opposition time diminished.

2X — Exempt undistributed sarniags of tanks so long as capital and
surplus together are less then 2O% of deposits* Xt might be woll
to require also that present capital plus future subscribed capital
should bo at least equal to surplus, in or&mr that advantage aey be
taken of this exemption.
The larger the capital and surplus of beaks, the less danger
there Is of loss to depositors and to the Federal Deposit Insurance

Interest rates are low and may remain low for a consider-

able period. Banks* earnings, therefore, are also lov and m&ny banks
experience difficulty in raising new capital, although the rapid
increase in deposits makes this desirable* In these circumstances
it may prore to the best interests of the country to encourage banks
to strengthen the proprietors* Interest by reinvesting earnings*
H I « for the purposes of the proposed tax, undistributed income should
be income undistributed by march let of the succeeding year*
Corporations do not know what their earnings have been until after
the end of the yet r. Adequate time should be allowed for the declaration
of a final dividend after the result of the year*s operations Is known.