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FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-7194 July 1, 1932. SUBJECT: Reimbursement of Par Remitting Banks for Tax on Remittance Drafts. Dear Sir: There are inclosed a confirmation of a telegram on the above subject which the Board i s sending today to the Governor of each Federal reserve "bank and a summary of the replies received from the vari ous Federal reserve banks as a result of the Board's telegram of June 23, 1932, on this subject. It appears that the Governors of one or two Federal reserve banks expect that the Federal Reserve Board w i l l issue a regulation on this subject; but this i s not believed to be necessary, as the subject of par collections i s adequately covered by the provisions of Regulation J (especially the last paragraphs of Sections II and III) and the fact that the tax i s levied on the drawers and not on the payees of checks and drafts clearly appears from the provisions of Section 751 of the Revenue Act of 1932 and Chapter IV of Regulations 42 of the Bureau of Internal Revenue. It i s not believed that any public announcement on this sub- X-7194 -2— ject i s desirable; but i t i s suggested that the matter "be taken up individually with each bank which attempts to deduct the amount of the tax from i t s remittance drafts or which requests the Federal reserve bank to reimburse i t for the amount of the tax and that the Board's position on the subject be explained to i t . If any bank i n s i s t s on deducting the amount of the tax from i t s remittance drafts after the Federal reserve bank has exhausted every reasonable means of persuading i t to desist from doing so, the matter should be reported to the Federal Reserve Board, i f the bank i s a member bank, or the bank should be removed from the par l i s t , i f i t i s a nonmember bank. In the light of the experience which various Federal reserve banks have had in recent years in connection with the removal of nonmember banks from the par l i s t , i t i s not believed that the policy outlined i n the Board's telegram w i l l result in any material impairment of the par collection system. Very truly yours, Chester Morrill, Secretary. Inclosures. TO GOVERNORS OF ALL F. R. BANKS. 30 X-7194-a COPY July 1, 1932 YOUNG BOSTON HARRISON NEW YORK NORRIS PHILADELPHIA EANCHER CLEVELAND SEAY RICHMOND BLACK ATLANTA McDOUGAL CHICAGO MARTIN ST. LOUIS GEERY MINNEAPOLIS HAMILTON KANSAS CITY McKINNEY DALLAS CALKINS SAN ERANCISCO Replies to Board's wire June 23 re absorbing tax on remittance drafts for cash l e t t e r s discloses that seven reserve banks oppose the absorption of such taxes, three favor i t , and the positions of two are doubtful. Board i s of opinion that, as matter of System policy, reserve banks should not reimburse remitting banks for tax on remittance drafts. Tax levied on drawers of drafts and should not be absorbed by Reserve Banks for same reasons that they should not absorb any other taxes levied on member or nonmember banks. In view of reasonableness of this position and fact that amount involved for each remitting bank i s very small, believe no great d i f f i c u l t i e s should be encountered and that very few, i f any, withdrawals from par l i s t should result i f situation i s explained properly to -banks raising the question. Experience of one reserve bank of which we have already been advised supports this b e l i e f . Law and regulations require member banks to remit at par for checks forwarded to them for collection by reserve banks and latter are forbidden to receive for collection checks on nonmember banks which cannot be collected at par. Deduction of tax from remittance drafts i s not par remittance. Letter follows. WW/ go MORRILL 31 X-7194-b SUMMARY OF VIEWS OF FEDERAL RESERVE BANKS EE ABSORPTION OF TAX ON REMITTANCE DRAFTS FOB CASH LETTERS. The following i s a summary of the replies of the various Federal reserve banks to the Board1 s telegram of June 23, 1932, inquiring whether, in view of the unifoim practice of the Federal reserve "banks absorbing certain costs in connection with the par collection of checks, such as those involved in shipments of cash by member banks in settlement of cash l e t t e r s , the Federal reserve banks, as a matter of system policy, would now be j u s t i f i e d in reimbursing member and nonmember banks for the 2^ tax on drafts sent in remittance for checks and drafts forwarded to them for collection or payment by the Federal reserve banks under Regulation J , BOSTON Ho NEW YORK Ho PHILADELPHIA Ho. Would be i l l o g i c a l and would establish bad precedent. In view of p o s s i b i l i t y of withdrawals from par l i s t , suggest that no announcement of policy be made "until a f t e r regulations have been issued and subject clarified", CLEVELAND Yes, Strongly recommends adoption of uniform system policy of absorbing tax on a l l remittance drafts. Refusal to do so would encourage removal of nonmember banks from par l i s t , thus impairing e f f i c i e n c y of check collection system. Many member banks have requested Federal re- serve bank to accept their advice of credit as payment * X-7194-T3 & for cash l e t t e r s in order to escape tax and t h i s would "be a step backward "because of tendency to change agency relationship which a l l Federal reserve "banks have t r i e d to strengthen and preserve. If reserve "banks absorb tax on remittance d r a f t s , a l l incentive to adopt subterfuges to avoid the tax w i l l be removed and e f f i c i e n c y of check c o l l e c t i o n system preserved. RICHMOND, No. Do not believe i t good policy to absorb any kind of tax and i t i s not correct in p r i n c i p l e . . ATLANTA. Doubtful. Amount involved in absorbing tax by reserve bank of Atlanta would be small - only about $3750 per year. As matter of policy would be e n t i r e l y w i l l i n g to absorb t h i s cost. Doubt remains as to whether as matter of policy we should pay t h i s tax for member and nonmember banks* since under federal He serve Act we are exempt from Federal taxes and i t might be bad policy in the face of such exemption f o r us to voluntarily absorb any taxes. My personal opinion in view of t h i s doubt i s that tax probably should not be absorbed. However i f system policy i s adopted of absorbing such taxes t h i s bank w i l l readily acquiesce. CHICAGO. No. ST. LOUIS. Yes, i f matter develops so as to jeopardize par l i s t . Drawer of checks should pay tax on remittance d r a f t s . Re- quests so f a r in Eighth D i s t r i c t not s u f f i c i e n t to j u s t i f y serious consideration from standpoint of e f f e c t on par list. Uniform action throughout System e s s e n t i a l . 4 m 83 * MINNEAPOLIS. Yes. X-7194~b $ » Inclined to think i t would make better f e e l i n g among banks, especially nonmembers, i f we were to absorb the tax. If we do not some nonmember banks w i l l withdraw from par l i s t . Already assume shipping charges on cur- rency and wire costs on transfers and 2$ additional would be small item. KANSAS CITY. No. If reimbursement were made to member banks i t would serve to diminish Federal revenue by reducing amount of franchise tax paid by reserve banks. DALLAS. No, Congress has attempted in the new tax b i l l to make an equitable distribution of the tax burden, basing i t upon business a c t i v i t y and other considerations and has s p e c i f i cally provided that the maker or drawer of a check or draft should pay the tax thereon and i t i s our thought we should no more absorb that item than we should a portion of a member banks other taxes. If we should reimburse the banks the expense would be absorbed out of funds that might otherwise be paid to treasury as franchise tax at end of year and thus the very purpose of the Revenue Act to that extent would be defeated. Aside from t h i s , we are render- ing very substantial amount of free service to member banks and we do not believe that in a l l fairness we are warranted at t h i s time in increasing the amount of expense absorbed by u s . We have not had and do not anticipate having any 34 - 4 •» X-7194-b (Dallas* continued) serious d i f f i c u l t y in this connection. A few "banks de- ducted the tax from their f i r s t remittances "but, upon our advising them with reference to the law, they readily agreed with oui> position and have not repeated the deduction. This i s true of both member and nonmember "banks. SAtT FRANCISCO. Position doubtful. Telegram of June 20 said Federal Reserve Bank of San Francisco would not absorb tax, but telegram of June 33 says, He serve bank i s now in receipt of drafts issued by member fend non-4nember banks in settlement cash l e t t e r s sent to them from which remitting bank has deducted 2 cent tax on covering draft, It would seem that absorption of this charge by Reserve Bank would ultimately come out of public treasury through lessening of p r o f i t s which may herea f t e r inure to government. Any ruling by commissioner In- ternal Revenue to e f f e c t that deduction of tax by remitting bank would n u l l i f y law and therefore prohibited would cause banks having accounts with reserve bank to discontinue use settlement drafts and adopt practice of giving credit advices. From standpoint check collections, use of credit ad- vices i s extremely dangerous; because i t would set up debtor and creditor relationship which System has taken great pains to avoid. Counsel of opinion that Commissioner Internal Revenue may rule that drafts issued to Reserve Banks in settlement cash l e t t e r s not subject to tax. If nonmember X-7194-b "banks i n s i s t upon deducting tax, reserve banks have no alternative but to pay or open wide whole par collection question. WW/sad 6 29 32
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