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JUN 1 ~ 1972.

TREASURY DEPAR1MENT

TREASURY DEPARTMENT
WASHINGTON. D.C.

January 22, 1969
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing January 30, 1969,
in the amount of
$ 2,704,032,000,
as follows:
91-day bills (to maturity date) to be issued January 30, 1969,
in the amount of $ 1,600,000,000,
or thereabouts, representing an
additional amount of bills dated October 31, 1968,
and to
mature
May 1,1969,
originally issued in the amount of
$ 1,101,238,000,
the additi.onal and original bills to be
freely interchangeable.
182-day bills (to maturity date) to be issued January 30, 1969,
in the amount of $1,100,000,000, or thereabouts, representing an
additional amount of bills dated July 31, 1968, and to mature
July 31, 1969, originally issued in the amount of $1,000,963,000
(an additional $501,533,000 was issued October 31, 1968), the
additional and original bills to be freely interchangeable.
The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time,
Monday, January 27, 1969.
Tenders will not be
L"eceived at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
K-l

- 2 -

responsible and recognized dealers in investlnent securities. Tenders
from others must be acccmpanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accerted bids. Those submitting tenders will be advised
of the acceptance or rej ection thereof. The Secre tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on January 30, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 30, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
prescribe the terms of the Treasul.-Y billf and govern the
'onditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 050~ranch.

nG.::~_ce

TREASURY DEPARTMENT
!

WASHINGTON. D.C.
January 22, 1969

FOR IMMEDIATE RELEASE
TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by
for two series of Treasury bills
$1,500,000,000, or thereabouts,
Treasury bills maturing January
$1,500,465,000,
as follows:

this public notice, invites tenders
to the aggregate amount of
for cash and in exchange for
31, 1969,
in the amount of

27~day bills (to maturity date) to be issued January 31, 1969,
in the amount of $ 500,000,000,
or thereabouts, representing an
additional amount of bills dated October 31, 1968,
and to
mature October 31, 1969,
originally issued in the amount of
$1,002,199,000,
the additional and original bills to be
freely interchangeable.

36S-day bills, for $ 1,000,000,000,
dated January 31,1969,
and to mature

or thereabouts, to be
January 31,1970.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Tuesday, January 28, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec'imals, e. g., 99.925. Fractions may not
be used o
(Notwithstanding the fact that the one-year bills will run
for 365 days, the discount rate will be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed
forms and forwarded in the special envelopes which will be supplied
by Federal Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to

K-2

- 2 s~bmit tenders except for theic own account. Tenders will be received
wlthout.deposit from incorporated banks and trust companies and from
responslble and recognlzed dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.

Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at th2 Federal Reserve Bank on January 31, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing January 31, 19690
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
posseSSions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
.need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
~
~

Treasury Departmen~ Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

TREASURY DEPARTMENT
WASHINGTON, D.C.
FOR RELEASE 6: 30 P.M.,
,Monday, January 27, 1969.
RESULTS OF TREASURY I S WUKLY BILL OFFERIBG
'lhe Treasury Department announced that tbe teDders tor two series ot Treasury
bills, one series to be an additional issue ot the b1~ls dated October 31, 1968, and
the other series to be an Edditional issue ot the b11~s dated July 31, 1968, which
were offered on January 22, 1969, were opened at tbe Federal Reserve Banks today.
~Dders were invited tor $1,600,000,000, or thereabouts, ot 91-day bills and tor
$1,100,000,000, or thereabouts, ot 182-day b11~s. ~ de~ils ot the two series
are as to110ws:
RANGE OF ACCEPTED
COOETITIVE BIDS:

High
Low
Average

91-day Treasury bills
maturing Mallo! 1969
Approx. Equiv.
Price
Jumual ltate
9ts.448
s.i4lOJ
98.437
6.183~
98.441
S.167~
Y

182-4&y

~asury

118 turi!'!l

Price
96.84/9
96.835
96.838

bills
Ju11 31 1 1969
,
Approx. Equiv.
Annual Rate

6.Z:33J;

6.26~
6.255~

17~ ot the amount of 91-day bills bid tor at ~ low price was accepted
65~ of the amount ~: 18:-~ay bills bid tor at the low price was accepted

'roTAL TENDERS APPLIED FOR AND ACCEPlED BY FEDEML RESERVE

District
Boston
New York
Philadelphia
Cleveland
Ricbm~nd

Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
~llas

San Francisco
'roTALS

Al!l2lied For
Acc~~ted
$ 32)1()5,OOO '7,706,000
1,087,876,000
1,934,8S1,OClO
18,773,000
34,569,000
29,983,000
32,1::S4,000
38,176,000
45,876,000
49,999,000
32,465,000
175,280,000
235,024,000
50,025,000
59,SY5,000
13,492,000
25 .. 242,000
26,590,000
28,909,000
16,956,000
27,956,000
93 1 2..71 000
141; 777z.000
$2,648,027,000

$1,600,569,000

DI~TRICTS:

Applied For
7,330,000
1,912,539,000
18,595,000
"7,358,000

•

Zl~055,OOO

30,251,000
1~,029,000

38,802,000
18,314,000
27,199,000
22,542,000
160z 060 z000

!I $2,"'9,074,000

i} Includes $331,005,; JO n:)llcompetitive tenders accepted at

Acce:2ted
•
6,300,000
895,519,000
8,273,000
22,828,000
7,055,000
13,416,000
37,835,000
30,666,000
5,374,000
17,716,000
11,542,000
45 z 780 z000
$1,102,304,000 ~/

the average priCE: of 98.441
Includes $180,994, ,laO noncompetitive tenders eccepted at the average price ot 96.838
lj ib.ese rates are on <, t':..inl-; c,iscount basis. '!'he equ:1.velent coopon issue yields are
6.35~ tor the 91-ch.J 1liiJ.s, and 6.55~ tor "J;be 182-day bills.

TREASURY DEPARTMENT
WASHINGTON, D.C.

Januar-y 28, 1969

TREASURY ANNOUNCES REMOVAL OF COUNTERVAILINC
DUTY ON IMPORTS OF FRENCH ~lliRCRANDISE
The Tr-easur-y Depar-t~ent announced today that mer-chandise
impor-ted fr-om Fr-ance and expor-ted fr-om that countr-y on and
aftt.:,r Fehruary 1, 1969, will no longer- be subject to
eounter-vailing dllt~,.
This action was taken after- the r-eceipt of official
advice fr-om th2 French Gover-nment that it is discontinuing,
as of Januar-v 31, 1969, its subsidy pr-ogr-ams on Fr-ench
exports under- the prr)visions of Fr-ench Decr-ee 68-581, as
arn~nd<~d •
Since Sept2mber 14, 1968, all dutiable Fr-encn pr-oduets
henefitin~ fro~ ehe or-iginal Fr-ench subsidy pr-ogr-am wer-e
subjected to a cour'ter-vailinE; duty of 2-1/2 per-cent underthe pr-ovisiollS cf 'lr-easur-y Decision 68-192. This decision
W3S published in the Federal Register- of August 14, 1968.
Subsequently, following a r-eduction in the Fr-ench
subsidy by fifey per-cent, the Tr-easury Depar-tment published
in the F2der-al I<egister- of November 1 a notice that tIle
counter-vailing duty on dutiable Fr-ench impor-ts was r-educed
fr-om 2-1/2 per-cent to 1-1/4 per-cent of the fcoob. pr-ice of
the mer-chandise
This action was taken under- the pr-ovisions
of Tr-easury Decision 68-270.
Notice of the elimination of the counter-vailing duty
will be pub1isLtd in the Feder-al Register of Wednesday,
Januar-y 29, 1969.

000

K-;

TREASURY DEPARTMENT
WASHINGTON. D.C.

?OR RELEASE 6: 30 P.M.,
~esday, January 28, 1969.

RESULTS OF TREASURY I S MONTHLY BILL OFFERING

'!he Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated October 31, 1968, and the
~tber series to be dated January 31, 1969, which were offered on January 22, 1969, were
opened at the Federal Reserve Banks today. Tenders were invited for $500,000,000,
or thereabouts, of 213-day bills and for $1,000,000,000, or thereabouts, of 365-day
bills. Tbe details of the two series are as follows:
365-day Treasury bills
maturing.January 31, 1970
Approx. Equiv.
Price
Annual Rate
6.10~
93.815
6.170;,
93.144
93.171
6.144~

RANGE OF ACCEPTED
213-day Treasury bills
COMPETITIVE BIDS :_..:ma:::;..::t~ur=-=ing=a.....::0~c:..;t;.:.ob;:;e:;;.:r:.....::3~1'..L'....::..19:::.:6~9=--_

High
Low
Average
~
4~
8~

Price
95.319
95.286
95.302

Approx. Equiv .
Annual Rate
6.1731)
6.216~
6.195~

Excepting one tender of $35,000
of the amount of 273-day bills bid for at the low price was accepted
of the amount of 365-day bills bid for at the low price was accepted

TOTAL TENDERS APPLIED FOR AND ACCEP'lED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
'IDTAIS

Acce:;2ted
AEElied For
1,842,000
$ 21,842,000 $
810,911,000
1,450,307,000
3,304,000
13,304,000
7,274,000
22,214,000
2,522,000
2,522,000
7,454,000
15,720,000
63,442,000
134,992,000
20,393,000
23,993,000
4,818,000
11,038,000
12,900,000
13,955,000
2,423,000
12,423,000
62,928,000
117 , 208 LOOO

Acce:;2ted
For
878,000
818,000 $
409,963,000
1,044,063,000
1,594,000
6,594,000
3,509,000
4,309,OJO
787,000
181,000
3,354,000
11,954,000
40,526,000
114)036,000
4,9(13,000
14,009,000
675,000
10,675,000
1,416,000
1,416,000
1,849,000
12,349,000
30,455,000
88,855,000

~ied

$1,309,985,000

~I Includes $23,111,000

500,055,000

$1,839,578,000

$1,000,211,000 ~/

noncompetitive tenders accepted at the average price of 95.302
Includes $65,343,000 noncompetitive tenders accepted at the average price of 93.111
1/ These rates are on a bank discount basis. Tbe equivalent coupon issue yields are
- 6.52 ~ for the 213-day bills, and 6.5i~ for the 365-day bills.

£I

TREASURY DEPARTMENT

WASHINGTON. D.C.

FOR IMMEDIATE RELEASE

January 29, 1969

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing February 6, 1969,
in the amount of
$2,703,621,000,
as follows:
91·-day bills (to maturity date) to be issued February 6, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated November 7, 1968,
and to
mature
May 8, 1969,
originally issued in the amount of
$1,101,010,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
dated February 6, 1969,
and to mature

or thereabouts, to be
A~gust 7, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100.000, $500,000 and $1,000, 000 :~,
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, February 3, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from

K-5

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on February 6, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 6, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. rnder Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0oO~ranch.

TREt\SURY

DEPAR1~MENI'

\NASHINGTON, D.C.
January 29, 1969
TREASURY

Al~\JJUl'JC2S

$1'1:.5 EILLIOll FZBRUA"[{Y

R.2i"lil~Ii:IG

The Treasury today announced that it is offerinG holders of the notes alid
bonds mat'.1rinr; February 15, 1969, the ri[Sht to exchange their holdir,gs for Q, 15month note or a 7 -year note.

The securities eligible for exch2.nge are:
$10,738 million of 5-5/S~:' TreasUl'Y Notes of Series A-19S9, 2nd
$3,728 million of t",~ Treasury Bon::ls of 19C9, (date:l Augnst 15, 1962).
The notes being offerec3_ are:
7/8[1i:: Trcasl.::CY ITotes of 3'2ries C-1970, dated February 15, 1969,
6 -0..1
Hay 15, 1970, at 99.95 to yield about 6 .42~, and

6-1/4~S T:ceasury Hotes ·Jf Serie.:; A-1976, dated February 15, 1969, d'w
February 15, 1976, a1; 99.7:5 to yield about 6. 2~~.

value

Subscribers ,'lill recei. ..re 2. cash pa:v·rnent for the difference bct~'leen th~ par
the maturi~g S8C1Jyi tics ar:d the offerir.g price 0:' the r,e"T securities.

The public holds about $5.4 billion of tr.e securities eligible for exchange,
and about $9.1 billion is held by Federal Reserve and Govermient accoQ.'1ts.
Cash subscript5_ons for the ne'''1 notes '''-'ill not be received.
The books '.-7::'11 be open for three clays only, on February 3 through ?e":Jruc:~ry 5,
for the receipt of subscription.s. Subscriptions addressed to '3. :Federal :E{e:::;erve 3&:;,~
or Branc!-'l, or to tnc Office of the Tre.:::.surer of the United states, ar.d placcc1 in
the mail before miclnj,ghtFebru2..ry5, 'ITill be considered as tincly. The 'J3.':r-,ent ,mel
delivery d8.te fay the :r:otes 'dill be Februar:r 17, 1969. The notes ,'Jill be ~n9.de
available in reGistered 3.S ~/lell as bearer for~-,. All subscribers requestiLg registered notes ".:il1 bc required to furnish a:Qpropriate iden tifyinG nur;~";)crs 8.::3 require'.
on tax retu:tns L~:1C~ other docu""ents suo"titted to the Internal Re-reDue Service.
Coupons dated Feoru8.ry 15, 1969, on the natuYing securities should be £e:'ac"c;ei
and cashed ~hcn due. The February 15, 1969, interest due 0:1 registered sccuYities
will be paid by issue of interest checks in reGular course to holders of recori on
January 15, 19;)9, the elate tt.e tr2.YlsfE:r "oo::::-:s closed.
6 -VI
7 /.
r/
•
..
'I
-c
.. 1''''
..
-r
·l,-.,l'<t.
.
.
Oi~~ v::.e
C -,J notes ~·7;,..12.. 812 ~:-,,~"::~lc C):l i: .. (lJ'" 1....) 2.::--~(,:.. _;OVE-:~'\'~oer LJ,
..:'.:c~,
I n:..erest.
and f·;ay 15, 1970. Interest on the 6-1(~:~ rlCltes ,'Jill be p2.Ydble on AU:];'J.::;t IS, 1969,
and t!2erc.:::.fte:r: 0:1 Febru?.ry 15 9.::11 A',:.;'J.S"'c 15 until r1'-2.turity.
J

Estimated Ownership of the February 15, 1968 Maturities
as of December 31, 1968
(In millions of dollars)
5-5/8%
Note

4%
Bond

Total

Commercial banks . . . . _ . . . . . . . . . . . . . . . . .

1,534

1,130

2,664

Mutual savings banks . . . . . . . . . . . . . . . . . .

Insurance companies:
L i f e ..••..•.•••..•..••....••••••••••
Fire, casualty and marine . . . . . . . . . . .

4
44

6
107

Total, insurance companies . . . . . . . .

113

Savings and loan associations . . . . . . . . .

200

278

Corporations . . . . . . . . . . . . . . . . . . . . . . . . . .

107

198

State and local governments . . . . . . . . . . .

336

199

535

All other private investors . . . . . . . . . . .

847

773

1,620

Total, privately held . . . . . . . . . . . . .

3,145

2,343

5,488

Federal Reserve Banks and
Government Accounts . . . . . . . . . . . . . . . . .

7,593

1,385

8,978

Total outstanding . . . . . . . . . . . . . . . . . . . . .

10,738

3,728

14,466

Office of the Secretary of the Treasury
Office of Debt Analysis

January 29, 1969

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

February 3, 1969
FOR IMMEDIATE RELEASE
DR. HENRY WALLICH IS NAMED SENIOR CONSULTANT
TO SECRETARY OF THE TREASURY DAVID M. KENNEDY
Secretary of the Treasury David M. Kennedy today announced
appointment of Dr. Henry C. Wallich of New Haven, Connecticut,
as his Senior Consultant, a part-time advisory post chiefly
involving international monetary matters.
A professor of economics at Yale University since 1951,
Dr. Wallich took leave from that post in 1958-59 to serve as
Assistant to Secretary of the Treasury Robert B. Anderson and
as a member of the Council of Economic Advisers under
President Eisenhower in 1959-60. In recent years, he acted as
a consultant to Secretary of the Treasury Henry H. Fowler.
From 1941 to 1951, Dr. Wallich was an economist for the
Federal Reserve Bank of New York, the last five years as Chief
of the Foreign Research Division. On leave from that position
in 1948 he was Chief of the Intra-European Payments Branch of
the Economic Cooperation Administration. His early career,
prior to taking a Ph.D. degree from Harvard University, was as
a securities analyst for the Chemical Bank and Trust Company
and the brokerage firm of Hackney, Hopkinson and Sutphen, both
of New York City. Previously, he had been in the commodities
business in South America.
At Yale, Dr. Wallich teaches Money and Banking as well as
Corporate Finance. His principal current research interest is
a comparative study of national monetary systems. His most
recent book is "The Cost of Freedom," an examination of modern
~apitalism.

Dr. Wallich is the author of numerous contributions to
technical journals as well as to popular magazin~and newspapers.
He has testified frequently on international monetary matters
before Congressional committees.
K- 6

000

. (

TREASURY DEPARTMENT

... v

WASHINGTON. D.C.
FOR RELEASE 6:30 P.M.,
Monday, February 3, 1969.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated November 7, 1968,
and the other series to be dated February 6, 1969, which were offered on January 29,
1969, were opened at the Federal Reserve Banks today. Tenders were inn ted for
$1,600,000,000, or thereabouts, of 91-day bills and for $1,100,000,000, or thereabouts,
of 182-day bills. The details of the two series are as follows:
RANGE OF ACCEPTED

9l-day Treasury bills

COMPETITIVE BIDS: _ _~ma~t..;;;ur;;;..;i;;;;.;;ng~..:.;Ma:;.;;y&.....:8:;.;,~1;.:;;96~9__

High
Low

Average
23~
5~

Price
98.429
98.417
98.420

Approx. Equiv •
Annual Rate
6.2l5J
6.262~
6.251~

182-day Treasury bills
maturing August 7, 1969
Approx. Equiv •
Annual P.:..te
Price

96.800
96.781
96.785

6.33~
6.367~

6.35~

of the amount of 91-day bills bid for at the low price was accepted
of the amount of 182-day bills bid for at the low price was accepted

IDTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
AEElied For
Boston
$ 27,870,000
2,097,084,000
New York
Philadelphia
36,595,000
Cleveland
41,519,000
Richmond
28,066,000
Atlanta
35,780,000
Chicago
188,091,000
St. Louis
53,835,000
Minneapolis
31,863,000
Kansas City
33,736,000
Dallas
31,579,000
191,453,000
San Francisco

AcceEted
$ 17,770,000
1,145,344,000
21,113,000
41,238,000
18,066,000
26,114,000
128,676,000
42,004,000
17,489,000
31,236,000
21,194,000
90,241,000

AEl!lied For
5,184,000
$
1,661,4:49,000
16,894,000
41,4.87,000
18,354,000
33,991,000
174,025,000
39,314,000
25,688,000
17,778,000
23,346,000
131,161,000

$2,797,471,000

$1,600,485,000

!I $2,189,171,000

IDTALS

AcceEted
$ 5,609,000
799,771,000
6,894,000
29,937,000
6,254,000
2(,466,000
114,425,000
35,914,000
9,188,000
14,759,000
13,346,000
43,461,000
$1,100,024,000 ~

Includes $324,728,000 noncompetitive tenders accepted at the avera~ price of 98.420
~ Includes $178,222, 000 noncompetitive tenders accepted at the average price of 96.785
Lj lJhese rates are on a bank discount basis. 'nle equivalent coupon issue yields are
6.44~ for the 91-day bills, and 6.66~ for the 182-day bills.

TREASURY DEPARTMENT
WASHINGTON. D.C.

February 5, 1969
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasul:'Y Department, by
fol:' two series of Tl:'easury bills
~,700,OOO,OOO,
01:' thel:'eabouts,
Tl:'easul:'y bills maturing February
$ 2,704,449,000,
as follows:

this public notice, invites tendel:'s
to the aggregate amount of
for cash and in exchange fol:'
13,1969,
in the amount of

91-day bills (to matul:'ity date) to be issued Febl:'uary 13,1969
in the amount of $ 1,600,000,000, or thereabouts, I:'epresenting an
additional amount of bills dated Novembel:' 14,1968,
and to
matul:'e
May 15, 1969,
0l:'igina11y issued in the amount of
$1,102,720,000,
the additional and original bills to be
fl:'ee1y interchangeable.
182-day bills, for $ 1,100,000,000,
or thel:'eabouts, to be
dated Febl:'ual:'y 13, 1969,
and to matul:'e August 14, 1969.
The bills of both sel:'ies will be issued on a discount basis undel:'
competitive and noncompetive bidding as hel:'einafter pl:'ovided, and at
matul:'ity their face amount will be payable without intel:'est. They
will be issued in bearel:' form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastel:'n Standard
time,
Monday, February 10, 1969.
Tenders will not be
I:'eceived at the Treasury Department, Washington. Each tendel:' must
be fol:' an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec"ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed fOl:'ms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application thel:'efor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and fl:'om

K-7

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce·
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on February 13, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 13, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences bety]een the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0QaBranch.

TREASURY DEPARTMENT
WASHINGTON, D.C.

FOR RELEASE AT 4:30 P.M.
WEDNESDAY) FEBRUARY 5,1969

February 5, 1969

EDWIN S. COHEN TO BE NOMINATED AS
ASSISTANT SECRETARY FOR TAX POLICY
Secretary of the Treasury David Mo Kennedy announced today the
selection of Edwin S. Cohen to be nominated as Assistant Secretary
for Tax Policy.
Mro Cohen, 54, has been a professor of law at the University
of Virginia, Charlottesville, since 1965. He is a nationally
known authority on tax law, and served as a member of president
Nixon's task force on tax reform.
Mr. Cohen has been active in the work of the taxation section
of the American Bar Association, and has been a special consultant
on tax matters to the American Law Institute o In 1956-58, he was
a member and counsel of the advisory group on corporate taxes of
the Ways and Means COI.:mittee, House of Representatives. In 1966-67,
he was consultant to the Virginia Income Tax Study Commission, and
drafted its report conforming the state's income tax law to the
Federal lawo Mr. Cohen was a member in 1967-68 of the advisory
group to the Commissioner of Internal Revenee
0

A native of Richmond, Virginia, Mr. Cohen received a

B.Ao degree from the University of Richmond in 1933 and a LL.B.
He was first in
degree from the University of Virginia in 1936
class at both universities.
0

The new Assistant Secretary began his law career with the
firm of Sullivan & Cromwell in New York City, and later became
a partner in the firm of Root, Barrett, Cohen, Knapp & Smith,
also of New York City. He has been a counsel to Barrett, Knapp,
Smith & Schapiro while teaching at the University of Virginia.
Mr. Cohen was a visiting lecturer in law at the university
in 1963-64, became a professor of law in 1965, and last year was
named Joseph M. Hartfield Professor of Law.
( OVER)

K-8

- 2 He is married to the former Helen Herz of New York City.
They have three children -- Edwin Carlin, 26, an attorney in
New York City; Roger 21, a student at Salem College, Salem,
West Virginia, and Susan Wendy, 17, a student at Albemarle High
School, Charlottesville.
Mro Cohen is a member of phi Beta Kappa, Order of the Coif,
and the Raven Society of the University of Virginia.

000

TREASURY DEPARTMENT
,
WASHINGTON, D.C.

February 6, 1969
FOR IMMEDIATE RELEASE
DONALD A. WEBSTER NAMED
ASSISTANT TO SECRETARY KENNEDY
Secretary of the Treasury David Mo Kennedy today announced
appointment of Donald A. Webster of Rochester, New York, as
Assistant to the Secretaryo
In this capacity he will be Secretary Kennedy's immediate
and principal staff assistant in carrying out all phases of the
Secretary's responsibilities.
Before joining the Treasury, Mro Webster was responsible for
domestic policy on the Nixon-Agnew Key Issues Committee, having
previously been Minority Staff Economist for the Joint Economic
Committee of the Congress from 1962 to 1968. From 1961 to 1962
he was a research writer for Congressional Quarterlyo
Mro Webster's prior government service also included a period
as research assistant to Senator Frederick Go Payne (1955-56) and
as Assistant to the Assistant Administrator for Congressional and
Public Affairs, General Services Administration (1961-62)0 From
1956 to 1959 he was on active duty in the Navy as a reserve
officer in photo intelligence.
Born in Rochester, December 9, 1930, the son of Albert and
Madeline Vandenbush Webster, he received a bachelor of arts
degree in 1953 from Hamilton College, Clinton, New York, where
he was elected to Phi Beta Kappa. In 1955 he received a master
of arts degree from the Johns Hopkins School of Advanced
International Studies, Washington, D.Co He is a member of the
American Economic Association, National Economists Club,
American Political Science Association and the Capitol Hill Club.
He and Mrs. Webster, the former Helen Long of Falmouth,
Massachusetts, live at 4615 Sedgwick Street, No W., Washington, D.C.
000

K-9

14
TREASURV DEPARTMENT
WASHINGTON. D.C.

February 7, 1969
FOR RELEASE AT NOON
FEBRUARY 7, 1969
STATEMENT BY SECRETARY OF THE TREASURY
DAVID M. KENNEDY
ON TAX REFORM
As President Nixon has emphasized, tax reform and
equitable tax administration will have a high priority in
his Administration.
The President and I have met with Representatives
Wilbur D. Mills and John W. Byrnes, Chairman and ranking
minority member respectively, of the House Committee on
Ways and Means. We expressed to them our intention to
work closely with the Ways and Means Committee in connection
.-with its planned hearings on tax reform. We at Treasury are
reviewing carefully the tax reform proposals developed at
the Treasury Department under the previous Administration
which have just been published. We are working on the
development of proposals and plan to present them at the
proper time to the Co~ittee.
There are three areas that I would emphasize in this
preliminary statement, but this emphasis does not mean that
any other area is necessarily excluded.
First, we have the question of equity -- are all
Americans in similar circumstances paying approximately the
same amount of income taxes? Recent testimony by the outgoing
Secretary of the Treasury suggests that they are not.
This area will receive our early attention.
Second, this Administration's interest in the use of
tax credits to help solve the problems of the cities and
of our disadvantaged is well known. Already the Treasury is
examining closely some of the more promising approaches
recommended by the President's Task Force on Taxation. We
shall proceed with these studies as rapidly as possible.
K-IO

- 2 -

Third, our whole tax system -- State and local as
well as Federal -- would benefit from a careful and
searching reexamination. The issues involved are long
run in nature and involve the strength of our domestic
economy, our international financial position, the
capacity to generate revenues to meet national needs, ~nd
many other factors. We shall be discussing approaches
to this long run problem within the Administration and
with Congressional leaders in the period ahead.

000

UNITED STATES SAVINGS BONDS ISSUED AND Rt:DEEMED THROUGH

January 31, 1969

(Dollar omounts in mill;ol1s - rC'Jnd.:,1 and will not nccouQrily odd to totol5o)
DESCRIPTION

,TURED
S~:ies

A-1935 thru 0-1941
ScriNI F I\lld G-1941 thru 1052
Series J Ilnd K-1952 thru 1956

AMOUNT ISSUED.!!

AMOUNT
REDEEMED

AMOUNT
OUTSTANOING

% OUTSTAIIOltirl
OF AMOUNT 1551:f.CJ

'!J

.1L

5,003
29,521
3,660

4,996
29,479
3,613

7
42
47

1,879
8,293
13,342
15,567
12,232
5,544
5,258
5,437
5,)64
4,689
4,057
4,249
4,852
4,945
5,151
4,973
4;680
4,561
4,271
4',278
4,325
4,164
4,6ho
4,524
4,424
4,758
4,710
3,763
578

1,656
7,323
11,816
13,690
10,580
4,613
4,218
4,265
4,124
3,555
3,071
3,J.91
3,561
3,,554
3,638
3,464
3,189
2,960
2,698
2,588
2,444
2,303
2,316
2,329
2,217
2,181
1,952
912
714

223
970
1,526
1,811
931
1,040
1,172
1,240
1,134
' 980
1,052
1,292
1,391
1,513
1,510
1,491
1,601
1,573
1,690
1,881
1,861
2,264
2,195
2,207
2,577
2,758
2,791
-197

1?9,509

115,313

44,196

27.71

5,485
6,914

3,249
1,500

2,2)6
5,414

40.77
78.30

12,399

4,148

7,650

61.70

.14

TotLl Series E
Series H (1952 thru May. 1959).v
H (June, 1959 thru 1968)
Total Series H
Total Series E and H
Series J and K 1957

{Tot.l matured
All Series

Total unmatured
Grand Total

171,908

120,061

11.81
11.10
11.44
12.06
13.51
16.79
19.78
21.56
23.12
24.18
24.16
24.76
26.63
28.13
29.37
30.36
31.86
35.10
36.83
39.'50
43.49
44.69
48.79
48.52
49.89
54.16
58.56
74.11

~,653

51,846

38,184
172,001
210,185

38,088
120,126
158,214

96
51,875
51,971

Buteoll 01 ,h. Public D.bt

[

ludu Qr.erued dilleount.
'
'fell! redemption value.
r.P~IOIl %wller bond. mor. be held and will earn IncerCl' lor additional period. alter oriGinal moturity datu •
.... u Ntwed bond. which halHl 1I0t been preaented {or redflmpciQII.

P.,. PO 3812 - TREASURY DEPARTMENT -

=::1

~MATURED

Series E 2/:
19o1l
1942
1043
19401
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
IS58
Unclassified

.,
.

I
I

I
1

-1

30.16

31.18

.25
30.16
24.13

TREASURY DEPARTMENT
WASHINGTON, D.C.
February 7, 1969

FOR D1r.1EDIATE RELEASE

PRELIMINARY RESULTS OF CURRE!l.iT EXCHANGE OFFEREJG
Preliminary figures show that about $12,435million, or 86.Cf/o of the $14,466
million notes and bonds maturing February 15 have been exchanged for the two notes
included in the current offering.
Subscriptions total $8,717 million for the 6-3/8% notes of Series C-1970 and
$3,718 million for the 6-1/4% notes of Series A-1976, of which $2,613 million for
the 6-3/8% notes and $885
million for the 6-1/4% notes ",ere recei'lcd fr€lm the
public.
Of the eligible securities held outside the Federal Reserve Banks and Government
accounts $3,498 million, or 63.7% of an aggregate of $5,428 !:lillian 'Here exchanged.
Fallowing is a breakdown of securities to be exchanged (al':'.ount s ir. millions)_:
ELIGIBLE FOR EXCHANGE
Securities

5-5/8%

notes, A-1969
47J bonds, 1969
Total
~

Amount

SECURITIES TO BE ISSUED
6-3/8%
6-1/410
Notes
Notes
Total
C-1970
A-1976

$10,738
3,728
$14,466

$6,713
2 1 004
$8,717

$3,025
693
$3,71d

~ 9,738
'2 z697

$12,435

UIJEXCHANGED
Amount
10
9.3
$1,000
27.7
lz03l
$2,031 14.0

Details by Federal Reserve Districts as to subscriptions will be announced later.

17
TREASURY DEPARTMENT
WASHINGTON. D.C.
FOR RELEASE 6: 30 P.M.,
!(onday, February 10, 1969.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING

The Treasury Depar'bDent announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated November 14, 1968,
and. the other series to be dated February 13, 1969, which were offered on February 5,
1969, were opened at the Federal Reserve Banks today. Tenders were invited for
$1,600,000,000, or thereabouts, of 91-day bills and for $1,100,000,000, or thereabouts,
of 182-day bills. The details of the two series are as follows:
91-day Treasury bills
maturing Mal 15 z 1969
Approx. Equiv.
Price
Annual Rate
98.137 ~
6.183~
98.426
6.227~
98.433
6.19~
!!

RANGE OF ACCEPTED
~OO'ETITIVE BIDS:
High
Low
Average

182-day Treasury bills
maturing AU6:!!st 14 z 1969
Approx. Equiv.
Price
Annual Rate
6.3441/
96.793 b/
96.778 6.373~
00.790
6.34~
!!

!I Excepting

one tender of $100,000;~/ excepting one tender of $2,000,000
of the amount ot 91-day bills bid-for at the low price was accepted
4~ of the amount of 182-day bills bid for at the low price was accepted

86~

roTA!,

mIDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Applied For
Boston
$ 25,191,000
New York
2,855,739, GOG
46,084,000
Philadelphia
46,321,000
Cleveland
27,954,000
Richmond
Atlanta
56,643,000
Chicago
327,990,000
St. Louis
56,097,000
33,795,000
MinneapOlis
45,058,000
Kansas City
Dallas
28,125,000
253,683,000
San Francisco
TOTALS

y Includes

$3,802,680,000

Accepted
$ 13, {fi6, 000
1,196,704,000
21,024,000
34,721,000
16,554,000
28,293,000
99,463,000
37,782,000
12,655,000
29,913,000
16,625,000
93,345,000

A12121ied For
$ 13,836,000
2,347,763,000
18,023,000
58,482,000
20,276,000
36,657,000
208,841,000
36,073,000
24,049,000
28,468,000
23,384,000
242 z 838, 000

$1,600,755,000 ~ $3,058,690,000

Acce12ted
$
3,836,000
896,701,000
7,780,000
22,072,000
11,156,000
18,499,000
47,363,000
19,873,000
4,549,000
16,168,000
12,584,000
39 z858 z 000
$1,100,439,000 ~/

$337,235,000 noncompetitive tenders accepted at the average price of 98.433

V. Includes $174,046,000 noncompetitive tenders accepted at the average price of 96.790
r; 'lhese rates are on a bank discount basis. The equivalent coupon issue yields are
6.3~

for the 91-day bills, and 6.65~ for the 182-day bills.

TREASURY DEPARTMENT

WASHINGTON, D.C.

February 11, 1969
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing
February 20, 1969, in the amount of
$2 , 703 , 177 , 000 ,
as follows:
91-day bills (to maturity date) to be issued February 20, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated November 21, 1968,
and to
mature
May 22, 1969,
originally issued in the amount of
$1,102,308,000,
the additional and original bills to be
freely interchangeable.
182- d ay bills, for $1,100,000,000,
dated
February 20, 1969,
and to mature

or thereabouts, to be
August 21, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m •• Eastern Standard
time,
Monday, February 17, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec'ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
:ustomers provided the names of the customers are set forth in such
~enders.
Others than banking institutions will not be permitted to
lubmit tenders except for their own account. Tenders will be received
lithout deposit from incorporated banks and trust companies and from
K-12

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce·
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on February 20, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 20, 1969. Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

TREASURY DEPARTMENT
!

WASHINGTON, D.C.
February 13, 1969

FOR IMMEDIATE RELEASE
THURSDAY, FEBRUARY 13,1969
SECRETARY KENNEDY NAMES JAMES E. SMITH
AS ASSISTANT FOR CONGRESSIONAL RELATIONS
Secretary of the Treasury David M. Kennedy today announced
~ppointment of James E. Smith of Aberdeen, South Dakota, as
Special Assistant to the Secretary. His responsibilities will
include Congressional Relations and associated duties.
Before joining the Treasury, Mr. Smith was on the Washington
,taff of the American Bankers Association from 1963 to 1969. His
pOSitions included Deputy Manager and Associate Federal
~egislative Counsel.
From 1962 to 1963, Mr. Smith was minority counsel to the
)enate Subcommittee on Intergovernmental Relations. He served as
Legislative aide to Senator Karl E. Mundt from 1957 to 1962, and
~rom 1955 to 1957 was an investigator in the Office of Security,
)epartment of State.
Born in Aberdeen, September 28, 1930, he received a bachelor
of science degree in 1952 from the South Dakota School of Mines
and Technology, Rapid City. In 1959 he received a bachelor of
aws degree from The George Washington University, Washington,
C.
Mr. Smith is married to the former Sarah Spear of Ashley,
llinois, at one time an assistant to Senator Paul H. Douglas.
'he Smiths and their daughter, Susan Elizabeth, 8, live at
604 Barcroft View Terrace, Bailey's Cross Roads, Virginia.
~. Smith has a son James E. Smith II, 14, by a former
larriage.

000

-13

TREASURY DEPARTMENT
,

2C!

WASHINGTON. D.C.

February 12, 1969

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN JANUARY

During January 1969, market transactions in
direct and guaranteed securities of the Government
investment accounts resulted in net purchases by
the Treasury Department of $50,418,000.00.
000

K-14

TREASURY DEPARTMENT

February 13, 1969
FOR IMMEDIATE RELEASE
TREASURY SECRETARY KENNEDY NAMES THOMAS Ro MAY
AS NEW SAVINGS BONDS CHAIRMAN FOR STATE OF GEORGIA
Thomas Ro May, President, Lockheed-Georgia Company, and
Vice President, Lockheed Aircraft Corporation, has been appointed
by Secretary of the Treasury David M. Kennedy as volunteer State
Chairman for the Savings Bonds Program in Georgia o
Mr. May will head a committee of state business, financial,
labor and governmental leaders who -- working with the Savings
Bonds Division -- assist in promoting the sales of Savings Bonds
and Freedom Shares throughout the state.
Mr. May is also a member of the 1969 National Industrial
Payroll Savings Committee, serving with 52 of the nation's top
executives
0

Mro May, who was born in Knoxville, Tennessee, majored in
business administration at the University of Tennessee. He attended the advanced management course at Harvard Universityo
During World War II, he served as an Air Force fighter pilot in
Europe
0

He began his aerospace career with the Fairchild Engine and
Airplane Corporation in Knoxville. Mro May joined LockheedGeorgia, in Marietta, in May, 1951, as an accountant. He served
in various capacities, in Georgia and California, and was promoted
to Vice President in charge of the company's C-130 Hercules program in January, 1962
Prior to his selection as President, Lockheed-Georgia Company, in May, 1967, he had responsibility -- as
Vice President -- for the company's C-5 Galaxy program, to design
and produce for the Air Force the world's largest airplane o
0

( more )

- 2 -

Mro May is active in a number of business and civic organizations, including the Kiwanis Club, the executive board of the
Atlanta Area Council, the Boy Scouts of America, and the Cobb
County Chamber of Commerce. He is a director of the Atlanta
and Georgia State Chambers of Commerce, Harvard Business Club
of Atlanta, and the First National Bank of Atlanta o
Mro May is also a member of the American Institute of Aeronautics and Astronautics and an honorary vice president of the
Society of American Value Engineers o
He and his wife, Mary, have four sons
Thomas, Terence,
Timothy and Jeffreyo They make their home in Atlanta o
000

22
TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE

WASHINGTON. D.C.
February 14, 1969

TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by
for two series of Treasury bills
$1,500,000,000, or thereabouts,
Treasury bills maturing February
$1,502,230,000,
as follows:

this public notice, invites tenders
to the aggregate amount of
for cash and in exchange for
28,1969,
in the amount of

27~day

bills (to maturity date) to be issued February 28, 1969,
in the amount of $ 500,000,000,
or thereabouts, representing an
additional amount of bills dated November 30,1968,
and to
mature November 30,1969, originally issued in the amount of
$1,000,940,000,
the additional and original bills to be
freely interchangeable.
36>day bills, for $1,000,000,000,
or thereabouts, to be
dated February 28, 1969,
and to mature February 28, 1970 0
The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and B~anches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Thursday, February 20, 19690
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec-ima1s, e. g., 99.925. Fractions may not
be used o (Notwithstanding the fact that the one-year bills will run
for 365 days, the discount rate will be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms
and forwarded in the special envelopes which will be supplied by
Federal Reserve Banks or Branches on application thereforo
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be. permitted to
K-15

- 2 -

submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on February 28, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 28,19690
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

TREASURY DEPARTMENT
WASHINGTON. D.C.
February 14, 1969

FOR IMMEDIATE RELEASE

SUBSCRIPTION FIGURES FOR CURRENT EXCHANGE OFFERING
The results of the Treasury's current exchange offering of
6-3/8~ notes dated February 15, 1969, maturing May 15, 1970, and
6-1/4~ notes dated February 15, 1969, maturing February 15, 1976,

3.re summarized in the following tables.

Amount
Eligible
for Exchan e

Issues Eligible
for Exchan e

5-5/8%

For Cash RedemEtion
0;0 of
%of
Exchanged For
Total
Public
OutRold6-378~ 6-174~
Notes
Notes
Total Amount standin
Amounts in millions

Notes, A-1969
i~ Bonds, 1969

$10,738
3,728

$6,741 $3,029
2,020
698

$ 9,770 $ 968
2,718 1,010

9.0
27.1

Total

$14,466

$8,761 $3,727

$12,488 $1,978

13.7

Exchan6es for 6-3L8~ Notes of Series C-;I;970
Federal Reserve
District

5-5/8~ Notes
Series A-1969

Boston
New York
Phil.a.de1phia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TOTAL

K-16

70,289,000
5,641,714,000
62,925,000
107,726,000
41,661,000
114,138,000
256,173,000
121,252,000
49,714,000
9:5,283,000
86,14l,000
80,304,000
15,276,000

$6,740,596,000

4;' Bonds
of 1969

Total

$2,020,494,000

$8,761,090,000

39,694,000
1,384,983,000
50,536,000
62,350,000
39,370,000
37,514,000
173,466,000
46,477,000
33,923,000
43,307,000
57,181,000
47,866,000
3,827,000

109,983,000
7,026,697,000
113,461,000
170,076,000
81,031,000
151,652,000
429,639,000
167,729,000
83,637,000
136,590,000
143,322,000
128,170,000
19,103,000

(OVER)

30 .• 5
42 .. 9

35~8

- 2 Exchanges tor 6-1L4:! Notes ot Series A-1976
Federal Reserve
District

5-5/8f1, Notes
Series A-1969

Bonds
ot 1969

Boston
Bew York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

7,813,000
2,774:,010,000
6,4:72,000
32,4:99,000
9,970,000
23,834,000
80,879,000
26,147,000
11,234:,000
24,362,000
9,505,000
22,093,000
202,000

$ 6,930,000
15,487,000
29,802,000
11,761,000
21,777,000
82,779,000
22,974,000
19,659,000
35,007,000
17,091,000
27,670,000
932,000

14:,74:3,000
3,180,361,000
21,959,000
62,301,000
21,731,000
4.5,611,000
163,658,000
4.9,121,000
30,893,000
59,369,000
26,596,000
49,763,000
1,134,000

$3,029,020,000

$698,220,000

$3,727,24.0,000

'IDTAL

4:~

4r06, 351, 000

Total

TREASURY DEPARTMENT
Washington
FOR RELEASE AT 12:30 P.M., EST
SUNDAY, FEBRUARY 16 z 1969
TRANSCRIPT OF INTERVIEW OF HON. DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BY EDDIE BARKER AND WALTER EVANS
KRLD-TV, DALLAS, TEXAS, ON SHOW "POINT OF VIEW , "
. TELECAST SUNDAY, FEBRUARY 16, 1969

Mr. Secretary, we welcome you and, as you were telling
us before you came on this morning, actually coming to Dallas
is not something new to you but rather an extension of many
visits down through the years.
SECRETARY KENNEDY: I have been coming to Dallas for
many years.We had a great deal of business in Texas,and I
have many friends here,so it is like coming home -- only in a
new role, a new capacity.

What is this role you have now assumed as Secretary
of the Treasury with all the problems facing us? Does it
seem that the office has taken on more here than perhaps it
has previously?
A. The office of the Secretary of the Treasury has been
important in our entire history. I think now that with the
problems we have,with the inflation in our economy, with the
budget problems we have,and with the other general matters
affecting taxation,it has taken on increased importance at
this time. I am looking forward to the challenge.

Isn't President Nixon going about getting his economic
advice in a slightly different way than his predecessors?
A. I think he is, sir. Because he is taking what I
would think a good attitude in trying to get the various

- 2 -

options -- he has taken a fresh look at each thing. And in the
financial field he wants us to come up with the kind of
proposals that will bring sustainable growth in our economy.
And I think the meetings he is having at the White House, in
limited numbers, and in the discussions, he is getting the
background and I think we will be able to make the right
kind of decisions.

I have heard some criticisms or read some criticisms
of the Nixon way of doing things -- to the extent that he
may perhaps be getting a bit "over-committeeized," if I
might coin a phrase. What is your thought on this?
A. I doubt that. I think he has, in effect, reduced the
number of meetings that will be held by keeping the numbers
smaller and with fewer people to report to him. NOw, he does
have an important White House staff. He does have a series
of White House committees. But those are background
committees and briefing committees to bring information to
his attention, and he wants to get both sides of each question
rather than have government by consensus. You see, you have
a mediocrity there when you have just a consensus position.
He wants to be able to take the decision on the ~asis of the
facts on each side of the equation.

- 3 -

Q. Mro Secretary, I think that most Americans are
interested today in what is the status of the pocketbook.
Where are we going on this tax thing? Have we reached a
point beyond which we cannot go in individual taxes in this
country? What's ahead for us?
Ao Well, I think that is one of the first orders of
business, and I have a directive from the President to come
up with some tax proposals to the House Ways and Means
Committeeo Congressmen Mills and Johnnie Byrnes of the
House Ways and Means Committee are coming up with hearings,
starting this month, on tax reform" And we at the Treasury
will look at the proposals made and we will have before us
the study made by the staff of the Treasury and submitted
by che previous administration without recommendation.
They will form a basis. But we will -- from them -distill our own recommendations and present themo
I don't
think that there is any question but what this country,
with our productive capacity -- our income-producing
capabilities -- can work out a tax change or changes that
will make our system more equitableo And that is what we
are looking at -- equity.
Qo
It is the feeling of the administration,then,that
there are some very root changes that should be made in
this tax equalization, would you say?
Ao Well there are two or three phases of this.
One is the equity if there are, and I am sure that the
facts indicate that there are, people who are not
paying any taxes in a very high income tax bracket. They
are not doing it dishonestly; it is not illegal. They may
have all their money invested in tax-free municipal
bonds o But there is the equity question which will be
looked at very carefullyo There is the question of
simplification, because there is a lot of red tape, a lot
of papers, and if you can make changes in the tax base so
that the reporting and the handling of the administrative
end of the tax structure can be expedited,it will reduce
not only cost, but it will be less burdensome to the
taxpayer.

- 4 -

Q. There are a lot of people outside of government who
say that the real answer to taxation is to take an arbitrary
figure and say, "All right -- everybody pays X percent
in taxes,regardless o" I am sure this cannot come about.
What are some of the reasons?
A. Mainly because we have adjusted in our country
to a tax system that is like Topsy: it has just growed
over a period of years. And our businesses and our
people have learned to live with this kind of a tax
structure o When you make a basic and substantial change,
it can distort business patterns and ways of life. The
time to make a wholesale or very broad change in taxes
would perhaps be when you wanted to reduce taxes
substantially. We are not in that position at this timeo
So we will come up this year with the kind of changes that
can be done in a period when we can't reduce taxes but
we must have the same amount of income or more, and then
look to the longer run and see if there are other basic
changes, as you have suggested, that can be done at a
later time o So, we have two things -- a short run and a
long run problem.
Qo But we are really at a point in this country
can you honestly ever see us with lower taxes in the
United States?
Ao Oh, yes. There is no question that if the
Vietnam war could, hopefully, end -- or if we could get some
control over expenditures and more value for the dollars
spent by the Federal government--I can see where our growing
income would produce enough revenue that we could reduce.
And we have had two fairly substantial reductions in the last
several years o In 1954 there was a reduction and we had one
in the Kennedy administration carried througho It was
actually effective under President Johnson, but a major tax
reduction o
Qo Do you think that the American people might as
well forget about seeing the surcharge removed any time
soon?

- 5 -

Ao At the moment I could not see the surtax removed,
because of the need for income to keep a balance in the
budgeto But I would be in hopes that it could be removed
at an early date o
By "early,"I would be in hopes that
we could get that at least as soon as the Vietnam war
ends, and maybe before.
Qo Governor Rockefeller has suggested that it be made
a permanent part of the tax structure, and the money derived
therefrom going to the states for welfare purposes.
A. We have had all kinds of proposals as you know,
to share the Federal tax -- collect the taxes,and
return them to the states and municipalities and, of
course, there is a definite need in the cities for the
problems that Governor Rockefeller indicated o At this
stage, as Secretary of the Treasury, I would have to look
pretty carefully at whether we could afford to turn any
of this tax, at the moment, to anywhere but the Federal
Treasury, because we must have a balance in the Federal
budget right nowo
Qo Mr. Secretary, you mentioned the end of the war
and certainly, in time, this will COfT'f'. But. what is
this going to do to the economy of tiis country? Are
we"escalated because of the war to where a sudden de-escalation
of the war would cause a problem, a depression, here?
Ao The answer to that is no o I think that the
escalation of the costs of the Vietnam war are largely
responsible for the heavy inflationary pressures that we
have in the economy todayo The increase in the price
level is in part due to the Vietnam war. That could end,
and we hope that it will. We believe it willo And
efforts are being made right now ~o try to bring it to an
end o It would not mean a complete reduction in the total
cost, as you might well know
We will still have to have
armies; we will still have to have heavy defense
expenditures because of the world situat"ion o " . There will be
a reduction, and that reduction would be very helpful to
us in many of the things that are needed in our own
country that should not be deferred because of a budget
situation. With the end of the war -,- with that additional
money -- it could be used for cities and for our various
problems that we are now having difficulty with.
0

So you see no recession.

- 6 -

Ao I see no recession. I see a reduction in
inflationary pressures -- which we are trying to bring
about. That would be the most helpful thing we could have
right now.

Q. It used to be that the Republican Party had the
impression of the party of depression. I haven't heard too
much about that lately, still, I am sure a lot of people
have this idea. What is your thought on that?
A. Well, I disagree, of course, with that one hundred
percent. I think that this administration can and will follow
programs that will dampen inflationary pressures and will
bring more balance and equilibrium into our economy and that
will, at the same time, provide the base for sustainable
growth. I am sure that while the Eisenhower administration
might be criticized for actions in the latter part of the
administration, I think a very strong case can be made that
what was done there laid the base for the kind of expansion
we had in the early sixties.

Q. Are you one of those who believes that the Federal
Government can manipulate the economy , or should manipulate
the economy, in order to stimulate growth or retard recession?
A. Well, I don't use the word "manipulate" -- ever. But
I believe that, with the size of the Federal budget and with
the central bank and its actions in monetary policy, that
movements in the economy can be influenced, for good or bad,
by actions taken. For example, if the tax bill that was put
in last year had been put in in '67 or late '66, when it
should have been, I think that is the kind of action that
would have kept the economy from going through the roof, so
to speako By the same token, at the present time, with retaining the surtax -- temporarily, I hope -- and with monetary policy
as it is now designed and operating, I think what we are trying to
do is take a little pressure out of the boiler to keep the
price level from zooming up too high.

Say that if the war goes on through this year, what
happens? Does this inflationary trend continue or is there a
leveling off regardless?
A. Our actions are designed, and our budget figures show,
a continuation of the Vietnam war. We are not putting into

- 7 -

the equation the end of the Vietnam war. We look at that
and have it in the back of our minds and hopefully it will
take place. But the budget figures and our actions that
are being taken now assume the Vietnam war. I think that
with the budget in surplus -- not large surplus -- very
small surplus in this year and next, plus the restrictive
policy that the Federal Reserve is following, that we can
dampen down these pressures and bring them under control.
And I don't see it dipping down seriously. I think there
is basically too much strength in our economy for that.
We are moving into a era of technological development
that's beyond the imagination of people. New products, new
ideas are coming, so that basically there is real strength
in our economy. Our problem is to keep it from escalating
in cost, which not only makes our people here concerned
and affects their pocketbooks. But it also has to do with
our balance in the world -- with the value of the dollar
because they look at us not only from the standpoint of
being the guide in this, but because our payments are in
precarious balance, and they want this kind of action.

Along that line,we haven't heard a lot of late
from Mr. deGaulle or from the British. Apparently, on these
situations with the pound and the franc, over the past few
weeks, at least -- there has not been a great deal of disclls'sion. Where do we stand, or what does the President's
trip to Europe later this month have to do as far as the
cDnversations he will have in this regard?
A. With respect to the earlier part of your question,
Mr. Volcker, who is our Under Secretary for Monetary Affairs,
is in Europe today. He has been over to the meetings of
the Group of Ten and the OEeD and having discussions in this
field. And there is, at least we hope, some temporary
stronger stability in the pound and in the franc. How long
that can last and what are the factors? We must wait and
see. And it is a concern, so we are watching and working

- 8 -

on thilt very "lrefllily. \.Jith respect: to the second part
of your questi'm, on President Nixon's trip abroad.
I
think his purpose there is to reestablish relationships,
to h,lve dLscu3sions, not to make cOtT.mitments and change
things, b.lt L) si~ dO'.m \vith the heads of- state in the
va rious impol' t: 111 t C cnm t rie s in Europe and talk about their
probLc:T1s dnd Clurs .- our .nutal problems -- our NATO
alliance -- tLyin~,hopefully,to·bring peace, not only in
Vietnam, hut in the Middle East and other areas of the
w()rlrl.
I was ()ne that advocated very strongly that he
~() nl)\V -- eari..~·.
Rt3CdllSe this is a very serious and
imp0rtant matter rn all of 1I~
tn lhecountry -- and
h0 is in .1 ver; g~od position to do it now, rather than
to \\lai t.

Hould you expect a summit.l1'(.;eting to come any
time this year he~~een the United St~tes and the Soviet
Union'!
A.
I \vould not know about that at this stage. That
will depend o~: lots of developments. There would be no
point in a su~mit rreeting unless y()~ nave really something
to discuss and to be able to try to hring some solutions
to problems. 1 think that this trir that he is having
is lTluch t11'.J:-? ~ /3' 3,-_-,-,' ~lS Iv-'.':ll~. h
"oes there and brings
unders tandin l ' od ,::ood\v i 11 and ·shO\vs his de·termination
personally as President of this gre~t country that he is
willing to conider these problems and take their views
into accc'uot in making up his Dl)lic) at the time when he
is trying t,J esta1llish tl1is policy.
I

- 9 -

Q. To change the subject just a minute, Mro Secretary.
You have been in and out of government for many years. You
wece in the Eisenhower administration, I think as
Assistant to the Secretary of the Treasury. I think your
own government service dates back prior to that, does it
not?
A. Yes, I had many years with the Federal Reserve
System -- for sixteen years. Then I carne to Chicago -_
then back, in the Eisenhower Administration.
Q. The point of my question being: You have heen
in and out of government. You have seen government change,
and you have seen it grow and in between your own tours
of duty, so to speak, you have been very prominent in the
business world. Isn't government too big today?
A. I would say that it is big, sure it's too
big, but I don't see any way to cut it back substantially.
There are problems, and its proportion, the Federal
government's proportion, of the total GNP is not
burdensome -- I think that the relationship is less than
it is in other major countries. But we should keep the
Federal government as small as we can in handling the
programs and problems in as businesslike away as
possible. Just adding people makes work o And it doesn't
accomplish much in the Federal government and one of our
problems will be to redirect programs.
Qo Is there a concerted effort in Treasury, for
example, for any sort of a cutback in personnel?
A. We are all under the control act of last year
when the tax bill went through and that is putting a burden
on various people. Internal Revenue people say they
don't have enough examiners, and I am hearing that we are
understaffed in varicus areas, and I am sure that is the
case o What we are doing -- the President has directed the
Director of the Bureau of the Budget to have each Cabinet
officer and his workers go over every item in their department,
and wee whether the programs can be justified, whether changed,
reduced, or in some way corne up with some savings so the programs
of the new administration will not just balloon the totalo
Otherwise we will just end up with more than we started with.

- 10 -

Mr. Secretary, I would like to get some of your
thoughts on this question of conflict of interest. If
I remember right --

I am not in conflict, I assure you.

-- some of the Senators during your confirmation --

One.

All right, one, was concerned about your conflict
of interest and your financial holdings, and eventually
they were all satisfied. They weren't as concerned just
over you as they were concerned over Mr. Packard. What
about this business of all but demanding that a man divest
himself of holdings once he assumes a Federal position?
A. Well, I think that is a very serious problem and
I told Senator Gore we were not at odds when I talked
with him. I had an hour talking with him. Told him my
problems. Showed him what I had. Came out with a clean
bill of health, I thought, and said I was giving up complete control. I was putting it in a trust and they could
invest in anything they want and I won't know what they
have because they will submit to me only the income, and
they will submit my tax return. I won't even see it. I
said there is a basic problem here: if a man who goes
into a high position in the government can't own any thing ,then
we
have to have that understood, and I think it is your
job, Senator, to find a way, and if I am disqualified,
I'm disqualified. And I think they'll look into this.
I think the trust agreement does it. A trust is out of
my hands. You either believe in a trust or you don't.
A trust means that you trust them. If a person wants to
be crooked, they can be crooked without owning a little
stock or something like that. I don't think that there is
any chance of manipulating there, using your words.

Q. You don't think a man automatically becomes
crooked once he assumes an executive office in Washington?

- 11 -

A. I think on the contrary. They lean over backwards
completely, and I think that the business interests of the
person who goes ill would suffer in a way. I realize that
because your associates would hesitate if they had any
direction of business -- and they haven't in the Treasury
t,-, give it to your firm.

Q. There is a theory among some that actually in high
government service you grow into the job rather than the
importance of the job.
A. I hope I do, but it is a sacrifice for those men
who are going in. I am not crying about my own but I think
there there should be a way found.

What is the answer? $100,000 a year Cabinet salary?

A. No -- I think the answer is to trust people and
have them put their p~operty as far away in trust as I have
done. I think this ans\vers it. And I think that the
Senate believes that. There was only one man in the Committee
that had any question in my case. And there will always
be questions by some man. I think that's good -- to have
a question now and then.

Q. To talk about the Treasury as a whole -- actually, the
Treasury encompasses many things. Is the Secret Service
still one of them?
A. Oh, yes. And it is a major one really.
protection of the President --

The

Is the Coast Guard?

A. Not the Coast Guard now. That has been transferred
to the Department of Transportation.

Is this an archaic thing -- that the Secret Service is
still part of the Treasury?
A.

It's part of history.

And counterfeiting --

- 12 -

Is it still practical today?

A. Dh, I think it is. They have built up a competence and I think they do a terrific job.

I'm not questioning- the job. I'm questioning where
it should be. The chain of command so to speak.
A. Well, you can say that it should be over at the
FBI or some other place and I can say that it shouldn't.
I think that the FBI is pretty big and large and that
this is a specialized service that they are performing and
doing very well. Whether it should be some place else -well, every once in awhile you look at that and think it
should be transferred from one department to another department and then you think it should be transferred back.
Q. Mr. Nixon has been criticized by minority groups,
particularly the blacks, for his lack of inclusion of a
Negro in the Cabinet, the lack of inclusion of a Jew in
the Cabinet. What do you think of this ethnic criticism
of Mr. Nixon? What real importance does this have?

A. I really don't know. I know that he has made a
sincere effort to get black Deople of quality and bring
them into the high positions in the government and some have
been brought in various positions;not in the Cabinet.
There is no exclusion. And I think the effort should be
made to get qualified people. And I am sure there are many
qualified black people that are qualified and should be
brought in. There are a num~er of Jewish people in high
positions in the government aid there is no discrimination
as far as I know. A~d I think that, by the President's
actions as time goes on, that they'll find that they are
getting a fair deal.

Mr. Secretary, President Nixon,prior to the election
w'ell prior to his ~omination -- duri.ng the campaign,
aad now, has constant reference, of cou~se, to his days
with the Eisenhower administration. He constantly consults

- 13 -

with General Eisenhower. You served in the Eisenhower
administration and now in the Nixon administration. Do
you see the philosophies of these administrations as a
parallel, or - -?

Is it just courtesy?

A. No, it is not just courtesy. He believes that General
Eisenhower is a great man and has ~reat wisdom, and he sees
him from time to time and he has asked each of the Cabinet
to. I've talked to the General. So he's brought in.
president Johnson will be brought in for discussion and for
his views. But Mro Nixon is following in part the Eisenhower
and in part the Johnson --

What is the great difference between the Eisenhower
and the Nixon administration?
A. I don't think I could delineate that clearly at
this point. He strengthened the National Security Council.
President Eisenhower had the National Security Council
fairly strong. It's a different kind of operation now than
it was under President Eisenhower. It's a small group and
with more discussion. And I think that's important, because
of the troubles of today. On the question of the Cabinet
Mr. Nixon is giving, I think, more authority to the Cabinet
and relying on them more than either Eisenhower or President
Johnson did. And I think that's to the good. Now, President
Eisenhower had a strong White House staff with Sherman Adams
sort of running it. President Nixon has a strong White
House staff, but he doesn't have a director of staff in that
sense, and each one is a specialist in his field. So there
are many differences.

We are just about out of time, but there is one
thing I wanted to ask. I am just curious. Have you signed
your name on the dollar bill yet?
A. Oh,no. That will be coming right away. They came
over the other day with one and I must say -- it looks pretty
good,

- 14 -

How many dollar bills are issued now in the course
of a year?
A. I couldn't answer that, but it is not just the
number that is in use o But there is a deterioration by the
use of the bills and so they are taking them out of circulation. Many, many, many, millions.

So your signature will become quite prominent?

But it will be quite small.

BARKER: Mr. Secretary, we are delighted that you
could spend this time with us today.
SECRETARY KENNEDY:

It is an honor and a privilege.

BARKER: We will look forward in the weeks, and months
and years ahead to your role in the Nixon administration and
we hope you will come back and visit us again.
SECRETARY KENNEDY:
ANNOUNCER:

I'll come back again.

And that's "Point of View" for today.

000

31
TREASURY DEPARTMENT
WASHINGTON. D.C.
FOR RELEASE 6: 30 P.M.,
!ttonday, February 17, 1969 •
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated November 21, 1968,
9nd the other series to be dated February 20, 1969, which were offered on February 11,
1969, were opened at the Federal Reserve Banks today. Tenders were invited for
$1,600,000,000, or thereabouts, of 91-day bills and for $1,100,000,000, or thereabouts,
'Jt 182-day bills. The details of the two series are as follows:

RANGE OF ACCEPTED
~OOmTIVE BIDS:

High
Low

Average

91-day Treasury bills
maturi!!5 Mal 22,2 1969
Approx. Equiv.
Price
Annual Rate
98.475
6.033~
98.446
6.148~
98.460
6.092~

182-day Treasury bills
maturi!!5 Au&!!st 21,2 1969
Approx. Equiv.
Price
Annual Rate
96.850 ij
6.2311'
96.814,
6.302~
96 .831
6.268~
11

Excepting one tender of $130,000
16i of the amount of 91-dsy bills bid for at the low price was accepted
3i of the amount of 182-day bills bid for at the low price was accepted

OOTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Applied For
Accepted
Boston
$ 18,303,000 $ 18,303,000
New York
1,086,818,000
1,795,018,000
19,761,000
Phllade lphia
34,761,000 .
Cleveland
27,933,000
27,933,000
Richmond
13,530,000
13,530,000
49, 394, OO!)
Atlanta
49,394,000
148,517,0(,)
Chicago
179,357,000
St. Louis
43,361,000
45,361,000
30,654,000
MinneapOlis
30,654,000
29,900,000
Kansas City
32,400,000
Dallas
19,725,000
27,725,000
112,2351,2000
San Francisco
145,751,000
TO~

$2,400,187,000

Applied For

5,065,000

Accepted

5,065,000

1,506,557,000
17,882,000
20,122,000
6,789,000
33,510,000
144,975,000
23,7'4,000
25,976,000
19,156,00)
24,891,000
139,2991,000

805,507,000
7,882,000
20,122,000
6,789,000
,6,510,000
El,475,000
19,759,000
25,976,000
18,086,000
15,891,000
67,021,000

$1,600,247,000 ~ $1,968,658,000

$1,100,083,000

( Includes $320,787,000 noncompetitive tenders accepted at the average price of 98.460
/ Includes $167,279,000 nonccmpetitive tenders accepted at the average price of 96.831
l} ihese rates are on a bank discount basis. The equivalent coupon issue yields are
6.27~ tor the 91-day bills, and 6.56~ tor the 182-day bills.

TREASURY DEPARTMENT
WASHINGTON, D.C.

February 18, 1969
MEMORANDUM TO TREASURY PRESS "REGULARS":
To allow the Secretary of the Treasury to exercise the
traditional prerogative of Cabinet Officers to fill policymaking positions on their staffs through appointments of
people they have personally selected, I will leave the position
of Special Assistant to the Secretary (Public Affairs) in
approximately

days.

I have assured Secretary Kennedy of my best wishes for
the success of his programs, and of my pleasure in working
with him during the transition period of the new Administration.
I am sure that the Public Affairs staff will serve him loyally
in the future.
I want to say thanks to all members of the press covering
the Treasury for the experience of working with you over the
past two years.

You have never been less than fair in seeking

and handling Treasury news, and I appreciate the guidance which
many of you have given me.

\~,~~.

Joh F. Kane
As:·
nt to the Secretary
Special
(Public Affairs)

33
ST~TEMENT

OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE
JOINT ECONOMIC COMMITTEE
10:00 A.M. .

1-(1-~t

Mro Chairman and Members of the Committee:
It gives me great pleasure to appear before your
distinguished Committee o

I am accompanied on this occasion

by Under Secretary Char1s Walker and Under Secretary for
Monetary Affairs Paul Vo1cker.

I understand that we are to

concentrate mainly on domestic economic matters this morning.
Your Committee has already received testimony earlier this
week from the Council of Economic Advisers and the Bureau of
the Budget.

Therefore, we will not attempt to review the

economic and fiscal situations in great detai1
statements are fairly shorto

Our prepared

I will begin by giving you my

own general appraisal of the current situation.

The Under

Secretaries will then comment briefly on specific issues in
tax policy and debt management.
It is no secret that there are serious flaws in the
economic picture o

Strong inflationary pressures and an

unsolved balance of payments problem require corrective
action.

But, there are also elements of great strength.

American productive achievements in recent years have kept
real income rising while also meeting the requirements of a

- 2 rapidly expanding defense effort.

Unemployment has been

reduced to the lowest levels in nearly two decades.

The

dollar is strong and respected in the world in spite of
recent inflationary trends and a deteriorating trade
balance.
As a nation, we are rich in material resources and
responsive to the needs we see around us.

Our conscience

has been awakened to the existence of poverty amidst
plenty and the need to make equality of opportunity a
reality for all of our citizens.
must be meto

These heavy responsibilities

To do so, the first priority must be to place

the current expansion on a sounder and more sustainable
basis.

Otherwise, we run the risk of trying to do too much

and end up by doing too little.
Any incoming Administration encounters unsolved problems
and we have our share.

We have inherited a serious inflation.

It is distorting the economy and weakening our international
competitive positiono

If unchecked, this inflation will

undercut the dollar at home and abroad.

Already, rapidly

rising prices have eroded the purchasing power of millions of
Americans who counted on their government to provide sound
money.

35
- 3 -

We reoognize that there are risks in attempting to stop
inflation too abruptly.

If the economy were to be halted

in its tracks, unemployment would rise prohibitively.
Even though the inflationary psychology might be broken, the
cost would be too high.
There are also risks in doing too little.

Insufficient

restraint would mean only a brief slowing down of the
economy and no lasting reduction of inflationary pressureso
Something very much like this occurred during the course of
1967, when expansionaypolicies were pressed so vigorously as
the economy slowed that the inflationary trend was never broken
as a result o

Inflation has built up a considerable momentum

in recent years.

The lesson

is that the economy must be

placed under firm restraint until there are unmistakable
signs that we are headed back on a non-inflationary path.
There will, of course, have to be a continuing review of
policies as the adjustment proceeds o
For the present, given the economic outlook as
outlined to you by the Council of Economic Advisers, a
combination of fiscal and monetary restraint is clearly
required o

The budget should be kept in surplus while the

Federal Reserve pursues appropriate complementary
po1icies o

While the Administration has reached no final decision

- 4 -

with regard to extension of the 10 percent surcharge
beyond this June 30th, a budget surplus will continue
to be needed if inflation is to be combatted without
extreme credit stringencyo

Unless fiscal 1970 Federal

expenditures can be cut back appreciably from the levels now
apparently in prospect, there will be no choice, in my
opinion, but to continue the surcharge for another year.
Other matters for legislative consideration will be
described by the Under Secretaries.

As you know, President

Nixon has emphasized that tax reform and equitable tax
administration are to have a high priority.

Hearings begin

this month in the House Ways and Means Committee and in
due course we will be submitting the Administration's
proposals.

The balance of payments continues to be a cause for
concern.

A small surplus was recorded last year on the

liquidity basis of calculation.

But this statistical

improvement reflected a massive inflow of foreign capit~l
both private and official.

Inflows are unlikely to

- 5 continue on that scale.

Meanwhile, our merchandise trade

surplus dwindled to the vanishing point last year.

A major

reason for the steadily worsening trade position since
1965 is the sharp increases in imports caused by overexpansion of the domestic economy.

A return to non-

inflationary growth is essential to the restoration of our
trade surplus and the maintenance of confidence in the
dollar o
In conclusion, I will only note that much the same
economic policies are needed to promote internal and
external equilibrium of the economy.

Both the domestic

economy and the balance of payments are badly in need of
relief from inflationary strains and distortions.

000

STATEMENT OF THE HONORABLE CHARLS E. WALKER
UNDER SECRETARY OF THE TREASURY
BEFORE THE
JOINT ECONOMIC COMMITTEE
FEBRUARY 19, 1969
10:00 A.M.
I am grateful for the opportunity of expressing to
the Committee the great interest of the Treasury Department in pressing forward with a program of tax reform
and equitable tax administration.

The President and the

Secretary have emphasized both publicly and to me that
these matters are to have a high priority in this Administration, and the Treasury will bend every effort to attain
these goals.
We have assured Representatives Wilbur D. Mills and
John W. Byrnes, Chairman and ranking minority member of
the Committee on Ways and Means, of our desire and intention to work closely with their Committee in connection
with the hearings on tax revision proposals that commenced
yesterday.

We are reviewing carefully the proposals

developed at the Treasury Department under the previous
administration which have recently been published.

We are

working on the development of proposals and plan to present
them at the proper time to the Ways and Means Committee.

- 2 We hope to accomplish this as soon as possible consistent
with the need for filling key vacancies in the Treasury
Department staff and the desirability of developing and
recommending a coordinated and orderly program of legislation.
Our first concern is with the equitable distribution
of the income tax burden.

The outgoing Secretary of the

Treasury recently called attention to some of the problems
involved on this score, and the agenda for the current
Ways and Means Committee lists these and others.

regard the matter of tax revision to achieve equity as
of fundamental importance, deserving of the most urgent
attention in the Administration and in the Congress.

shall strive to achieve also a good measure of simplification in this complex field.

It may well be necessary to

approach this task in stages, accomplishing first those
changes that permit of ready solution and examining at
g~ter

length more fundamental revisions of the tax

structure.
We are also devoting every attention to the use of
tax incentives to help solve the problems of the cities

- 3 -

and of our disadvantaged citizens.

We are examining

closely some of the more promising approaches recommended
by the President's Task Force on Taxation.

We hope that

means will be developed to use the potency of tax incentives,
along with other programs, to enlist private capital and
business ingenuity in this urgent effort.
We intend also to bring the whole tax system -- state
and local as well as Federal -- under a careful and
searching examination.

The issues involved are long run

in Qature and involve the strength of our domestic econGmy,
our international financial position, the capacity to
generate revenues to meet national needs, the appropriate
distribution of revenues among different levels of government in relation to their fiscal responsibilities, and many
other fac tors.
Among these issues are those of the coordination of
Federal, state and local taxes, an exploration of the role
of value-added taxes used by a number of Western European
countries, and similar issues of fundamental significance.
We believe these matters should be carefully examined and
we plan to discuss approaches to these studies within the
Administration and with Congressional leaders in the period
ahead.

STA'fEMENT BY THE HONORABLE PAUL A. VOLCKER
UNDER SECRETAFtY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
JOINT ECO~OMIC COMMITTEE
FEBRUARY 19, 1969
10:00 A.M.
Mr. Chairman:
I appreciate this opportunity to accompany Secretary
Kennedy and Under Secretary Walker
before your Committee.

011

our first appearance

As Under Secretary for Monetary

Affairs, a good part of my own time will be devoted to the
balance of payments and

international finance.

I understand

that you plan to devote a later meeting exclusively to those
matters.

Consequently, my brief remarks this morning will

be directed toward some proplems of domestic financial
policy related to my responsibilities for Treasury financing.
Virtually my first official act upon my return to the
Treasury three weeks ago was to announce the terms by which
the Treasury would refund some $14-1/2 billion of maturing
debt.

By necessity, those terms included the highest rates

of interest available on a Treasury note or bond since the
Civil War.

As it turned out, even those record rates --

6.42 percent for an ]B-month issue and 6.29 percent for a
seven-year issue
potential investors.

failed to attract much enthusiasm among
More than a third of the maturing

securities held by the general public had to be paid off in
cash.

- 2 -

, That experience reflects in a concrete way the strains
pervading the domestic credit markets as we took office.
You are, I am sure, familiar with other signs of pressure
and imbalances:

for example, the relative shortage and high

cost of residential mortgage money, the sharp increases in
interest expense for our state and local governments, and
the growing tendency of some lenders to require an element
of equity participation before committing loan funds.
My purpose today is not to elaborate these facts.
Rather, I would like to suggest how, in managing the
Treasury's finances and debt, we might contribute toward
restoring better balance in financial markets.
The main responsibility, I should make plain, must lie
elsewhere -- in responsible budget and fiscal policy and in
appropriate monetary policy.

These are the principal policy

tools for restoring sustainable, non-inflationary balance
to the economy as a whole.

This kind of balance in the

economy generally is a prerequisite for any lasting
reduction of tensions and interest rates in financial
markets.
There are two ways in which debt management can and
should playa supporting role in·this effort to achieve
better balance.

In the first place, Treasury financing can

43
- 3 -

at times provide some positive support to restrictive fiscal
and credit policies by absorbing funds that might otherwise
simply fuel excessive private demand.

The precise means of

achieving this result will always be dependent upon the
particular set of economic and market circumstances prevailing
at the time of a financing.

It would be an oversimplification

to measure the economic impact of Treasury financing
entirely by the maturity of the securities soldo

Neverthe-

less, there can be no doubt that inability to offer longerterm securities eliminates one highly important option in
debt management, and

thereby sharply limits its potential

effectiveness as a tool of general economic policy.
The second way in which debt management can support the
aims of stabilization policy is at least as significant.

the best of circumstances, the necessitous nature of Treasury
financing and the potential impact of these large borrowings
on credit markets create difficult problems for the conduct
of monetary policy.

These problems can -- and should -- be

minimized by orderly spacing of financings, by reducing the
size of maturing issues, and by use of financing techniques
that avoid

undue reliance on sales

to the commercial banking

system or exposure to market fluctuations.

Again, the

maturity of the securities offered is not the only considerationo

But it is a relevant and important variable.

- 4 These circuDlstances explain why we shall ask the Congress
at an early date to review the 4-1/4 percent interest rate
ceiling on Government bonds.
issue in the past, and

This has been a contentious

I have no desire to open that debate

prematurely this morning.
I will only observe that the

average maturity of the

privately-held debt has shortened steadily since mid-19G5,
when it stood at 5 years, 9 months.

By the end of last

month, it had declined to a post-war low of 4 years.

This

continuous shortening of tho debt increased liquidity in
the economy, and thus tended to add to the inflationary
potential.

And the net result has be on to force the

Treasury into the market for refunding in such large amounts
as to immobilize monetary policy for extended periods.
In 1965, for example, the average amount of privately-held,
marketable Treasury debt maturinG each quarter was $3 billion;
the average amount maturing in each quarter of this year,
$5-1/2 billion, is very substantially larger.
I would also note, in this connection, that our savings
bonds -- suld to millions of individuals in relatively small
amounts -- are subject to a 4-1/4 percent ceiling.

The

savings bonds program has oeen a part of the

Treasury's debt

management effort since before World War II.

In some ways,

the value of this program is greatest precisely in an

- 5 -

inflationary period like the present.

Yet, we are

all

conscious that these same inflationary pressures that have
so profoundly permeated other sectors of the credit market
have, for the time being, reduced the relative attractiveness of savings bonds.

This is also a matter that we will

be reviewing urgently in coming weeks.
In conclusion, I can make no promise of immediate
relief from the heavy pressures on domestic financial
markets, or from high Treasury interest costs.
certainly a part of our ultimate objective.

That is

Moreover, with

fiscal and monetary policy both geared to a non-inflationary
path, it seems to me a reasonable hope for the not-toodistant future.

But to put low interest rates and better

availability of money first on our list of priorities would
be self-defeating.

For the attempt could only add more

fuel to the fire of inflation and, thus, to the distortions
and strains in financial markets.

000

TREASURY DEPARTMENT
,
WASHINGTON. D.C.
February 19, 1969

FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by
fo~ two series of Treasury bills
$ 2,700,000,000, or thereabouts,
T~easu~y bills maturing February
$ 2,704,300,000,
as follows:

this public notice, invites tende~s
to the aggregate amount of
for cash and in exchange fo~
27, 1969,
in the amount of

91-day bills (to maturity date) to be issued February 27, 1969,
in the amount of $ 1,600,000,000, or thereabouts, representing an
additional amount of bills dated November 29, 1968,
and to
mature
May 29, 1969,
originally issued in the amount of
$1,100,150,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $ 1,100,000,000,
iated February 27, 1969,
and to mature

or thereabouts, to be
August 28, 19690

The bills of both series will be issued on a discount basis under
:ompetitive and noncompetive bidding as hereinafter provided, and at
naturity their face amount will be' payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
?S,OOO, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
Ip to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, February 24, 19690
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec-ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
s~bmit tenders except for their own account. Tenders will be received
wlthout deposit from incorporated banks and trust companies and from
K-17

- 2 -

responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by pa)~ent of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on February 27, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing February 27, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered tv accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from con5ideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

4~'

TREASURY DEPARTMENT
WASHINGTON, D.C.
RELEASE 6: 30 P.M."
rsday, February 20, 1969.
RESULTS OF TREASURY'S MONTHLY BILL OFFERING
'!be

Treasury Department announced that the tenders for two series of Treasury

15, one series to be an additional issue of the bills dated November 30, 1968,
the other series to be dated February 28, 1969, which were offered on February
1969, were opened at the Federal Reserve Banks today. Tenders were invited for

0,000,000, or thereabouts, of 275-day bills and for $1,000,000,000, or thereabouts,
365-day bills. The details of the two series are as follows:
:lE OF ACCEPTED
PE'l'I'l'IVE BIDS:

High
Low

Average
22~
91~

275-day Treasury bills
maturing November 30, 1969
Approx. Equiv.
Price
Annual Rate
6.z40iJ1
95.233
95.157
6.34~
95.182
6.307~
1:./

365-day Treasury bills
maturing Febru8:1"Y 28, 1970
Approx. Equiv.
Price
Annual Rate
93. 744
6.17011
93.623
6.29~
6.234~
93.679

of the amount of 275-day bills bid for at the low price was accepted
ot the amount of 365-day bills bid for at the low price was accepted

H, TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

.strict
)stoD
!w York
lilade1phia
.eveland
.cbmond
;lanta
dcago
;. LOUis
.nneapol1s
,lDsas City
'iUas
LD FranCisco
'roTALS

Applied For
Acce;eted
343,000
343,000 $
$
411,352,000
1,122,292,000
477,000
5,477,000
1,332,000
1,332,000
291,000
491,000
2,707,000
5,207,000
28,443,000
90,443,000
4,722,000
5,722,000
5,540,000
7,040,000
1,122,000
1,122,000
4,027,000
12,027,000
39,2677 Zoo0
72,2457,2000
$1,323,953,000 $

500,033,000!/

AE:E1ied For

565,000

AcceI!ted

565,000

1,219,795,000
11,508,000
14,644,000
2,728,000
9,413,000
87,364,000
4,494,000
7,170,000
4,087,000
11,717,000
90 z054 02 000

803,495,000
1,508,000
4,644,000
2,528,000
8,413,000
81,364,000
4,494,000
7,170,000
4,087,000
6,717,000
751.°541. 000

$1,463,539,000

$1,000,039,000 ~/

Deludes $17,410,000 noncompetitive tenders accepted at the average price of 95.182
,Deludes $36,082,000 noncompetitive tenders accepted at the average price of 93.679
hese rates are on a bank discount basis. 1be equivalent coupon issue yields are
64~ tor the 275-day bills, and 6.6~ for the 365-day bills.

K-18

~~~

[~1\f1t.~
. . ·~.~ ~:" 1

TREASURY DEPARTMENT
WASHINGTON. D.C.
February 19, 1969

FOR IMMEDIATE RELEASE

~\~
,:../,,~~T
17>;<)

TREASURY BILL OFFERmG OF $1 BILLION

The Treasury announced today that a total of $1 billion will be added to
five outstanding monthly series of Treasury bills.

These are the series which

mature on the last day of the months of April to August, 1969, inclusive.

They

were originally sold as l2-month bills and will be reopened in the amount of
$200 million each -- a total of $1 billion.
The auction will be on Tuesday, February 25 with payment on March 3.

this "strip" offering, subscribers will put in for equal amounts of each of the
five series of bills being reopened.

Commercial banks may pay for their own

purchases and for their customers' purchases by crediting Treasury tax and
loan accounts.

K-19

49
TREASURY DEPARTMENT
WASHINGTON. D.C.
February 19, 1969

FOR lMMEDIATE RELEASE

TREASURY OFFERS $1 BILLION STRIP

t"0~"'THLY

BILLS

The Treasury Department, by this PUbiic notice, invites tenders for additional
mounts of five series of Treasury bills to an aggregate amount of $1,000,000,000,
thereabouts, for cash. The additional b:!.lls will be issued March 3, 1969, will
in the amounts, and will be in addition to the bills originally issued and
aturing, as follows:
Amount of
ldditional
Issue

Original
Issue Dates

200,000,000
200,000,000
200,000,000
200,000,000
2°°1°°°2°00
,000,000,000

April
May
June
Jul:y
August

1~)68

Maturity
Dates

Days from
March 3, 1969
to Maturity

19C9
30

April 30

:'jl

Vay 31
,Tu;-)e 30
.July ::1
Aur;ust .31

30
31
31

Average

58
89
119
150
181
-119.4

Amount
Currently
Outstanding
(in millions)
$1,501
1,503
1,502
2,606
1,506

e additional and orig:i.nal bills will be freely interchangeable.

Each tender submitted must be in ths a~ount of $5,000, or an even multiple
and one-fifth of the amount tendered will be applied to each of the above
~ies of bills.
~reof,

The bills offered hereunder will be issued on a discount basis under competitive
i noncompetitive bidding as hereinafter provided, and at maturity their face amount

Q be payable without interest.

They will be issued in bearer form only, and in
laminations of $1,000, $5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
Lturity value).
Tenders will be received at Federal Reserve Banks and Branches up to the closing
one-thirty p.m., Eastern Standard time, Tuesday, February 25, 1969. Tenders
1 not be received at the Treasury Department, Washington. In the case of cornitive tenders the price offered must be expressed on the basis of 100, with not
'e than three decimals, e.g., 99.925. Fractions may not be used. A single price
t be submitted for each unit of $5,000, or even multiple thereof. A unit represents
000 face amount of each issue of bills offered hereunder, as previously described.
is urged that tenders be made on the printed forms and forwarded in the special
elopes which will be supplied by Federal Reserve Banks and Branches on application
refor.
~,

Banking institutions generally may submit tenders for account of customers
Vided the names of the customers are set forth in such tenders. Others than
king institutions will not be permitted to submit tenders except for their
account. Tenders will be recei ved without deposit from incorporated banks
trust companies and from responsible and recognized dealers in investment

"20

- 2 -

securi ties. Tenders from others must be accompanied by payment of 2 percent of
the face amount of Treasury bills applied for, unless the tenders are accompuded
by an express guaranty of payment by an incorporated bank or trust company.
All bidders are required to agree not to purchase or to sell, or to make ~
agreements with respect to the purchase or sale or other disposition of any bills
of these additional issues at a specific rate or price, until after one-thirty
p.m., Eastern Standard time, Tuesday, February 25, 1969.
Immediately after the closing hour, tenders will be opened at the Federal
Reserve Banks and Branches, following which public announcement will be made by
the Treasury Department of the amount and price range of accepted bids. Those
submitting tenders will be advised of the acceptance or rejection thereof. The
Secretary of the Treasury expressly reserves the right to accept or reject any
or all tenders, in whole or in part and hi s action in any such respect shall be
final. Noncompetitive tenders for $100,000 or less (in' even multiples of $S,~)
without stated price from anyone bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids. Settlement for accepted
tenders in accordance with the bids must be made or completed at the Federal
Reserve Bank or Branch in cash or other immediately available funds on March 3,
1969; provided, however, any qualified depositary will be permitted to make payment by credit in its Treasury tax and loan account for Treasury bills allotted
to it for itself and its customers up to any amount for which it shall be qualified
in excess of existing deposits when so notified by the Federal Reserve Bank. of ita
District.
The income derived from Treasury bills, whether interest or gain from the
sale or other disposition of the bills, does not have any exemption, as such,
and loss from the sale or other disposition of Treasury bills does not have any
special treatment, as such, under the Internal Revenue Code of 1954. The bills
are subject to estate, inheritance, gift or other excise taxes, whether Federal
or State, but are exempt from all taxation now or hereafter imposed on the
prinCipal or interest thereof by any State, or any of the possessions of the
Uni ted States, or by any local taxing authority. For purposes of taxation the
amount of discount at which Treasury bills are originally sold by the United
States is considered to be interest.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is not considerK
to accrue until such bills are sold, redeemed or otherwise disposed of, and such
bills are excluded from consideration as capital assets. Accordingly, the owner
of Treasury bills (other than life insurance companies) issued hereunder need
inlcude in his income tax return only the difference between the price paid for
such bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made, as ordinary gain or loss. Purchasers of a
strip of the bills offered hereunder should, for tax purposes take such biU.
on to their books on the basis of their purchase price prorat~d to each of the
five outstanding issues using as a basis for proration the closing market
prices for each of the issues on March 3, 1969. (Federal Reserve Banks will
have available a list of these market prices, based on the mean between the bid
and asked quotations furnished by the Federal Reserve Bank of New York.)
Treasury Department Circular No. 418, Revised, and this notice, prescribe
the tenns of the Treasury bills and govern the conditions of their issue. Copie.
of the circul.ar may be obtained from any Federal Reserve Bank or Branch.

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

February 20, 1969
FOR IMMEDIATE RELEASE

EUGENE T. ROSSIDES TO BE NOMINATED AS
ASSISTANT SECRETARY OF THE TREASURY
Secretary of the Treasury David Mo Kennedy announced today
on behalf of President Nixon that Eugene T. Rossides will be
nominated as Assistant Secretary of the Treasuryo
Mro Rossides, 41, has been a partner in the law firm of
Royall, Koegel & Wells of New York City and Washington, D.Co
As Assistant Secretary of the Treasury, he will supervise
Lreasury's Bureau of Customs, Bureau of Engraving and Printing,
Bureau of the Mint and the office of the Special Assistant to the
Secretary for Enforcement.
Mro Rossides, from 1958 to 1961, served as
reasury Under Secretary Fred C. Scribner, Jr o,
of the practice of law in New York City. Early
areer he served as a Criminal Law Investigator
ureau on the staff of New York County District
rank S. Hogano

Assistant to
before returning
in his law
in the Rackets
Attorney

For two years Mr. Rossides was an Assistant Attorney General
or the State of New York, having been appointed by the then .
ttorney General Jacob Javits, who assigned him to the Bureau of
ecurities to investigate and prosecute stock frauds. A former
legal officer for the Air Materiel Command, U.S. Air Force,
r. Rossides holds the reserve rank of Air Force Captain.
A native of New York, Mr. Rossides graduated from
rasmus Hall High School,. Brooklyn; received his AoB. degree from
Columbia College in 1949; his LL.Bo degree from Columbia Law
School in 19520 He is a member of the Columbia College Council,
vice president and director of the Columbia College Alumni
Association, and a member of the Columbia College varsity "c" Club.

-21

(OVER)

- 2 A member of the Greek Orthodox Church, he serves on the
church's highest ruling body, the Archdiocesan Council of the
Greek Orthodox Church of North and South America, both as
treasurer and member of the Council's policy committee. He is
a vice president of the Metropolitan Chapter of the National
Football Foundation and Hall of Fame, and a director of the
Touchdown Club of New York. He is a member of the American,
Federal and New York State bar associations, the New York State
District Attorneys Association, the American Political Science
Association, and the Academy of Political Science.
He is married to the former Aphrodite Macotsin of
Washington, D. C. They have three children, Michael Telemachus
6; Alexander Demetrius, 4, and Eleni Ariadne, 1. Mr. Rossides
has another daughter, Gale Daphne, 14, by a previous marriage.

000

TREASURY DEPARTMENT
WASHINGTON. D.C.

FEBRUARY 24, 1969

MEMORANDUM ACCOMPANYING DEBT LIMIT MESSAGE
The President has asked the Congress for a rev~s~on
of the debt limito This revision will take care of the
Treasury's immediate needs and, looking ahead, provide an
adequate margin for financing the Federal Government for
the foreseeable future o The President's recommendation
will also bring the debt limit into conformity with the
unified budget concept now utilized in all budget
presentations
0

The present debt limit corresponds closely to the
administrative budget concept formerly used in budget
analyses. The proposed revision will bring the debt limit
into accord with the financing analyses presently shown in
the monthly Treasury statements and the budget under the
headings of "borrowing from the public" or "debt held by
the publico" The debt transactions reflected in these
categories can be directly reconciled to the over-all
surplus or deficit in the unified budget accounts.
The major differences between the proposed concept
of the debt limit and the concept now used are:
(1)

All debt issues of Federal agencies in
which the U. S. has an ownership interest
are included in the proposed concepto

(2)

Investments of Government accounts
(including trust funds) in Federal securities are not included in the proposed
concept.

(more)

- 2 -

The attached table reconciles the two concepts as of
the 21st of January. As may be seen, on that date borrowings
from the public amounted to $293.7 billiono The President
has requested a limit on that basis of $300 billion.
The debt subject to the present limit totaled $364.2
billion on January 210 If the debt limit were to be continued on the old basis, the Congress would need to provide
an increase in that limit to approximately $382 billion to
provide equivalent leeway through fiscal 1970. Moreover,
further sizable increases would be required in subsequent
years, even if balance is maintained in the unified budget,
so long as the Federal trust funds realize substantial
surpluses and invest those surpluses in Federal securitieso
As the President's message points out, the proposed
change in the debt limit has no effect on the operations or
integrity of Federal trust fundso These funds will continue
to operate precisely as in the past.
The inclusion of the public borrowing of Federal
agencies in the total debt subject to limit will be a major
step forward in promoting better public understanding of
public financing. In particular, the new concept reflects
the growing role of agency financing in the total public
borrowing of the United States Government.
Attachment

-000-

DEBT SUBJECT TO LIMIT -- COMPARISON OF
PRESENT CONCEPT TO THE PRESIDENT'S PROPOSAL
January 21, 1969
(In billions)

$365.0

Current debt limit
Public debt

•• 0.0

36100

Guaranteed securities 0•• 00.00.0.0 ••••••••••••• 0.

Total public debt and guaranteed securities..

361.6

000 • • • • • • • • • •

••••• 0.00 ••••

•••

Deduct:

Public debt not subject to
present limit 0 0•• 0 • 0 • 00 •• 0 0•••• 0 0 0 .0.
Participation securities subject to
present limit, (issued by FNMA in
fiscal year 1968).00.0000 •••••• 0••••• 00.

3.2

Debt subject to limit, present concept 0 ••••• 0

$364.2

Add:

Public debt not subject to present limit ••
Federal agency issues (including participation certificates) not subject to
present limit •••• 0.0 •••••••• 0•• 0 •• o • • • 0 •

Deduct:

Federal securities held as investments
by Government accounts .0 ......•.. 0...
Special issues to IMF reflecting
balance of U.S. subscription 00 ••••• 00

Debt subject to limit, proposed concept
(borrowings from the public) 0.000000000

06
1102
81.5
08
$29307

TREASURY DEPARTMENT
WASHINGTON, D.C.
FOR RELEASE 6: 30 P.M. I
Monday, February 24, 1969.
RESULTS OF TREASURY'S WEEKLY Bn.L OFFERIlfG

1be Treasury Department announced that the tenders for two series of Treasury
bills, one series to be an additional issue of the bills dated November 29, 1968,
and the other series to be dated February 27, 1969, which were offered on February
19, 1969, were opened at the Federal Reserve Banks today. Tenders were invited for
$1,600,000,000, or thereabouts, of 91-day bills and for $1,100,000,000, or thereabouts, of 182-day bills. The details of the two series are as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average

91-day Treasury bills
maturing Mal 29 2 1969
Approx. Equiv.
Price
Annual Rate
98.473
6.040lJ
98.455
6.112~
98.463
6.08~
!I

182-day Treasury bills
maturi~ Au~st 28 z 1969
Approx. Equiv.
Price
Annual Rate

96.848
96.822
96.836

6.235~
6.286~
6.258~

Excepting 2 tenders totaling $900,000
71~ of the amount of 91-day bills bid for at the low price was accepted
91~ of the amount of 182-day bills bid for at the low price was accepted

'roTAL TENDERS APPLIED FOR AIm ACCEPTED BY FEDERAL RESERVE DIS'mICTS:

District
Boston
New York
Phllade lph1a
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
IDTALS

AEElied For
AcceEted
29,881,000
$
$ 19,857,000
1,867,869,000 1,095,369,000
36,315,000
21,315,000
34,678,000
34,678,000
11,562,000
11,562,000
45,947,000
35,347,000
194,517,000
159,817,000
45,057,000
39,767,000
28,083,000
22,083,000
29,442,000
28,942,000
26,745,000
17,455,000
144 z 069 z000
114 z 169 z 000
$2,494,165,000

AEElied For

4,91~,OOO

1,446,869,000
31,147,000
20,532,000
6,404,000
32,539,000
143,051,000
22,063,000
23,261,000
15,811,000
22,082,000
132 z607 z 000

$1,600,361,000 ~ $1,901,277,000

Accel!ted
$
4,911,000
788,989,000
21,147,000
20,532,000
6,404,000
22,139,000
100,051,000
18,318,000
13,761,000
15,311,000
12,082,000
761. 607 z000
$1,100,252,000 ~

~ Includes $315,476,000 nonccmpetitive tend.ers accepted at the average price of 98.463
~ Includes $162,387,000 noncompetitive tenders accepted at the average price of 96.836
!I '!hese" rates are on a bank discount basis. 'lhe equivalent coupon issue yields are
6.26~ for the 91-day bills, and 6.55~ for the 182-day bills.

TREASURY DEPARTMENT
WASHINGTON. D.C.
FOR RELEASE 6: 30 P.M.,
Tuesday, February 25, 1969.

RESULTS OF OFFERING OF $1 BILLION STRIP OF TREASURY BILLS
ihe lreasury Department announced that tenders for additional amounts of five
series of Treasury bills to an aggregate amount of $1,000,000,000, or thereabouts,
to be issued March 3, 1969, which were offered on February 19, 1969, were opened at
the Federal Reserve Banks today. 1he amount of accepted tenders will be equally
divided among the five issues of outstanding Treasury bills maturing April 30, May 31,
June 50, July 31, and August 31, 1969. ~e details of the offering are as follows:
Total applied for - $2,960,415,000
Total accepted
- 1,000,400,000

RANGE OF ACCEPTED

JOMPETI'l'IVE BIDS:

Price
98.058 ~7
98.035
98.041

(includes $63,735,000
entered on a noncompetitive
basis and accepted in full at the average price
shown below)

Approximate equivalent annual rate of discount based
on 119.4: days (average number or days to maturity)
5.855~

5.925~

5.907j

Excepting two tenders totaling $1,100,000
75~ of the amount bid for at the low price was accepted

~TAL

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
MinneapOlis
Kansas City
Dallas
San Francisco

Applied For
$ 129,315,000
1,427,015,000
165,4:50,000
155,925,000
13,075,000
74,970,000
353,155,000
75,200,000
201,630,000
74:,4:60,000
128,380,000
161,84:0,000

Accepted
$ 30,290,000
4:87,765,000
73,350,000
63,325,000
5,075,000
29,570,000
31,115,000
13,500,000
105,630,000
58,010,000
27,130,000
75,64:0,000

IDTALS

$2,960,4:15,000

$1,000,4:00,000

1b1s rate is on a baDk discount basis.

K-22

The equiY8.1ent coupon issue yield is 6.11~.

TREASURY DEPARTMENT
,
WASHINGTON, C.C.

February 25, 1969
FOR IMMEDIATE RELEASE
PAUL W. EGGERS TO BE NOMINATED
AS GENERAL COUNSEL OF THE TREASURY
Secretary of the Treasury David M. Kennedy announced today
that president Nixon intends to nominate Paul W. Eggers of
Wichita Falls, Texas, an attorney and Republican candidate for
Governor of Texas in 1968, as General Counsel of the Treasury
Department.
Mro Eggers, 49, who has been engaged in full-time private
practice of law in Wichita Falls since receiving his law
degree in 1948 from the University of Texas, has been active
in the field of tax law. He has served as chairman of the
State Bar Association's Tax Section, and was chairman of his
state's Republican Party Task Force on Revenue and Fiscal
Policy.
Mr. Eggers, who served as Republican County Chairman
for Wichita County, was a delegate to the Republican
National Convention in 1968.
Born in Seymour, Indiana, the son of the late Ernest H.
and Ottillie Carre Eggers, he attended public schools there,
receiving his bachelor of arts degree from Valparaiso
University in 1941. During World War II he served in the
U.S. Army Air Corps, attaining the rank of major.
He is a member of the State Bar of Texas and the American
Bar Association. He is married to the former Frances May Kramer
of Wichita Falls. They have one son, Steven Paul, 11.

000

K-23

TREASURY DEPARTMENT
WASHINGTON, D.C.
February 25, 1969

FOR IMMEDIATE RELEASE
MRS. BETTY HIGBY NAMED
SUPERINTENDENT OF DENVER MINT
Treasury Secretary David M. Kennedy announced today
that president Nixon will nominate Mrs. Betty Higby of
Colorado Springs as Superintendent of the Denver Mint. For
the past five years she has been Public Trustee of El Paso
County, Colorado.
Among other duties, Mrs. Higby will be responsible for
planning, direction and coordination of all activities of the
Denver Mint, which manufactures coin for domestic use and for
foreign governments.
Mrs. Higby has for many years been active in ClVlC and
community organizations. A past president of the Public
Trustees' Association, State of Colorado, she has also
served as chairman of its legislative committee. She has been
chairman of the Women's Division, Community Chest, and of the
Residential Division, Red Cross, as well as president of the
Women's Board of St. Francis Hospital and president of the
El Paso County Coordinating Council of Women's Organizations.
Mrs, Higby is vice president of the Altrusa International Club
in her city and a member of the Legislative Committee of the
State Coordinating Council of Women's Organizations.
Over more than a decade, Mrs. Higby has filled a number
of posts in the Republican Party, having been State Public
Relations Chairman for Nixon-Agnew and a candidate for
National Committeewoman in 1968. From 1957 to 1959 she was a
director of the National Federation of Republican Women. She
served two terms as vice chairman of the Colorado Republican
Central Committee.
Widow of the late Don W. Higby, a former district
attorney, Mrs. Higby was born in Kansas City, Kansas, where
she was educated in the public schools. She has one son,
Wayne Higby, who teaches at the University of Nebraska, and
two grandchildren. She is a member of the Church of the
Holy Spriit (Episcopalian).

K-24
000

TREASURY DEPARTMENT
,
WASHINGTON. O.C.
February 26, 1969
FOR IMMEDIATE RELEASE

bills (to maturity date) to be issued
March 6, 1969,
in the amount of $ 1,600,000,000, or thereabouts, representing an
additional amount of bills dated December 5, 1968,
and to
mature June 5, 1969,
originally issued in the amount of
$1,100,082,000,
the additional and original bills to be
freely interchangeable.
18~day

dated

bills, for $ 1,100,000,000,
March 6, 1969,
and to mature

or thereabouts, to be
September 4, 1969.

The bills of both series will be issued on a discount basis unde
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m.,
Eastern Standard
time, Monday, March 3, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the ba.sis of 100,
with not more than three dec"ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders b~ made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
Customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
s~bmit tenders except for their own account. Tenders will be receive
wlthout deposit from incorporated banks and trust companies and from
K - 25

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on March 6, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing
March 6, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or o'ther excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

STATEMENT BY THE HONORABLE PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE JOINT ECONOMIC COMMITTEE
THURSDAY, FEBRUARY 27, 1969
10:00 A.M.

This Committee has come to playa special role in stimulating Congressional thinking and public discussion in the complex
area of international finance, and I particularly look forward
to the opportunity of working with you in the future.

As you

will understand, I will not at this stage attempt to layout
the specific ingredients of our approach towards the balance of
payments or a precise agenda for improvements in our international monetary arrangements.

Rather, I would like to appraise

where we now stand and to suggest a general framework for approaching the future.
Certainly, there can be no shrinking from the fact that
serious problems exist

in- the areas you are

reviewing today.

Secretary Stans has already covered our balance of payments
results for last year.
detail.

I will not go over that ground again in

However, I would reiterate the plain fact of the matter.

The over-all balance in our external payments last year on the
liquidity basis, welcome as it is, was achieved only as a result
of an unprecedented swing in the capi tal accounts.
States, fo~ the first time in the postwar

K-26

The

Uni ted

period, became a

- 2 -

large net importer of capital.
for the world's richest economy.

That is an extraordinary position
It is a position that we should

neither expect nor want to sustain for long.
Meanwhile, the international competitiv~ position of our
industry is feeling the effects of several years of accelerating
price inflation and overheating at home.
balance

The impact on our trade

has been aggravated by slower growth and

in some other leading industrialized

excess capacity

cou~tries.

The behavior of our price indices hotps tell the story.
Consumer prices in this country rose by only a little over one
percent a year from 1958 to 1964, and export prices were nearly
flat.

From 1964 through 1968, in contrast, consumer prices rose

by over 14 percent, and the latest available data show export
prices up by about 9 percent from 1964.

A composite index of

export prices for the industrial countries of Europe rose by only
2 percent over the latter period; and, in Japan, the rise was
only one percent.
While movements in relative prices are certainly not the
only factor responsible, we are faced today with a situation in
which our once healthy trade surplus has entirely disappeared.
The most recent data, while difficult to interpret because

the dock strike, show no clear evidence that the turning point
has yet been reached.

In these circumstances, there is no room

for complacency with respect to our competitive position.

- 3 -

I have no wish to minimize the constructive and longer-term
elements in the large capital inflow last year.

Given the fact

of the deterioration in the trade balance, these flows did

an equilibrating function and, in part, reflect some
longer-run structural changes in financial markets.

serve

desirable
For instance,

the foreign net purchases of U. S. stocks, which jumped

$1.9 billion last year from an average of only $200 million over
the previous five years, may stem, in part, from a basic shift
in the investment patterns of many European investors, attracted
by the liquidity and growth potential of the American market.
The expanded promotional activities of the American financial
community -- back-stopped by action the Government itself has
taken to rationalize the tax treatment of foreign portfolio
investment -- has certainly played a part.
Similarly, the rapid development of the Euro-bond market -and the Euro-dollar market more generally -- has provided both
U. S. and foreign businesses with an alternative source of funds
in financing overseas expansion, reducing the drains on the
American market.

The result was that U. S. firms could raise some

$2 billion in the European bond markets at interest costs only
marginally hi3her than they might otherwise have paid in the
United States.
Nevertheless, more transient factors also played a major
role in the swing in the capital accounts.

The main impetus to

- 4 foreign borrowing by the U. S. companies came from the mandatory
controls on direct investment outflows from the United States.
Commercial banks, faced with tighter guidelines on their foreign
lending, cut their overseas credits in 1968, in contrast to a
sizeable increase the year before.

These particular sources of

improvement will not be operative in the future.

Indeed, instead

of relying on controls to achieve short-run improvement, we want
to move in the direction of relaxation just as quickly as circumstances permit.
The increasingly tight money conditions in the U. S. market
also pulled large amounts of capital to this country.

This was

most visible in the form of an increase of about $2 billion in
borrowing of American banks from their own overseas branches.
Those branches, in turn, were bidding for funds in the Euro-dollar
market.
The pull of tight money, which has continued into the early
weeks of the new year, helped to account for the sizeable surplus
of $1.7 billion achieved on the official settlements basis in
1968.

Essentially, dollars that might have become foreign

official claims on the U. S. were, instead, diverted into the
Euro-dollar market and returned for use in this country through
the

private market.

In the short run, this inflow was helpful.

But short-term borrowing in this amount can hardly be considered
a part of a long-term solution to our balance of payments problem.

- 5 -

A variety of so-called special transactions arranged with
foreign official institutions also were an important element in
last year's results, and an element that should not be relied
upon year after year.

Here, I would draw a distinction between

those special transactions that represent an "offsetting" or
"neutralization" of our military expenditures abroad and those
designed simply to change the maturity of some of the dollars
held'by foreign central banks.

The former reflect an effort to

come to grips with the continuing problem of evening out balance
of payments burdens arising out of the mutual defense effort.
We cannot be entirely satisfied with the form of many of these
offset transactions, but the basic principle that no country
should suffer balance of payments disadvantage through its
contribution to the NATO defense structure is sound.
Turning from our own balance of payments to the international financial scene generally, signs of tension and strain
have been evident over the past year or more.

I need not

review the series of so-called crises, beginning with the
devaluation of sterling in late 1967, that have attracted so
much attention.

Nor will I maintain that the period of

relative calm that has been restored to the markets since the
Bonn Conference last November is an indication that the
problems are now behind us.

But I would urge that, in approach-

ing these problems and finding durable solutions, we not be

- 6 -

beguiled by the thought that a full answer can be found merely
by a change in some of the technical international monetary
arrangements.
The problems are deeper.

In part, they are a symptom of

inflation, not only in some countries abroad, but in recent
years in the United States as well.

The result has been a

sense of lack of control -- of drift

which, if long continued,

could undermine the sense of confidence in the monetary system.
Without confidence, any monetary mechanism will work poorly -and orderly change becomes more difficult.
That is one reason why a first priority for the United
States must be to regain control over its own inflation.

We do

not have the option of achieving that result in an abrupt way
that would lead to a contraction in trade abroad as well as
excessive unemployment at home.

Even looking at the balance of

payments in isolation, there would be little or nothing to be
gained from a sharp recession that drives too much money abroad
in search of more profitable employment.

But steady restraint,

applied as long as necessary, is the basic ingredient upon
which American leadership in the international monetary area
must rest.
Apart from the current inflationary problem in the
United States, developments in recent years have brought into
fresh focus some old -- but still unsolved -- problems of

- 7 international adjustment.

Sr:::

Nations give heavy weight to domestic

objectives, and it is natural for differing emphases to emerge
with respect to employment, growth, productivity, and price
stability.

The result is a tendency to pusn balance of payments

out of equilibrium, with resultant strains on the monetary
mechanism.
Even considering balance of payments objectives themselves,
the

~vidence

seems to be accumulating that nearly all countries

feel more comfortable with -- and aim for -- surpluses (or at
least increases in international reserves) over a period of
time.

Yet, unless new reserves are being created in sufficient

v~lume

to support these aims, they turn out to be mutually (and

arithmetically) incompatible and thus impede adjustment.
As a practical matter, the United States, because of its
size and the widespread use of its currency, is in an
essentially different position from most other countries in this
respect.

A small country is able to make adj ustments in its

economic policies within some range upon the assumption that the
rest of the world will "stand still;" the adjustments will,
therefore, be effective in terms of its balance of payments.
The United States often cannot make the same assumption.

The

policies we adopt have a pervasive influence on the rest of the
world, and other countries may thus react to our moves by
changes on their part to maintain their external balance.

- 8 -

this situation, so long as other countries collectively want,
over time, to run a surplus -- and essentially achieve this
surplus by adjusting. to the position of the United States -- the
ability of this country to restore a

durabl~

equilibrium is

closely circumscribed.
I would go further and put the point more positively.
Surplus countries must themselves recognize they share the
responsibility for undertaking the adjustments, in current as
well as capital accounts, necessary to achieve a healthier
international monetary system.
Another problem area is the strains on the monetary
mechanism that have developed from structural changes in international payments.

One aspect of this change, referred to

earlier, is the large and sustained burden of defense expenditures abroad.

These expenditures obey no economic law; yet

they do permeate the economic and payments structure of the
United States and other countries in a way that cannot easily,
if at all, be absorbed by the traditional adjustment policies.
At least as important over time is the increasing volume
of capital flows that have accompanied the growing integration
of the international economy, particularly in the highly
developed part of the world.

This movement of capital brings

great gains in the rapid dispersion of technology and
managerial techniques, in the potential for efficient large-

- 9 -

scale production, and in the better allocation of scarce
capital worldwide.

But it also brings the potential for a

great volatility of funds and essentially speculative flows that
do not reflect lasting economic advantage and can be an added
source of strain to the financial mechanism.
These comments can, of course, do nothing more than touch
lightly upon some of the underlying problems that lie behind
the international financial difficulties of the past year or
more.

Moreover, in citing these problems, I do not want to lose

sight of the very real economic achievements of the postwar
period for which the international monetary system can certainly
take a large share of the credit.

For instance, in terms of the

acid test of expanding trade, increases have averaged 7 percent
a

y~ar

since 1950, and that upward trend continued through the

crises of last year.

Capital flows have expanded enormously

among the industrial world, and gains in productivity and income
have been both relatively steady and large by historic
standards.

International cooperation has, in the pressure of

events, proved up to the task of containing and defusing the
crises that have developed, without lasting damage to trade.
These are substantial achievements, not to be jeopardized
lightly in a search for the will-of-the-wisp of some simple,
sweeping reform that will easily solve all our problems.

this complex world, such a simple one-dimension solution does

- 10 -

not exist.

We cannot escape from the problems of achieving a

better adjustlaent process, or orderly growth in liquidity, or
sustaining confidence in the dollar by increasing the monetary
price of gold.

Secretary Kennedy has pointed out we will not seek

an answer to our problems by such a change.

Nor should we be

under any illusion that the opposite extreme of freely
fluctuating exchange rates, in theory bringing a quick and
automatic adjustment process

would necessarily be less painful

or less disturbing.
But, as this Committee has itself emphasized, neither can
we stand aside, unwilling to examine responsible proposals for
change that deal with important parts of the evident problem.
We will not drift into a morass of controls, whether on capital
or trade, in a misguided effort to avoid changes in financial
arrangements, where change

is needed.

We do not seek change for the sake of change.

We want to

test our ideas and plans with our friends abroad to make sure
that they are

responsive to the common interest in a strong

and durable international monetary system.

But where change is

demonstrably needed and responsive to the nature of problems
before us, we will be prepared to move ahead.
Some items •are already on the agenda. Prompt ratification
of the Special Drawing Rights, and then their early activation,
are high on the list.

1bis is the method of supplementing world

- 11 -

liquidity agreed in the framework of the International M0netary
Fund after years of patient negotiation.
part

It is

~imed

at only a

but an important part -- of the problem before us.

Special Drawing Rights will not cure our own balance of payments
problem.

But they can make a vital contribution in further

undergirding the stability of the system, even in the shorter
run, by providing concrete evidence of the capacity of the world
community to manage consciously the supply of international
liquidity in the common interest.
Progress in achieving a more equitable distribution of the
balance of payments consequences of the military effort is
another area in which we need now to build more permanent
arrangements, learning from the experience of the past.
tariff barriers to trade

in general, and border taxes

Nonin

particular, deserve -- and are receiving -- our close attention
to see whether changes in these areas might contribute to
facilitating the adjustment process.
Our already strong defenses against speculation -- the
network of swaps and other facilities for marshalling funds
quickly at the point of need -- will be maintained and adapted
to

changin~

circumstances, as necessary.

Our horizons must extend further.

Discussions in this

Committee and elsewhere have proposed means for introducing
an element of greater flexibility into exchange rates.

Careful

- 12 -

evaluation is needed of the possible contribution such changes
might make to dampening speculation by increasing its costs,
and to easing the longer range problems of adjustment.

Your

Committee and others have also proposed new means of better
assuring stability in the composition of reserves, and these
proposals, too, need to be explored.
But I would conclude by repeating again what must be the
sine qua non of lasting progress -- a strong and respected
dollar rooted in healthy, non-inflationary growth at home.
Without this, no monetary device can assure stability and an
international financial framework conducive to economic progress.
But, with inflation under control, I am confident that we can
attack, forcefully and intelligently, the remaining causes of
strain and tension with every prospect of success.

000

TREASURY DEPARTMENT
Washington

REMARKS OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE NATIONAL GOVERNORS CONFERENCE
MID-YEAR MEETING, EXECUTIVE SESSION
WASHINGTON HILTON HOTEL
FEBRUARY 27, 1969, 2:00 P.M., EST
The growth of our Federal system of government has
brought with it a widespread interweaving of its operations
with those of our State and local governments. In the
present fiscal year, the Federal government is contributing
nearly $21 billion in grants-in-aid to State and local
governments through more than 400 separate authorizations,
which go through almost everyone of the government's
departments and agencies. In fact, the Federal government
is providing funds equivalent to about 18 percent of State
and local expenditures, as reported in the national income
accounts.
Scarcely a day goes by that some governor or mayor
isn't publicly airing the financial plight of State and local
governments. And their lamentations are largely justified,
because many of these State and local governments are in
deep financial trouble. The problem, I believe, is simple:
public need and demand for State and local services are
rising much more than revenues
Thus, despite efforts
to hold the line on spending,legislators, governors, mayors
and other municipal officials are constantly seeking new
revenues from a tax base which is not rising fast enough.
0

In a Federal system such as ours the question of
Federal-State-local fiscal relationships is a perpetual
one because the distribution of functions and tax
resources between the various levels of government cannot
be perfectly matched. The growth in needs and demands for
public services in a prosperous growing economy, increasingly
urban, brings to "the forefront the problem which the State
and local governments face in financing services which have
been traditionally their responsibility. This has recently

K-27

- 2 -

brought about considerable discussion of the size and ~orm
of Federal financial assistance to State and local
governments.
With this brief background, let me talk for a few
moments about some of the measures being debated, both
publicly and within the councils of government. Let me
also say here that this discussion is not meant to give
anyone the impression we are placing mor,e emphasis on one
or two proposals while relegating to second place other
proposals. There are a number of very worthy proposals
which will -- and let me assure you of this -- receive the
most penetrating analysis this Administration can provide.
In anticipation of the post-Vietnam period there is
much public discussion of "peace dividends" and "growth
dividends" which are expected to be available to the
Federal government. I personally believe these so-called
dividends are greatly overstated. And many programs seem
to be waiting in the wings to get part of these funds.
We are learning of many proposals for new forms of Federal
aid including block grants for broad categories of
expenditure, sharing of a percentage of Federal income tax
revenues, Federal income tax credit for State income taxes,
and Federal assumption of greatly increased responsibility
for certain major functions such as welfare and education.
With respect to proposals for revenue sharing or a
general support grant, your Committee on State and Local
Revenues has done considerable work and has developed
general criteria for such a plan and alternative types
of plans to meet these criteria. You are fully aware of
the problems of allocating funds among the States and to
cities and other local governments within the States. The
organizations representating the cities have also developed
specific proposals which they have asked us to consider in
our studies of this problem. The recent studies of the
Advisory Commission on Intergovernmental Relations in
connection with its Fiscal Balance study and the Report
of the National Commission on Urban Problems will also be
useful to us.
One alternative suggested for helping State and local
governments to raise additional revenue is a Federal income
tax credit for State and local income taxes. Under such a

- 3 -

plan persons filing a Federal income tax return would deduct
from their Federal tax part of their State and local income
taxes. The effect of such a credit on State and local
government finances is to reduce the burden on State and
local taxpayers of these taxes. The Federal government and
indirectly the taxpayers of the entire Nation would share in
the tax burden of each individual State or locality.
Tax credits have been used to encourage use of certain
taxes by the States. The credit for State death taxes
against Federal estate taxes is an example.
Plans for such credits have been worked out by the
Advisory Commission on Intergovernmental Relations, by the
Committee for Economic Development and others. In
consideration of such a credit it must be remembered that
State and local income taxes as well as sales taxes and
property taxes are already deductible from the Federal
income tax and to the extent of the value of the deduction
the Federal government is now sharing a portion of the
State and local tax burden.
For example, a taxpayer in the 50 percent bracket now
has half of his State income tax paid by the Federal
government. It is estimated that the deduction of income
taxes alone results in the Federal government paying
approximately 29 percent of each dollar collected by State
and local income tax officials. The effect of a credit
would be to provide Federal income taxpayers a more
generous write-off of their income tax payments than they now
obtain by itemizing them as a deduction. In this context
let me just point out that in 1968 the loss of Federal
revenues arising from the deduction for State and local
individual income taxes amounted to approximately $1.4 billion.
Some of the problems with respect to an income tax
credit are that the credit may be viewed by some as coercing
the States to adopt similar tax structures, especially by
those 15 States which do not even have a personal income
tax now, and some would argue that other State and local
taxes should be made eligible for the credit.

- 4 -

A tax credit would have very different initial impacts
in States with and without present income taxes. Residents
of States which now have an income tax would in the first
place get relief if there were no change in State tax rates.
The State itself would have no additional revenues until it
increased its income tax rates. A governor of a State which
already has an income tax would have the choice of permitting
residents of a State to enjoy the benefits of the reduction
or proposing additional income taxes of which part would be
offset by the credit. The State's need for revenue and
political considerations would be expected to influence his
choice. Fifteen States would have to enact new income
taxes to benefit.
At this point let me repeat that this recital of these
particular examples of alternative methods of helping State
and local governments is not to be taken as an outline of
things to come in the immediate future. I cite them only
as evidence that finding new directions in these important
areas of assistance beyond the Federal level, is a highly
complex matter, with many facets needing thorough
exploration.
As you know, the Treasury is now exploring tax reform
measures, and expects in due course to present its
recommendations to the Congress. Hopefully, some tax
reform will be passed by the Congress this year, but I would
not expect this legislation to break any new and dramatic
ground in the area of Federal-State-local fiscal relations.
However, this area is obviously a crucial part of the overall
tax problem, and it will receive high priority in our
long-range studies.
However, we must keep three things in mind. First,
while we investigate these very important problems, we
must remember there will continue to be demands on Federal
budgetary resources, especially while hostilities in
Vietnam continue at their present levels.
Second, in the present inflationary climate it is
important that our budget have a surplus. The fight against
inflation is critical for everyone, including State and
local governments which are obliged
to pay high interest
rates, meet heavy wage demands and over-mounting capital

75
- 5 -

expenditures. Controlling inflation will require controlling
the growth of expenditures in the Federal budget. Controlling
inflation is probably one of the most single important
contributions the Federal government can make at this time to
a healthier State and local fiscal situation.
Third -- and I believe this is a key element to
achieving success in this particular area -- while our own
exploration and discussion goes on, we in the Treasury
welcome any assistance you can give us, individually and
collectively. By working together we will achieve the
wisest solutions that our collective knowledge can provide.

000

TREASURY DEPARTMENT
WASHINGTON. D.C.
t RELEASE 6:30 P.M.,
~y,

March 3, 1969.
RESULTS OF TREASURY'S WEEKLY BILL

O~RIBG

Treasury Department announced that the tenders for two series of Treasury
Is, one series to be an additional issue of the bills dated December 5, 1968,
the other series to be dated March 6, 1969, which were offered on February 26,
9, were opened at the Federal Reserve Banks today. Tenders were invited for
600,000,000, or thereabouts, of 91-day bills and for $1,100,000,000, or tbereuts, ot 182-day bills. " The details ot the two series are as follows:
~

91-day Treasury bills
me. turi!!6 June 51. 1969
Approx. Equiv.
Price
Annual Rate
98.436
6.187J
6.235j
98.424
6.215j
98.'29

GE OF ACCEPrED
PETITIVE BIDS:

182-day Treasury bills
ma. turi!!6 SeEtember 4r,a 1969
Approx. Equiv.
Price
Amlua1 ~te
6.356
96.797 y
96.788
6.353~
96.794
6.3'2j

High
Low
Average

af Excepting 1 tender of $18,000; E/ Excepting 1 tender of $1,158,000
1'~ ot the amount ot 91-day bills bid for at the low price was accepted
6~ of the amount of 182-day bills bid for at the low price was accepted
U,

TENDERS APPLIED FOR AIm ACCEPTED BY FEDERAL RESERVE DISTRICTS:
.

Lstr1ct
)ston
!w York
li lade 1phia
.eveland

ApE lied For
,
26,370,000
1,874,835,000
32,230,000
33,431,000
.cbllond
13,269,000
olanta
47,420,000
licago
199,686,000
i. LOUis
48,292,000
lIDeapOlis
29,329,000
llSas City
31,090,000
Uas
33,222,000
11 Prancisco
153 z411 z000
~'llLS

$2,522,585,000

ApElied For
$
7,331,000
1,086,995,000
1,649,107,000
17,230,000
17,207,000
33,386,000
28,726,000
13,269,000
5,932,000
31,717,000
40,212,000
170,686,000
137,417,000
36,728,000
27,894,000
16,579,000
23,657,000
28,210,000
19,589,000
23,342,000":
21,406,000
125 z551 z000 :
186.z305.1000

Acce!ted

$6,370,000

$1,600,063,000

£I

$2,164,783,000

AcceEted
$
5,313,000
857,996,000
5,387,000
28,726,000
5,8'1,000
24,112,000
55,809,000
15,61',000
5,107,000
14,157,000
11,006,000
71.1469.1000
$1,100,537,000 ~

Deludes $334,548,000 noncompetitive teDders accepted at the average price ot 98.429
Deludes $161,451,000 noncompetitive tenders accepted at the average price ot 96.794
beae rates are on a bank discount basis. 1he equivalent coupon issue yields are
.~tor the 91-day bills, aDd 6.64j tor the 182-day bills.

(7
,

STATEMENT BY THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY, BEFORE THE
HOUSE COMMITTEE ON BANKING AND CURRENCY
on
REPLENISHMENT OF THE RESOURCES OF
THE INTERNATIONAL DEVELOPMENT ASSOCIATION
10:00 A. M., Tuesday, March 4, 1969

Mr. Chairman and Members of the Committee:

I am especially pleased that the purpose of my first
appearance before

yc~r

Committee is to give my full support

to H.R. 33.
This bill, introduced by the Chairman of the Committee
and the Chairman of the International Finance Subcommitte,
would authorize the United States participation in replenishing
the resources of the International Development Association (IDA),
an affiliate of the World Bank.
After carefully reviewing the proposal for replenishing
IDA's resources, I am strongly convinced of its merits.

I am

equally strongly convinced of the need to act promptly.

The

United States should join in the action already taken by others
so that this second replenishment can be put promptly into effect.
The Committee is well acquainted with the bill before you to
increase IDA's resources.
on an identical bill.

Last year it examined and took action

Accordingly, I propose in my opening

statement to comment on only five points.

K-28

- 2 -

First, there is a clear and urgent need for an increase
in IDA's resources to finance development.
President Eisenhower stated, when IDA was first proposed
in 1958, that -the well-being of the free world is vitally
affected by the progress of the nations in the less developed
area.Despite the development that has been achieved in the
decade since then, too many nations--many recently established-still fall far short of a satisfactory rate of progress, and too
much of mankind still lives in poverty and despair.
I would not suggest that IDA alone, even with greatly
increased resources, can resolve all of these problems.

But

IDA has a unique role to play in a concerted development effort.
IDA concentrates its efforts on the poorer of the developinq
nations and provides funds on repayment terms suited to the
financial condition of these nations.

It is making, and can

continue to make, a critical contribution toward economic
advancement.

It represents a unique multilateral effort to

bring the experience, expertise and practice of the World Bank
into areas of lending that would not be financially appropriate
for the Bank itself.

- 3 -

President Nixon has said that "America's basic self-interest
in world development stems from the brutal fact that there can
be no sanctuary for the rich in a world of the starving."
Presidents, members of Congress and leaders of both parties
have long recognized that our national interest is served by
joining together with others in sensible efforts to help the
developing nations along the road to progress.

IDA embodies

this kind of sensible effort.
Second, IDA is an effective instrument for sharing
the costs of worldwide development assistance among donor
countries "
We seek to encourage other developed nations to increase
their assistance to the "have not" nations.

As the other

industrial countries gain in financial strength, it is
appropriate that they assume a greater share of the burden for
providing development finance.

IDA has been, and can continue

to be, a most important channel for bringing about this result.
The initiation of IDA in 1960 was a major step in the
concept of sharing the burden of providing concessional
development financing--a burden which previously had rested
overwhelmingly on the shoulders of the u.S. alone.

This

commitment to more equitable sharing of the burden was extended

- 4 -

by the decision in 1964 to increase sharply the level of IDA
funding under the so-called first replenishment of IDA's
resources.

The present proposal for a second replenishment

would again increase the level of IDA funding and again
represents a substantial step towards increased burden-sharing.
IDA expanded from a level of contributions from the
economically advanced countries of about $150 million per
year in the first five years of its life, to a level of about
$250 million per year in the subsequent three years.

We now

look forward to a level of $400 million per year under the
present proposal.
creased, the

u.s.

As the level of IDA's operations has inpercentage share has gradually been reduced.

Our share of the total supplied by the developed countries
declined from over 43 percent when IDA was established to
40 percent under the present arrangement.
There is a compelling case to support
on grounds of our financial interest alone.

u.s.

participation

IDA provides the

machinery for ensuring that other developed countries bear a
larger proportion of the financial responsibility for development assistance than has been possible outside multilateral
channels.

In IDA they put up $3 for every $2 the United states

puts up, and this does not count any additional money other

7Q
'v

- 5 -

countries add to IDA over and above the replenishment
agreements or the amounts which the World Bank is able to
transfer to IDA each year out of its current net earnings.
Moreover, the uniform repayment terms provided by IDA
assure all donor countries are providing assistance on the same
concessionary terms.

Within the IDA framework there is no

problem of funding from some qountries being lent out on
harder repayment terms than others.
Third, IDA brings the economic and political advantages
of the multilateral approach and the proven value of IBRD
administration.
This Committee appreciates the merits of the multilateral
approach to development financing.

To sum up these advantages,

they include the opportunities for burden-sharing both with
respect to amounts and concessional repayment terms; the
objectivity which the international institutions enjoy; the
experience these institutions have; and the leadership role
they can play in the development effort.
We can be confident that IDA, as an affiliate of the World
Bank, under the same President, using the same expert management
and staff, and guided by the same Board of Directors and
Governors, will use its funds wisely.

IDA credits are extended

- 6 -

under the same rigorous criteria and with the same careful
scrutiny which the World Bank applies to its own loans.

IDA

credits and World Bank loans do not differ with respect to
careful loan appraisal.
hard currencies.

Moreover, both require amortization in

But IDA does enable funds to flow where

substantially longer periods of time are needed for repayment
and where only a low service charge, rather than market interest
rates can be paid.

These IDA terms are essential to prevent

a rapidly mounting debt-burden from obstructing the development progress of IDA's borrowers.

IDA credits are extended

only to those countries at the low end of the range in terms
of per capita income.

Many IDA borrowers already face severe

debt servicing problems in the years ahead.

It just would

not make financial sense to require harder terms for these
countries.

Nor would it meet the objectives for which IDA

was established.
Fourth, the proposal contains safeguards for the U.S.
balance of payments.
I could not under present conditions ignore the question
of possible impact on the U.S. balance of payments.

I am fully

satisfied that the proposed arrangements are adequate.
emerged from what I understand to have been very careful
negotiations.

They

- 7 -

The proposal for IDA's second replenishment is structured
so that if our balance of payments problems should persist, we
need suffer no serious balance of payments consequences from
our contribution.

There is an absolute assurance in the

agreement up to 1972 that if required by our balance of payments
situation, we would pay over in actual cash only that portion
of our share to pay for IDA procurement in the U.S.

Moreover,

the agreement provides that this arrangement will continue after
that date until other contributors' funds that make this
arrangement possible are exhausted.
Looking at it another way, the balance of payments
safeguard provides that the United States' contribution to
IDA, to the extent required for other than United States
procurement, will be postponed.

Other contributing countries

accelerate their contributions during such periods.

There

will be no move away from the World Bank or IDA's traditional
system of international competitive bidding, a point made
amply clear by the President of the World Bank and by the
Board of Directors.
The same mechanism that safeguards our balance of payments
also has the effect of reducing the budgetary cost of our
contribution while our balance of payments problem continues.
Briefly, while our pledge is $160 million a year for three

- 8 -

years, actual cash is called only when IDA needs funds to
meet actual disbursements of the credits it extends.
are on all contributors pro rata.

Calls

Because of the lag

between credit commitments and disbursements, calls for cash
will be only a fraction of the pledge for some time.
even further reduced for the

u.s.

This is

because we would be called

on for even less than our pro rata share should we continue in
balance of payments difficulty.

A detailed explanation of

these balance of payments arrangements is contained in the
report submitted by the National Advisory Council last year.
International Action Depends on U.S. Action
This brings me to my final point:

The responsibility

to act so that the 18-nation agreement to contribute to the
second replenishment can come into effect now rests squarely
with the United States.
Two steps are required for this IDA replenishment.

IDA

member governments must approve of the Board of Governors
second replenishment resolution.

This was done in 1968

by the required two-thirds vote of the 102 countries that are
members of IDA.

Only the United States and 10 non-

contributing countries have failed so far to vote for
the resolution approving the replenishment agreement.
The

u.s.

Governor could not vote because Congress did not

complete action on it last year.

- 9 -

The second step to put the replenishment agreement into
effect occurs only when twelve contributing countries having
contributions aggregating $950 million (of the $1.2 billion
total) have signified their agreement.

To date, eleven

countries with contributions totaling $472 million have
taken all necessary steps to fulfill their part of the
agreement.
As soon as the united States agrees, therefore, the
second replenishment will become effective.

Without the

United States contribution the replenishment cannot
become effective.

It is expected that soon after

we act the other six countries which have not acted on their
pledges will follow suit.
In view of the difficult situation faced by IDA because
of the delay in the second replenishment, a number of contributing countries are arranging to make advance contributions
against their second replenishment pledges.

This is a sign

of international confidence in IDA and is permitting some
continuity in IDA lending.

If the United States fails to

take affirmative action, it would be a most unfortunate
setback, not only to IDA, but also to the cooperative
concept of multilateral development assistance.

- 10 Appropriations Required
The legislation would authorize the appropriation, without
fiscal year limitation, of $480 million for our
amount to remain available until expended.

contributio~tut

The first of three

equal annual installments would be sought as an FY 1969 supplemental item.

Two further installments would be paid to IDA

in FY 1970 and 1971.

Each installment would be in the

form of non-interest bearing letters of credit, to be drawn
on by IDA at a later date as cash needs for disbursement
arises.

These letters of credit entail no budgetary ex-

penditure until actual drawings on them are made.
Conclusion
I testify here today as a representative of President
Nixon, to assure you that IDA has his full approval and support.
As you know, IDA took shape during the Administration of
President Eisenhower, under the guidance of one of my
predecessors, Secretary Robert Anderson.

Subsequently, it

developed further and expanded its operations with the support
of President Kennedy and President Johnson.

I am sure that it

is because of the advantages I have mentioned that IDA has
enjoyed a wide measure of support.

The creation of IDA was

chiefly one result of inititatives and actions of the U. S.
Congress.

It would be tragic if it should also end in

these chambers for want of the support it deserves.

82
- 11 -

I urqe this Committee aqain to qive its endorsement
to leqislation providinq for our fair share of the second
IDA replenishment and to carry this leqislation promptly
throuqh to final passaqe.

83
STATEMENT OF
THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE

March 51 1969
10:00 A.M.
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

The President in his message to the Congress on
February 24, 1969 requested the prompt enactment of
legislation to revise the debt ceiling.

Specifically, he

proposed a new permanent statutory ceiling for the Federal
debt of $300 billion under a definition according with
the unified budget concepto

This new statutory debt

ceiling is designed to take care of our needs indefinitely
into the future for as long as we are successful in
maintaining a balance in the budget.
The new ceiling is required to meet three specific
obj ectives:
First, the proposed ceiling will enable
the Treasury to meet anticipated cash requirements
in an orderly way through the middle of April
of this year.
Second, the proposed limit will meet
requirements anticipated for fiscal year 19700

K-29

- 2 -

Third, by bringing the debt ceiling
into accord with the ·budget presentations now
used by the Federal Government and by focusing
attention on total borrowings from the publtc,
the proposal will promote a better understanding
of public finance and contribute to more effective
control of the debt.
Under existing law the Treasury has been operating
very close to the temporary ceiling of $365 billion.

the end of January and February, debt subject to the limit
was within $3 to $3-1/2 billion of the statutory ceiling
and on individual days the leeway has been less than
$1 billion.

Assuming normal cash balances of $4 billion,

our latest projections -- while reflecting better-thananticipated tax collections over the past month -- still
indicate financing needs that would bring us above the
legal ceiling by minor amounts for six days in March and
by substantial amounts for seven days in April.

- 3 -

By permitting our cash balance to decline below the
levels required by prudent financial management, by
exercising close control on those balances by borrowing
from the Federal Reserve on a day-to-day basis, and by
making maximum use of agency borrowing that does not come
under the debt limit, we might be able to squeeze through
this period without disturbing the orderly flow of
expenditures or tax refunds.

However, the margin in

March and April is extremely tight.

Unforeseen expenditure

increases above projections or declines in revenues below
projections, even of relatively minor proportion, would
impair our ability to get through the April period without
extraordinary measures to conserve cash.

Essentially, we

have no leeway for emergencies.
With expenditures and tax receipts running about
$750 million per day, even the most careful projections
need to be revised frequently, and some deviation in the
actual results are normal and expected.

Fortunately,

recent results have indicated receipts are flowing
somewhat more strongly than the projections available when

- 4 I took office.

But prudent management of the Government's

financial affairs simply does not warrant undertaking the
risk of confining our margins of flexibility under the
debt ceiling to a few hundred million dollars.
After mid-April, we should readily get through the
remainder of this fiscal year.

The outstanding debt will

be declining sharply, and our financing pattern will
permit us to be comfortably below the ceiling for the
rest of the year.
However, an increase in the ceiling will certainly
be required in the early part of fiscal 1970.

The situation

can be illustrated by using the numbers in the Budget
Message submitted by the prior Administration.

As you

remember, that Budget forecast a surplus on the unified
budget basis of $2.4 billion in fiscal year 1969 and
$3.4 billion in fiscal year 1970.

Assuming these projected

surpluses can be realized, our estimates indicate that
at the seasonal peak in fiscal 1970 the debt subject to
the limit under its current definition will be $374 billion,
far in excess of the present seasonal limit of $365 billion.

- 5 -

As the Budget Director will explain in more detail,
we have some reservations concerning the expenditure
figures in the budget and anticipate spending in some
categories will be greater than estimated by the outgoing
Administration.

Because our review is not yet completed,

we cannot now tell the extent to which urgent efforts to
achieve further economies will offset these higher costs.
But it is evident that no practical savings can avoid the
need for an increase in the debt ceiling next year.
Our debt projections have been constructed on the

basis of an assumed $4 billion operating cash balance as
is the usual practice in these hearings.

That more or less

arbitrary amount, I might point out, was first established
for debt limit projections years ago when Federal expenditures
were less than half the current annual tota1so

In the

latest fiscal year, 1968, even with tight cash management
our operating balances averaged $5.1 bi11iono

Our average

balance has not averaged $4.0 billion or less since fiscal
year 1958.

Nevertheless, even with no further allowance

- 6 for contingencies, the current debt ceiling will be
inadequate to take care of our needs.
It has long been recognized in past hearings and
legislation that prudent management of the Government's
finances requires adequate allowance for contingencies
beyond the assumption of a $400 billion cash balance.

reviewing the problem this time, we are particularly conscious
of several special factors in the situationo
Perhaps most important quantitatively, the surtax on
individuals and corporations is scheduled to expire on
June 30, 1969.

As best we can now look ahead, we anticipate

that this surtax will need to be retained to maintain an
appropriate budgetary postureo
the consequences of expirationo

However, we must consider
The revenues that the

surtax would supply in fiscal year 1970 are estimated at

$9.0 billion, and there would be an earlier shortfall of
$05 billion in fiscal year 1969.

This contingency alone,

were it to materialize, would be several times the projected
surplus for 1970 shown in the budget.

- 7 -

There are also the uncertainties of revenue shortfall
that could occur from a more moderate rate of economic

growth.

The budget for 1970 included $10.7 billion of

higher revenues attributable 'primarily to higher individual
and corporate income from economic growth and ir1£lationo
A full measure of success in our efforts to moderate rising
prices could result in a reduction of this estimated gain
in revenues.
These possibilities, on top of all the more or less
normal uncertainties in anticipating cash needs more than
a year ahead, in our judgment justify a larger than normal
contingency allowance.

We are, therefore, requesting

a margin of $8 billion over the projected peak debt totals.
We feel that this is the smallest allowance that we can,
with prudence and reason, request in setting a debt limJt
that we hope to be able to maintain for the indefinite

future.

It is smaller than the contingency allowance

provided in 19670

I believe a still larger allowance

could certainly be justified.
With this allowance, the need for the statutory debt
limit on the present basis amounts to $382 billiono

The

President has, however, proposed that we now change the

- 8 statutory definition of the debt limit to conform to the
unified budget concept.
and urge its acceptance.

We strongly support this redefinition

On this basis we will need

a ceiling of $300 billion to provide the same margin for
contingencies as would be provided by the $382 Lillion
figure on the present definition.
The statutory debt limit can, of course, be defined
in any way that the Congress sees fito

As I understand it,

the main purpose of the statutory debt limit and these
hearings is to provide the Congress an opportunity to
review in a comprehensive way the outlook for the Government's
finances and to authorize the Treasury to issue indebtedness
in the light of this review o

It seems to me that, to

facilitate this review and to best achieve the Congressional
purpose, the changes in debt subject to limit should be
related as nearly as possible to the net budget

resu~ts.

This would greatly clarify Congressional appraisal of the
impact of Government finances on the debt limit and contribute
greatly to better understanding by the public.

Thus we do

see a clear public interest in placing the debt limit within
the frame of the present unified budget presentations.

- 9 -

The unified budget has been used in both the last two
budget messages.

It was designed to avoid the confusion

over various budget concepts formerly given wide publicity:
(1) the administrative budget, (2) the cash budget, and
(3) the national income accounts budget.

Each of these

served a different analytical need, but the net result was
confusing

The unified budget concept was designed to

eliminate this confusion and to enforce a consistent
discipline on budgetary presentations, thus maintaining
year-to-year comparability and facilitating analysis of
the economic implications of Federal financeso
I had the honor of serving as Chairman on the President's
Commission on Budget Concepts.

As you know, that Commission

was comprised of men of different political affiliations
and experience from both the public and private wor1do

They

engaged in an intensive review of all the problems and
unanimously recommended the adoption of the new budget
concept

Although the President's Commission on Budget Concepts
did not specifically recommend a change in the statutory
debt limit itself, the Commission did suggest that the
limit be re-examined with the new debt concepts in mind.

· - 10 That is what the President has doneo

He concluded that

the appropriate policy would be to make the debt limit
consistent with the unified budget presentationo
This consistency is achieved partly by eliminating
from the ceiling Federal securities owned by trust funds
and other agencies.

The laws establishing various trust

funds require that we invest their surplus funds in
Government securities.

The interest on these investments

provides additional earnings for the trust funds o

But

this investment accounting is internal; it does not affect
the net surplus or deficit on the unified budget and no
funds flow from or to the public on these transactionso
Nevertheless, the securities provided the trust funds are
included in the present statutory definition and this
results in the anomaly of the ceiling needing to be raised
at a time when the overall budget is operating at a surplus.
The fact is that, so long as the trust funds are
operating at a surplus and thus acquiring additional Treasury
issues, the debt subject to the ceiling will increase even
if the overall budget is in balance.

The trust funds are

projected to provide surpluses of $904 billion and $10.3
billion in the fiscal years 1969 and 1970 respectively.

- 11 -

That alone is the reason why the debt on the present
statutory basis will continue rising, even though the
unified budget is in surplus and the debt held by the
public is projected to decline.
Conversely, if at some time in the future the trust
funds happened to operate at a deficit, the debt on the
present definition might decline, even though the unified
budget had no surplus.
Clearly, this situation could give rise to results
out of keeping with the intent of the Congress in setting
a debt limito

For instance, a larger-than-anticipated

surplus in the trust funds, which as trustee I must invest
in public debt, could result in a tighter ceiling on public
borrowing than the Congress intended.

A smaller surplus

or deficit in the trust funds, on the other hand, would
provide more leeway.
The second general way in which the new debt limit
will importantly improve understanding and control of
public finances is to include the debt issues of agencies
in which the U. S. Government has an ownership interest.
This will add the debt issues of TVA, the Export-Import Bank,

- 12 Defense family housing, and the participation certificates
issued by FNMA before and after the fiscal year 1968.

contrast, the present limit includes only the FNMA pic's
issued in 1968 and lesser amounts of debentures or bonds issued
by the Federal Housing Administration and the District of Columbia.
This change to a uniform treatment of all agency
issues side-by-side with direct Treasury debt will for
the first time relate the debt ceiling to the total of
Federal borrowing demands in the financial markets.

This

is the total appropriate for governing and controlling
these aggregate demands.
Your Committee in prior hearings has focused intensively
on the problems generated by use of agency and pic financings
as a substitute for direct financing by the Treasury.

Under

the proposed concept, the choice between agency issues and
direct Treasury issues has no effect on the debt limit.
Thus, the appropriate financing mechanism, whether by
direct Treasury issues or agency borrowing, can be considered
entirely on its own merits without any suspicions that the
choice has been affected by a desire to finance in ways
that will not show in the debt limit.

There have been

- 13 -

,} V

allegations in recent years that the Government was using
agency financing to get around the statutory debt limit
and for budget "gimmickry".

Whether true or false, the

important thing is to eliminate the possibility and provide for
the treatment of the d.ebt that best assures pub1 ic confidence
in the integrity of the Government's financial arrangementso
I would emphasize that the exclusion of the holdings
of Government accounts, including trust funds, from the
debt ceiling in no way effects the operations or investments
of the Federal trust funds.

These funds operate under

statutory provisions covering their revenues, benefit payments
and investments.

The statutes thus assure that these funds

will continue to operate as they have in the past and, as
the managing trustee of many of these funds, I pledge that
their investment management will be carried out in full
accordance with the law and the intent of the law.

Indeed,

removal of these securities from the debt limit should
provide an additional element of protection for the trust
funds, for it assures that a Secretary of the Treasury
will never be faced with a conflict between his statutory
duty to remain within the debt ceiling and his responsibility
to maintain full investment of the monies in the trust fundso

- 14 In conclusion, we have examined the need for prompt
debt limit action and the need for a redefinition of the
debt subject to the 1imito

We urge the prompt enactment

of legislation providing a new permanent ceiling of $300
billion as recommended by the Presidento
Attached is a table showing our estimates of the semimonthly debt totals through June 1970 on the new basis
consistent with the January budget presentationo

Attachment

PUBLIC DEBT SUBJECT TO PROPOSED NEW LIMITATION
FISCAL YEAR 1969
(In billions)
Operating
Cash Balance
(excluding free gold)
ACT

Public Debt
Subject to
Limitation
L

1968
June 30

$5.2

$290.6

July 15

5.6
5.9

294.8
294.6

August 15
Augusc 31

5.4
4.5

296.6
297.5

September 15
September 30

1.3
8.5

297.7
292.9

Qictober 15
Qictober 31

4.4
6.4

293.0
296.1

September 15
September 30

2.0
2.7

295.1
295.4

September 15
September 31

1.0
4.6

296.6
291. 9

JULY

1969
February 15
February 31
February 15
l'eoruary 28

1.8
7.1
4.0
4.8

March 5, 1969

q.
'JA

ESTIMATED PUBLIC DEBT SUBJECT TO PROPOSED NEW LIMITATION
(Based on constant minimum operating cash balance of $4.0 billion)
FISCAL YEAR 1970
(In billions)
Operating
Cash Balance
(excluding free gold)

Public Debt
Subject to
Limitation

Allowance to Provide
Flexibility in
Financing and for
Contingencies
$

1969

3.0

8.0

June 30

$4.0

$278.4

281. 4

286.4

July 15
July 31

4.0
4.0

282.3
282.0

285.3
285.0

290.3
290.0

August 15
August 31

4.0
4.0

285.3
285.0

288.3
288.0

293.3
293.0

September 15
September 30

4.0
4.0

288.3
281. 9

291. 3
284.9

296.3
289.9

October 15
Qictober 31

4.0
4.0

286.3
287.8

289.3
290.8

294.3
295.8

November 15
November 30

4.0
4.0

291. 3
288.9

294.3
291.9

299.3
296.9

December 15
December 31

4.0
4.0

291.4
286.8

294.4
289.8

299.4
294.8

January 15
January 31

4.0
4.0

290.3
287.8

293.3
290.8

298.3
295.8

February 15
February 28

4.0
4.0

290.0
287.6

293. O'
290.6

298.0
295.6

March 15
March 31

4.0
4.0

291.1
288.4

294.1
291.4

299.1
296.4

April 15
April 30

4.0
4.0

291.7
283.5

294.7
286.5

299.7
291.5

May 15
May 31

4.0
4.0

286.3
284.5

289.3
287.5

294.3
292.5

June 15
June 30

4.0
4.0

282.5
274.4

285.5
277.4

290.5
282.4

1970

March 5, 1969

TREASURY DEPARTMENT
(

WASHINGTON. D.C.
March 5,1969

FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by ~his public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
~,700,000,000,
or thereabouts, for cash and in exchange for
Treasury bills maturing March 13, 1969,
in the amount of
$ 2,700,536,000,
as follows:
9~day

bills (to maturity date) to be issued March 13, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated December 12, 1968,
and to
nature June 12, 1969,
originally issued in the amount of
$1,100,831,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
or thereabouts, to be
jated March 13, 1969,
and to mature September 11, 1969.
The bills of both series will be issued on a discount basis under
:ompetitive and noncompetive bidding as hereinafter provided, and at
naturity their face amount will be payable without interest. They
/Jill be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
lp to the closing hour, one-thirty p.m., Eas tern Standard
time, Monday, March 10, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
)e for an even mu1 tiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
Nith not more than three dec"imals, e. g., 99.925. Fractions may not
)e used. It is urged that tenders be made on the printed forms and
fOnNarded in the special envelopes which will be supplied by Federal
~eserve Banks or Branches on application the refor.
Banking institutions generally may submit tenders for account of
::ustomers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
)~bmit tenders except for their own account. Tenders will be received
Nlthout deposit from incorporated banks and trust companies and from
K-30

- 2 -

responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied 'for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secre tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each is sue for $ 200,000 or les s without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Rese rve Bank on March 13, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 13, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills "issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bill s (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thiS
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of t~ circular may be obtained
from any Federal Reserve Bank 060~ran(h.

TREASURY DEPARTMENT
t

WASHINGTON, C.C.

Maroh

lO~

1969

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSAC TIONS IN FEBRUARY

During February 1969, market

transact~ons

Federal Securities of the Governement investment
accounts resulted in net purchases by the
Department of $181,547,°00.000
000

K-31

Tr~asury

UNITED STliTtS SA~INGS BONDS ISSUED AND REDEEMED THROUGti

February 28, 1969

(0011 or amounts in millions - rounded and will not nocoS5orily odd to totol,)
OESCRIPTION

AMOUNT ISSUEo1!

UREO
A-I 935 thru 0-1941
~rit's F' and G-1941 thru 1952

~ries

Irles J and K-1952 thru

195h

5,003
29,521
3,660.

AMOUN1'
REOEEMEO

AMOUNT
OUTSTANDING

4,996
29,419
3,618

1
41
42

.14
.14

ides E!1:
10H
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1061
1062
1963
1964
1965
1966
1967
1968
1969

1,819
8,295
13,345
15,574
12,236
5,547
5,262
5,441
5,369
4,693
4,060
4,255
4,857'
4,950.
5,156
4,979
4,685
4,566
U,276
4,283
4,330.
4,170.
4,648
4,532
4,431
1.,766
4,718
4,040.

Total Series E
ries H (1952 thru May, 1959)>>
H (June, 1959 thru 1969)
Total Series H
Total Series E and H

{TO,al ma'ured

'e, Or.trued tli' COUll'
I~ redemption wIue ••

bOM,

/rIG)'

""Uw,tI 'ond, wAlch

11,8~3

13,699
10,587
4,617
4,222
4,271
4,129
3,559
3,<>81
3,20i
3,566
3,559
3,644
3,470.
3,196
2,969
2,70.5
2,596
2,452
2,309
2,38J
2~338

2,226
2,195
1,977
1,086

222968
1,523
1,875
1,648
930.
1,0.39
1,170
1,240.
1,1)4
979
1,0.53
1,,2.91
1,390.
1,512
1,508
1,489
1,597
1,571
1,687
1,818
1,8'61
2,265
2,194
2,20.5
2,571
2,741
2,954

11.81
11.61
11.41
12.04
13.47
16.71
19.15
21.50.
23.10.
24.16
24.11
24.75
26.58
28.08
29.33
30..29
31.78
34.98
36.74
39.39
43.37
44.63
48.73
48.41
49.76
53.94
58.10.
73.12

977

~277

- 16<;>,043

l15,823

44,220.

27.63

5,485
6,951

3,270.
1,533

2,215
5,418

40..38
77.95

12,435

4,80.3

7,632

61.38

172,479

120.,626

51,853

30..06

38,184
172,572
210.,756

38,094
120.,697
158,190.

90.
51,876
51.966

~ies J and K 1957

1Series Total unma.tured
_
Grand Total

1,651
7,327

700

Unclassified

1.15

.. TURED

;1011 0/ owner

OUTSTANDING
OF AMOUNT ISSUEO

.y,

be held and will earn interclt for addilional period, after original ntlJ,uri'1 d~'8.
IloWl tlot bectl pruenlcd lor rcdllmptiutl.
.
<

'orm PD 3a12 - TREASURV DEPARTMENT - Bureau of tho P"bllc D.bt

24.47
.24
30..06
24.66

TREASURY DEPARTMENT
WASHINGTON, D.C.
RELEASE 6:30 P.M.,
181, March 10, 1969.
RESULTS OF TREASURY I S WEEKLY BILL OFFERING

me Treasury Department announced that the tenders for two series of Treasury
Ls, one series to be an additional issue of the bills dated December 12, 1968, and
other series to be dated March 13, 1969, which were offered on March 5, 1969, were
:led at the Federal Reserve Banks today. Tenders were invited for $1,600,000,000,
~reabouts, of 91-day bills and for $1,100,000,000, or thereabouts, of 182-day
Ls. '!he details of the two series are as follows:
OF ACCEP'l!ED

?ETITIVE BIDS:

High
Low

Average

91-day Treasury bills
maturing June 12~ 1969
Approx. Equiv.
Price
Annual Rate
98.480
6.013J;
98.464
6.0761z
98.471
6.0491z 1/

182-day Treasury bills
maturing Se:Etember l1a 1969
Approx. Equiv.
Price
Annual Rate
6.2151;
96.858
96.840
6. 2511z
96.849
6.233~
1/

45~of the amount of 91-day bills bid for at the low price was accepted
94~of
~

the amount of 182-day bills bid for at the low price was accepted

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

.strict
laton
!w York
11lade lphia
.eveland
,chmond
;lanta
licago
;. Louis
.Dneapol1s
,nsas City
Illas
,n Francisco
'rom!,S

APElied For
Acce:Eted
$ 33,016,000 $ 21,966,000
1,820,957,000
1,083,257,000
32,876,000
17,876,000
45,028,000
44,973,000
22,203,000
22,203,000
51,519,000
58,754,000
198,214,000
140,564,000
48,923,000
38,923,000
32,835,000
36,885,000
41,118,000
38,368,000
30,458,000
23,458,000
84,247,000
149,257,000
$2,517,689,000

$1,600,189,000

A12;21ied For
$
6,838,000
1,536,105,000
17,605,000
34,354,000
13,254,000
33,147,000
141,487,000
24,616,000
24,115,000
24,441,000
22,749,000
164,780,000

Acce;2ted

$2,043,491,000

$1,100,010,000

6,838,000

823,405,000
7,605,000
31,276,000
7,254,000
19,081,000
53,406,000
17,916,000
14,429,000
18,311,000
14,689,000
85,800,000

'E./

:ncludes $365,485,001) noncompetitive tenders accepted at the average price o!. 98.471
.ncludes $170,290,00) noncompetitive tenders accepted at the average price of. 96.849
!lese rates are on a bank discount basis. 'lhe ~quivalent coupon issue yie1d~ s.re
i.23~ tor the 91-day bills, and 6.521z for the 1,S2-day bills.

TREASURY DEPARTMENT
:
=

WASHINGTON. D.C.

March 12, 1969
FOR IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by thist)ublic notice, invites tenders
for two series of Treasury bills to th(: aggregate amount of
$2,700,000,000, or thereabouts, for ca~h and in exchange for
Treasury bills maturing
March 20, 1969,
in the amount of
$2,701,387,000,
as follows:
9~day

bills (to maturity date) to be issued March 20, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated December 19,1968,
and to
mature June 19, 1969,
originally issued in the amount of
$1,101,293,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $ 1,100,000,000,
dated
March 20, 1969,
and to mature

or thereabouts, to be
September 18, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, March 17, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec"ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
Customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
~~bmit tenders except for their own account. Tenders will be received
wlthout deposit from incorporated banks and trust companies and from

K-32

- 2 -

responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated ba~
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public &mo~
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rej ection thereof. The Secre tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subj ect to these reservations, noncompetitive tender.
for each issue for $200,000 or less without stated price from anyo~
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues,
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on March 20, 1969, in
cash or other immediately available funds or in a like face amooot
of Treasury bills maturing
March 20, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upoo
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the--c.irculgr f@:Y be obtained
from any Federal Reserve Bank 060~ra~h.

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

March 14, 1969
FOR RELEASE A.M. NEWSPAPERS
MONDAY, MARCH"17, 1969
SECRET SERVICE PROMOTES NEW YORKER
TO WHITE HOUSE POST
Secret Service Director, James J. Rowley, announced today
the promotion of Robert J. Newbrand, former Assistant to the
Special Agent in Charge of the New York Field Office to a
Secret Service position at the White House in Washington, D.C.
Mr. Newbrand's new position is Assistant to the Special
Agent in Charge of the Presidential Protective Division. In
this assignment, he will serve as the White House Receptionist
for the Office of the President. This position is located in
the west office wing of the White House o
Mr. Newbrand, 44, is a native New Yorker and is a
graduate of Manhattan College in New York City. He served
with the U.S. Marine Corps and as an officer in the U.S.
Navy during World War II. Since his appointment to the
Secret Service in 1951, he has served on the Presidential
Protective Division and in the Washington, San Francisco,
and New York field offices.
Mr. Newbrand replaces Emory P. Roberts who is being
promoted to the position of Inspector at Secret Service
Headquarters, Washington, D. C.
Mr. Roberts was born on November 28, 1914, in
Cockeyesville, Maryland. He attended Baltimore Business
College and the University of Baltimoreo
Prior to his appointment to the Secret Service in 1944,
he served with the Maryland State Police and the Baltimore
County Policeo Mr. Roberts has served with the Secret
Service in the Washington and Baltimore field offices, the
Vice Presidential Protective Division, and the presidential
Protective Division.

000

TREASURY DEPARTMENT
,

WASHINGTON, D.C.

March 14, 1969
FOR IMMEDIATE RELEASE
RUSTAD NAMED NEW NATIONAL
SAVINGS BONDS DIRECTOR
Secretary of the Treasury David
Elmer L. Rustad of McLean, Virginia,
the Department's U. S. Savings Bonds
had been Assistant National Director
of the national sales management and
replaces Glen Rv Johnson.

M. Kennedy today named
as National Director of
Division. Mr. Rustad, 60,
in Washington, since 1966,
marketing program. He

Secretary Kennedy cited Mr. Rustad's "outstanding"
public service career record of 28 years,most of which have
been with Treasury's Savings Bonds Program.
Mr. Rustad's first appointment came in November, 1941,
when he was assigned to the Defense Savings Staff for
South Dakota, his native state. From 1943 to 1946, he was on
active duty as a Naval Officer, serving in the South Pacific.
Returning to his former post with the South Dakota Defense
Savings Staff, he retained that capacity until 1952.
In March of that year, he was named Assistant Sales
Manager of the Savings Bonds Division in Washington and, in
1955, was promoted to Director of Saleso

On July 25, 1966, he was again promoted to his previous
position of Assistant National Director of the Division. In
September of that same year, he was presented Treasury's
"Distinguished Service Award".
He is a graduate of Wakonda High School and Sioux Falls
College and he received his Master of Arts Degree from the
University of Minnesota.
Prior to his Navy and Treasury experience, he had been
teacher, athletic coach, principal and superintendent of high
schools in South Dakota, during the period, 1929-19410 He was
Superintendent and Athletic Coach at Egan and Supervisor of
Junior High Schools in Aberdeen.

K-33

(OVER)

- 2 -

He is married to the former Berniece Hillery of Volin,
South Dakota. They have a married son and daughter, Robert L.
of Virginia Beach, and Patricia Herrmann of Fayetteville,
North Carolina, and five grandsons.

000

TREASURY DEPARTMENT
Washington
OQ
J
J

FOR RELEASE TO PM'S, FRIDAY, MARCH 14,1969
(DELIVERY EXPECTED AT 2:00 P.Mo, EST)

REMARKS BY THE HONORABLE DAVID Mo KENNEDY
SECRETARY OF THE TREASURY
BEFORE 1969 "SHARE-IN-AMERICA" SAVINGS BONDS
VOLUNTEER CONFERENCE
SHOREHAM HOTEL, WASHINGTON, D.C o
FRIDAY, MARCH 14, 1969
It is an honor and a pleasure to meet with this
outstanding group of volunteers so soon after taking office
as Secretary of the Treasury.
President Nixon.

I bring you greetings from

And I want to assure you that you are

held in very high regard indeed by all of the new top team
at Treasury.
I have been involved in the Savings Bonds program -either as a banker or a public official since 19410

recall my participation in past campaigns with pride, and
I look forward to joining you in helping to make the
coming year's campaign one of the most successful in your
34 program's history.

- 2 You dedicated men and women represent voluntary pUblic
service at its best.
than I can say.

Your leadership is appreciated more

On that note -- leadership -- I have two

announcements to make that I know will be of great
interest.
First, Glen R. Johnson, a man who has brought real
leadership to the post of National Director of the
U. S. Savings Bond Division since 1967, will shortly be

leaving.
I offer my sincerest thanks to Mr. Johnson.

He has

served his country well.
NOw, while Mr. Johnson is leaving a large pair of
shoes to be filled, I am happy to report that we have
found a man who can do so.

- 3 -

It pleases me immensely, therefore, to announce that
I am appointing as National Director the man who has served
for nearly three years as Assistant National Director.
He is a career officer in the Savings Bonds Division and his
name, as you already have inferred, is Elmer L. Rustad o
Mr. Rustad, who is from South Dakota and the
University of Minnesota, has been in the Savings Bond
business since 1941, when he organized the Defense Savings
Staff in his home state.

He came to Washington in 1955 as

Assistant National Sales Manager and assumed his present
duties in 1966

I don't have to remind this audience of the key role
played by Savings Bonds in our economy.

You are all

familiar with the many sound reasons for the average
citizen to invest -- as one of your slogans puts it --

- 4 "in a share in America o "

What is not so well known,

however, is that this investment is a hedge against
inflationary pressures on our economy

It is this subject

I would now like to explore briefly.
I would be less than honest if I did not acknowledge
that the statutory limit of four and one-quarter percent
on the return that E Bonds pay makes them less attractive
than certain other investments.

This is a good occasion,

then, for assuring you that the new administration is
acutely aware of this problem, and is studying it, as
well as other troubling factors in our public debt
picture, on an urgent basis o

1(.'

""-

- 5 -

This administration is determined to curb inflation -and I cannot say too often that we are firmly committed
to that goal.

We are aware of the risk of slamming on

the brakes too hard and this we will not do.

But

at the same time, we are going to apply them firmly
until we have positive evidence that the machine -basically in good shape but moving much too fast and showing
the strain -- is, in fact, slowing down o

The administration

will apply suitable fiscal policies in the area of taxes
and budgeting while the Federal Reserve pursues
complementary measures in the monetary field o
But today there are not many indications that the
slow-down has begun, although we are confident that the
restraints now in effect will not fail to do their work o
Yet, if one reads the news of the day, he is aware that

- 6 the forces of expansion are potent indeed, and very hard
to harness.

One of them surfaced clearly just yesterday

when the Department of Commerce and the Securities and
Exchange Commission released data indicating that
investment by commerce and industry in plant and equipment
this year is expected to run 14 percent more than 1968.
Now, this is a lot higher than anyone thought it would
be and if the forecast proves accurate, 1969 is going to
parallel the unfortunate experience of 1965 and '66.

those years, comparable outlays placed great strains on the
suppliers of capital goods and on the financing apparatus that
makes such purchases possible.
I am frankly disturbed by this evidence of how the
collective decisions of the nation's investors may help to keep
inflation growing.

- 7 -

Now, in honesty, we must recognize it's not all bad.
There is a good side, too.

Expansion improves technology,

boosts productivity, and, in the long run, cuts production
costs.

But there is danger in cranking up the industrial

machine faster than it is ready to go, and thus

addi~g

to inflation.
This Administration is absolutely resolved to keep
the Federal Budget in surplus.

And I can also report to you

that the Federal Reserve authorities are determined to
continue necessary monetary restraint.

There is a lesson,

here too, for private voluntary savers.
The national interest clearly calls for a larger total
of private savings -- I earnestly hope that this needed
increase will be realized.

- 8 -

And that gets us back to Savings Bonds which are
ideal instrument for this purpose.

And it gets us back

also to the challenge that faces the people in this room
in helping your government with the Bond Program.
We need your help and I am certain that we will get it -as we always have.

000

TREASURY DEPARTMENT
WASHINGTON. D.C.
~

6:30 P.M.,
March 17, 1969.

RESULTS OF TREASURY I S WEEKLY BILL OFFERIBG
. '!be Treasury Department announced that the tenders for two series of Treasury
3, one series to be an additional issue of the bills dated December 19, 1968, and
:>tber series to be dated March 20, 1969, which were offered on March 12, 1969, were
~d at the Federal Reserve Banks today. Tenders were invited for $1,600,000,000,
~reabouts, ot 91-day bills and for $1,100,000,000, or tbereab~ts, of 182-day
~. 1be details of the two series are as follows:
~ OF ACCEPrED
gTITIVE mIX):

High
Low
Average

91-day Treasury bills
maturias June 19 2 1969
Approx. Equiv.
Price
Annual Rate
98.463
6.08~
6.116~
98.45'
98.456
6.108~

182-day Treasury bills
_turi!!! Sel!tellber 18,£ 1969
Approx. Equiv.
Annual Rate
Price
96.868
6.195~
6.231j
96.850
6.221j
96.855

yExcepting 1 tender ot $100,000; ~ Excepting 1 tender ot $750,000
4:~ of the amount of 91-day bills bid for at the low price was accepted
4~ of the amount of 182-day bills bid for at the low price was accepted
~

TEEERS APPLIED FOR AJm ACCEPl!ED BY FEDERAL RESERVE DISTRICTS:

;tr1ct
Iton
, York
lladelphia
!veland
!hmond

Lanta
lcago
. Louis
meapol1s
lsas City
lias
1 Francisco
'IDTALS

Al?El1ed For
Accel!ted
$ 26,464,000 $ 15,557,000
1,957,659,000
1,142,653,000
38,812,000
23,782,000
82,401,000
50,481,000
20,254,000
16,344,000
61,988,000
37,864,000
315,524,000
164,524,000
56,906,000
45,146,000
20,916,000
33,316,000
37,612,000
26,394,000
27,029,000
15,429,000
170 2 917,£000
41,£677,£000
$2,828,882,000

AE,Elied For
$
4,813,000
1,696,292,000
20,912,000
21,035,000
11,958,000
49,957,000
142,506,000
26,999,000
22,023,000
26,364,000
'24,33',000
135,,9231,000

$1,600,567,000 ~ $2,183,116,000

Accel!ted
$
4,813,000
863,952,000
10,912,000
20,155,000
9,958,000
19,693,000
75,576,000
16,319,000
8,543,000
19,364,000
1',174,000
361,8751,000
$1,100,334, 000 ~

lclucles $34:7,130,000 Doncaapetitive tenders accepted at the average price of 98.456
lciud.es $166,298,000 noncompetitive tenders accepted at the average price of 96.855
lese rates are on a bank discount basis. i!le equivalent coupon issue yields are
.2~ tor the 91-day bills, and 6.51; tor the 182-day bills.

TREASURY DEPARTMENT
!

WASHINGTON, D.C.
March 18, 1969
FOR IMMEDIATE RELEASE

MEMORANDUM FOR THE PRESS:
Paul A. Volcker, Under Secretary of the Treasury for
Monetary Affairs, leaves late Tuesday, March 18, on a
ten-day trip to Europe.
Chief purpose of the trip is to continue introductory
meetings with officials of those countries regularly
participating in international groups in which Mr. Volcker
represents the United States.

His itinerary includes

Brussels, Bonn, Frankfurt, Stockholm, The Hague,
Amsterdam, Rome and Zurich.

In February, Mr. Volcker

attended Organization for Economic Cooperation and
Dev~lopment

meetings in Paris and called, at that time,

on officials of the French and British governments.
Mr. Volcker also plans to visit

Lugan~,

Switzerland,

toward the end of the month to attend a discussion group
meeting of economists from several countries held under
the chairmanship of Dr. Fritz Machlup of Princeton
University.

He expects to return to the United States

on Saturday, March 29.
000

105
TREASURY DEPAR1-MENT
sa

acsan;;;;e::&..

*.U'JM~Si£;~.-~CH&g;¥ ..+:~iOG'~aaA;~~Ei&1A!LII!I

WASHINGTON, D.C.
If.ARCH 18, 1969

OR mr·1EDIATE RELEASE

TREASURY BILL OFFERING OF $1.8 BILLION
The Treasury announced today that a total of $1.8 billion will be added to

ix outstanding "leekly series of Treasury bills.
ature May 8 to June 12, 1969, inclusive.

These are the series "lhich

They will be reopened in the amount of

300 million each -- a total of $1.8 billion.

The auction will be on Tuesday, March 25 with payment on 111arch 31.

his "strip" offering, subscribers will put in for equal amounts of each of the

ix series of bills being reopened.

Cornmercial banks may pay for their mm pur-

hases and for their customers' purchases by crediting Treasury tax and loan
::counts.

106
TREASURY DEPARTMENT

",.
c-::rJ"1 I• r'./'---Of"
• \. ,~'-".
L ., \.::J I
'i. D • C
J·:arch 18, 1969

n.:i.XDIATt.: RELEASE

•

TREASURY OFFERS $1,8 BILLIOI\ STRIP OF HEEKLY BILLS
The Treasury Department, by this public notice, invites tenders for additional
:unts of six series of Treasury bills to an aggregate amount of ¢1,800,000,000,
thereabouts, for cash. The additional bills will be issued I·ja:>:cn 31, 1969, "iill
in the ar:1ounts, and ,·]ill be in addition to the bills originall:l is sued and
uring, as follows:

!nount of
.ditional
Issues

Original
Issue Dates
1968

300,000,000
300,000,000
300,000,000
300,000,000
300,000,000
300,000,000
800,000,000

November
November
Novenber
November
December
December

7
14
21
29
5
12

Maturity
Dates
1969
May
I'fay
lIjay
Hay
June
Ju,'1e

Days from
I'larch 31, 1969
to l·~aturi tv
,

8
15
22
29
5
12
Average

38
45
52
59
66
73
-55.5

Arnount
Currently
Outstanding
( In
, ml_
"1'lons )

$2,702
2,699
2,705
2,702
2,701
2,701

additional and original bills will be freely interchangeable.
Each tender submitted must be in the amount of $6,000, or an even multi~le
reof, ancl one-sixth of the amount tendered vri 11 be auulied to e2.ch of the above
ies of bills.
The bills offered hereunder '<lill be issued on a discount basis under competitive
n::mc8mpetitive bidding as hereinafter pl'ovided, and at naturity their face amount
.l be payable "]ithout interest. They will be issued in bearer forr.l only, and in
om~nations of $1,000, $5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
turity value).
Tenders i'lill be received at Federal Reserve Banks and Branches up to the closing
one-thirty p.m., Eastern Standard time, Tuesday, I'larch 25, 1969. Tenders will
be received at the Treasury Department, Hashington. In the case of competitive
ders the pl'ice offered must be expressed on the basis of 100, ,·,i th not more than
ee deCimals, e.g., 99.925. Fractions may not be used. A single price must be subted for each unit of $6,000, or even multiple thereof. A unit represents $1,000
e amount of each issue of bills offered hereunder, as previously described. It is
.ed that tenders be f:1ade on the printed forms and fon-larded in the special envelopes
ch '~ill be supplied by Federal Reserve Banks and Branches on application therefor.
T,

Banking institutions generally may subr~li t tenders for account :::>f custorners pr:::>ed the names of the customers are set forth in such tenders. O-:hers than banking
titutions "]ill not be permitted to submit tenders except for the~.r O"dn account:
.ders will be received without dep8si t fr8r.1 incorporated banks and trust cOfi:panles
from res'Oonsible and recQgnized dcale:rs in investc::ent secur:.t:'ces. Tendc:rs fr::;m

- 2 -

,-"

.-:.

---- - - -.
-

",
~

- ....
,:-

'.""

- -,

I~ediately

after the clos:'ng hour, tenc1e:;:s ,dll be opened at the Federal Reserve
nks and. Branches, follo"dng ,·,hich public arm:Jli..YJ.ce:T_ent ,.J:i.ll De [r.acle by tl,e 'l'reasury
oal'tnent of the ar.10unt and price ranee a-: accepted bids. rrhose subr.·,itting tenciers
il be adviseci. sf t!ie acceptance or rejecti::m thereof. The Secretar~T of the Trec_sury
pressly reserves the right to accept 01' rej ect any sr all tene.ers, in ,,:hole or in
rt, and his action in any such respect shall be final. l~oncorr.petiti ve tenci.ers for
30,000 or less (in even rr.ultiples of ~6,OOO) "lithout stated p:!:ice frG:n any cme bidder
11 be rccepted :tn full at the averae;e price (in three decir.lals) of accepted CS[;ltitive bids. Settlenent for accepted tenders in accordance uith the bids ~ust be
de or completed at the Federal Reserve Ban}: or Branch in cash or other im:r,ed:~_2tely
ailable funds on I·~arch 31, 1969; provided, hC),~'iever, any qualified deposi tal'Y ,dll
permi tted to mal~e pay:r:ent by c:..'ed:.t in :Lts Treasury tax and lGan acc:Junt for
easury bills allotted to i t -for itself and its customers up to any an:ount for "ihieh
shall be qualified in excess of existing deposits vlhen so notieed by the Fedel'al
serve Bank of its District.

The incorr:e deri vecl frsm TreasUl'y bills, "lhether interest or gain from the sale
other disPQsi tion of the bills, does not ha'.'e any exeLlption, 2.S such, and loss from
e sale or other disp:Js:i.t:·on of Treasury bills dCles nClt have any spec5.2.1 tl'eatment,
such, under the Internal Revenue Code of 1954. The bills are subject tCl estate,
heritance, gift or Clther excise taxes, vlhether Federal or State, but are exempt frDm
1 taxation nO"1 ClY hereafter ir:1posed on the principal or interest thereof by any State,
any of the possessions of 'che United States, or by any lClcal taxing authC)ri ty. For
rposes of taxation the am. aunt of di.scClunt at \'lhich Treasu.ry bills 8.re Clrie;i.nally
ld by the United States is cClnside:ced tCl be interest.
Under SectiClns 454 (b) and 1221 (5) of the Internal Revenue CClde of 1954 the
ount of discount at "lhic:h bills issued hereunder are sold is not cons:'.dered tCl
crue until such b:Uls are sold, redeeDed or otherl'!ise dispClsed of, and such bills
'e excluded from consi.deration as capital assets. AccClrdj_nsly, the ClImer of
'easury bills (othe~' than life insurance co~:panies) issued hereunder need include
I his inCOl:le tax return only the diffel'cnce oetl'ieen the price paid for such bills,
.ether on original issue or Cln subsequent purchas8, and the aX:JUl1t actually
:ceived either upCln sale or redemption at maturity durinc; the taxable year fClr
dch the return is [:lade, as ordinary gain or loss. Purchasers of a strip of the
11s offered hereunder should, for tax purposes, ta~e such o~.lls on tCl their bOClks
I the basis of their purchase price prorated to each of the six outstc:.nding issues
.ing as a b?-sis for prClration the closing market prices for each of the issues on
.rch 31, 1969. (Federal Reserve Ban}:s v1ill have available a list of these market
'ices, based on the r.1ean oet"leen the bid and asked quotations furnished by the
lderal Reserve Ban~ of New YClrk.)
Treasury Depal'tr.1ent Circular No. 418, Revised, and this notice, prescl'ibe the
lrms of the Treasury b:1.1ls and govern the cond:t tions of theil' j.ssue. Copies of the
.rcular may be Clotained frClm any Federal Reserve Bank or Branch.

TREASURY DEPARTMENT
(

VJASHINGTON, D.C.
March 18, 1969

FOR ].lI1EDIATE RELEASE

TREAStJRY'S HOHT'dLY BJ..LL OFFERING

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
It
a 000 ,'J'
0""0
or theren,bouts, for cash and in exchange for
'I'l,50,
Treasury bills maturing
l,:al~ch 31, 1969
in the amount of
$1,500,40,000
as fo11m'7s:
275-day bills (to maturity date) to be issued !'larch 31, 1969,
in the amount of $ 500,000,000
or thereabouts, representing an
additional amount of bills dated Decer:1oer 31, 1968
and to
mature Dcce",oe:c 31, 1969
originally issued in the amount of
$ 999,152,000
the additional and original bills to be
freely interchangeable.
365-day bills, for $ 1,000,000,000,
or thereabouts, to be
dated r.1arch 31, 1969
and to mature Harch 31, 1970.
The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount 1;vi1l be payable 1;vithout interest. They
.wi11 be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p. m., Sas~er!l Sta::.c.ard
time, i'Jedr..esdo.:r, :,:arc~ 26, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
t~nders the price offered must be expressed on the basis of 100)
wlth not more than three dec'imals, e. g., 99.925. Fractions may not
be used. (Notwithstanding the fact that the one-year bills will run
for 365 days, the discount rate will be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms
and forwarded in the special envelopes which ~7ill be supplied by
Federal Reserve Banks or Branches on application therefor,
Banking ins ti tutions generally m2y sub[T.i t tenee:::-s for 2CCO'.lnt of
eus to [;lers prOVlG2Q
.. , toe
,
- ,
.,
.
naS,2S or: tEe cUStOQ,2:::-S ace S2~ ':::C:::-~C;, ::..,~ ':::':-::"-1
tenders • O~L.'her~
t'n'"'n
'D-:!-"'\'"'~"-:;
.!ns'--j-,-"t-~,...,·"1~
\,·i".L1 n-'" '-,~ ~:,--'-'---:::2 to
Ll':'
c::.
1
___
__
0
~

1.....-_.1. .... _

Io..._Lu.~

vLL~

,'; .....

~~.J_

'-"_.;:"-_.'

1.-

- 2 :>;C!:S:!.~b1~e

rl
2r.'-"

-,....eco~-l'7C~
5''--''- --'

\.....3:::-,~l0:~
- .- - - -

i~_
-

~""-""I.'T"~c4-~onf-_., - .. - -

c._~'7::r'
. .._'." . _-l.~tl_C.,c:.
- -

~r-_..
_~_pr_c:
- ..,.,
.- '-'

of::1ers !T:ust c·e accC~-:-:7c..~Li,~,:. ·C:.
:-:~l'':- 0:: :: ~=·t2:'-C'2:-LJ~ of "t:~~J.2 fc.ce
~.! 11 ~
~
-I .; ec' ':::0'"
.,
,
)1]nt or TLe2sur) D.L_.:...~ c:p~__
lL, l~~11ess
L-:e
::er:.c.::cs
are
!ompanied by an express guaranty of payment by an incorporated bank
trust company.
~~

.---

:;::'.'::::,-:-

-n,

Immediately after the closing hour, tenders \vill be opened at
~ Federal Reserve Banks and Branches, following which public announcett will be made by the Treasury Department of the amount and price
1ge of accepted bids. Those su~mitting tenders will be advised
the acceptance or rej ection thereof. The Secre tary of the
~asury expressly reserves the right to accept or reject any or all
lders, in whole or in part, and his ac tion in any such respect
ill be final •. Subj ect to these reservations, noncompetitive tenders
~ each issue for $200,000 or less without stated price from anyone
Ider will be accepted in full at the average price (in three
:ima1s) of accepted competitive bids for the respective issues.
:t1ement for accepted tenders in accordance with the bids must be
Ie or completed at the Federal Reserve Bank on I'larch 31, 1969'
ih or other immediately available funds or in a like face amount
Treasury bills maturing l,:arch 31, 1969.
Cash and exchange
tders will receive equal treatment. Cash adjustments will be made
. differences between the par value of maturing bills accepted in
:hange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
.n from the sale or other disposition of the bills, does not have
'exemption, as such, and loss from the sale or other disposition
Treasury bills does not have any special treatment, as such,
ler the Internal Revenue Code of 1954. The bills are subject to
:ate, inheritance, gift or other excise taxes, whether Federal or
,te, but are exempt from all taxation now or hereafter imposed on
principal or interest thereof by any State, or any of the
sessions of the United States, or by any local taxing authority.
, purposes of taxation the amount of discount at \vhich Treasury
1s are originally sold by the Uhited States is considered to be
e.rest. Under Sections 454 (b) and 1221 (5) of the Internal
enue Code of 1954 the amount of discount at which bills issued
eunder are sold is not considered to accrue until such bills are
d, redeemed or otherwise disposed of, and such bills are excluded
m consideration as capital assets. Accordingly, the ovmer of
asury bills (other than life insurance companies) issued hereunder
d include in his income tax return only the difference between
price paid for such bills, whether on original issue or on
sequent purchase, and the amount actually received either upon
e or redemption at maturity during the taxable year for which the
urn is made, as ordinary gain or loss.

i Treasury Department Circular No. 418 (current revision) and this
~e.prescribe the terms of the Treasury bills and govern the
ht~ons of tilelL lssu~. ~pies of the circular may be obtained

TREASURY DEPARTMENT
WASHINGTON. D.C.
March 19, 1969

FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing March 27, 1969,
in the amount of
$2,709,020,000,
as follows:
91-day bills (to maturity date) to be issued March 27, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated December 26, 1968,
and to
mature June 26, 1969,
originally issued in the amount of
~,104,988,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
or thereabouts, to be
and to mature September 25, 1969.
dated March 27, 1969,
The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time,
Monday, March 24, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec"ima1s, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
Customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from

K-39

- 2 -

responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on March 27, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing March 27, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority,
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Un~er Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0oO~ranch.

TREASURY DEPARTMENT
t

WASHINGTON. D.C.

March 21, 1969
FOR IMMEDIATE RELEASE
BROWN APPOINTED
DEPUTY SPECIAL ASSISTANT TO THE SECRETARY
Appointment of Benjamin L. Brown as Deputy Special
Assistant to the Secretary of the Treasury (Congressional
Relations) was announced today by Secretary of the Treasury
David M. Kennedy.
Mr. Brown, 27, as deputy to Special Assistant
James E. Smith, comes to the Treasury Department from two
years service on Capitol Hill as Administrative Assistant
to Rep.James F. Battin (R-Mont.). He was previously
chief political writer for Montana's largest daily newspaper,
The Billings Gazette.
A native of Billings, Montana, Mr. Brown attended
Eastern Montana College from 1962 to 1966. From 1958 to
1962, he served as an enlisted man aboard a destroyer in
the Navy.
Mr. Brown and his wife, the former Karen Ebeling
of Billings, live at 2017 Maynard Drive, Falls Church, Virginia.
They have one son, Benjamin Jr.

000

K-40

TREASURY DEPARTrVlENT

" §t.~~x~u ..~~~~t-::!':~~'~i:t':i"=-:!;:~L...."2~.<7"~.G")~~:::r:::

WASHINGTON, D.C.

March 21, 1969
FOR RELEASE A.M. NEWSPAPERS
MONDAY, ~~RCH 24, 1969
BRUCE K. }~CLAURY NAMED DEPUTY UNDER SECRETARY
OF TREASURY FOR MONETARY AFFAIRS
Secretary of the Treasury David M. Kennedy today announced
the appointment, effective April 1, of Bruce K. MacLaury,
Vice President of the Foreign Department of the New York Federal
Reserve Bank, as Deputy Under Secretary of the Treasury for
Monetary Affairs.
Mr. McLaury, as deputy to Under Secretary Paul A. Volcker,
will succeed Frank W Schiff who will join the Corruni ttee for
Economic Development in Washington, D. C., as Vice President
and Chief Economist.
0

Mr. MacLaury, 37, a native of Chappaqua, New York, did his
undergraduate work at Princeton, receiving an AoB. degree in
1953. He received his Master of Arts degree in economics from
Harvard University in 1958, and his Ph.D. from the same
institution in 1961. From 1954 to 1956, he served in the
U.S. Army as a Lieutenant of Artillery.
He joined the Federal Reserve Bank of New York in 1958 as
an economist in the Foreign Research Division.
In 1962-63, he served as a consultant in international
finance to the Organization for Economic Cooperation and
Development in Paris. In 1963, he rejoined the New York
"Fed," as Hanager, For.eign Department. In 1965 he was named
an Assistant Vice President, Foreign Department, and in 1968
was appointed Vice President of that Department.
Mr. MacLaury is married to the former Vi~ginia Doris Naef
or Surnmi t, Nel;v Je rsey
They have t\vO ch ildren, John Kenne th
MacLaury, 5, and David Bruce MacLaury, 3.
0

000

K-4l

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

FOR IMMEDIATE RELEASE
EXCERPTS FROM REMARKS BY THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE BUSINESS COUNCIL
AMERICAN SECURITY AND TRUST BUILDING
WASHINGTON, D. C.
FRIDAY, MARCH 21, 1969, 9:45 A. M.
lam honored to meet with the members of the Business
Council, and delighted to have this opportunity to review
with you the Nation's economic problems and goals.
The most critical economic problem facing our country
today is, of course, inflation. It is a continuing threat
to the strength of our economy -- the purchasing power of the
dollar at home -- confidence in it abroad -- and the future
of every American.
Because inflation is such a destructive force, the task
of curbing it is a matter of the highest national priority.
It calls for the strongest effort at every level of Government,
by every sector of the economy, and by every one of our citizens.
Let me take a moment to pay tribute to James M. Roche
and the other members of the Business Council who are making
a major contribution to the fight against inflation through
their service on the U.S. Industrial Payroll Savings Committee.
The Payroll Savings Plan that Mr. Roche is guiding this
year is one of our most effective weapons. Every dollar that
is invested in a Savings Bond is a dollar that does not add
to the strain on our productive resources. It is also an
important help to the Treasury in maintaining sound debt
management and reducing the demands we must make on the
private financial markets.

- 2 -

I would be less than honest if I did not acknowledge
that the statutory limit of four and one-quarter percent on
the return that E Bonds pay makes them less attractive than
certain other investments. TIlis is a good occasion, then,
for assuring you that the Administration is scutely aware of
this problem, and is studying it, as well as oth~r troubling
factors in our public debt picture, on an urgent bas1sw
The members of the Business Council have always given
their strong support to the Payroll Savings Campaign in the
past, and I am confident that we -- Mr. Roche, his committee,
the Treasury, and the country -- can count on you again this
year.
As you know only too well, we have other pressing national
problems in addition to inflation: We must alleviate poverty -and we must see that every citizen has equality of opportunity.
However, ~~ a prerequisite to solving those, we must curb
inflation. Unless that is our first objective, we risk
stretching ourselves too thin -- and thereby might end up
doing too little. The kind of price increases we have
experienced in recent months can carry the economy to the
point where recession and accompanying higher unemployment
naturally follow.
We are confident that the current fiscal and monetary
restraints will check inflation. Yet progress is being
achieved very slowly. This points up the fact that inflation,
once it has gained momentum, is extremely difficult to bring
under control.
Last week brought new evidence of the strength of the
expansionary forces in the economy. The Department of Commerce
and the Securities and Exchange Commission reported that
their most recent survey indicates that buainess plans to
increase its capital expenditures by about 14 percent more
than in 1968.
That projected rise in planned spending is a much higher
figure than anyone had anticipated, and is a clear signal
that we must not relax our anti-inflationary posture ••••

.. 3 -

Let me say -- as strongly as I can -- that this
Administration does not intend to let inflation continue
1e will not apply the economic brakes
escalating prices ••
suddenly and hard, because that might bring about unacceptably
high tmemp loyment • But we ~ mean to app ly the brakes
steadily and firmly until the economy is slowed to a
sustainable rate of speed. The Administration is rebolved
to apply appropriate fiscal policies. And the Federal Reserve
is determined to continue all the monetary restraint that the
current situation makes imperative. Those are the correct
policies to follow, and their effects will be felt gradually
but surely throughout the economy.

::--v.

have no plans for tinkering with the investment
tax credit. Congress intended the credit to be a part of
the regular tax system, and not a device for stimulating
or slowing the economy. Moreover, the credit has been
highly effective in encouraging the long-run investment
that creates additional jobs and income.
~e

In our fight against inflation, we must also achieve
and maintain a surplus in the Federal budget -- and I can
assure you that the Administration is also firmly co~tted
to ~ goal!
The budgets prepared by the previous Administration
forecast surpluses of $2.4 billion this year and $3.4 billion
in Fiscal 1970. However, the surpluses will be difficult to
attain because of such factors as higher interest costs on
the public debt, a tendency for some estimates of expenditures
to be on the low side, and increased labor and materials
costs for the highway construction and other programs. This
Administration is determined to make additional cuts in
Government expenditures to reduce the budget below the
Johnson budget.
I should also point out that the surplus for Fiscal 1970
is predicated on a continuation of the surtax. About $9 billion
of the estimated fiscal year receipts would come from the surtax.
Given the present economic outlook and the importance
of a budget surplus during a time of serious inflation, I
must say, in all candor, that I believe that the surtax must
be retained ••••

- 4 -

Turning to another area of concern to you, our balance
of payments, like our domestic economy, badly needs relief
from inflationary strains and distortions.
Last year, our international accounts showed a small
surplus on the liquidity basis of calculation. This was
a welcome development, but it came about only because of
an unprecedented swing in the capital accounts which made
the United States, for the first time since the end of
World War II, a large net importer of capital.
We cannot count upon continued capital inflows of such
magnitude, however. In fact, as the world's wealthiest
nation the United States can be expected to be -- and should
be -- a net exporter of capital.
Moreover, the artificial restraints on capital outflow
from the United States resulting from direct controls are
fundamentally undesirable. We will ease these restrictions
as quickly as circumstances will permit.
In contrast to our capital accounts, our trade surplus -always the mainstay of our balance of payments in the past -nearly disappeared last year. Because of over-expansion of
the economy, imports were at a record rate and the trade
surplus was reduced to the smallest amount since 1959.
We must restore our trade surplus to its once healthy
position in order to maintain confidence in the dollar. And
the surest way to rebuild that surplus is by returning the
economy to the path of non-inflationary growth.
Another goal of this Administration is to work closely
with our country's friends abroad in strengthening the international monetary system.
There is no simple, easy answer to the problems underlying
the monetary difficulties of the past year or more. We cannot
end the complex problems of improving the balance of payments
adjustment process, or meeting the need for a growth in world
reserves, or sustaining confidence in the dollar by increasing
the price of gold or by going to the opposite extreme of
freely fluctuating exchange rates. The idea that either action
would automatica~ly solve or even help the world's financial
problems is an illusion.

- 5 -

While rejecting the idea of a simple, sweeping reform
that will supposedly solve all difficulties, we are prepared
to join with officials of other nations in studying responsible
proposals for changes in financial arrangements -- changes
that will serve the common interest by improving and
strengthening the monetary system.
The Special Drawing Rights agreement illustrates clearly
the value of careful study and patient negotiations. When
the SDR facility has been established in the International
Monetary Fund, the world community will be able to manage
the supply of international liquidity according to plan and
in an orderly manner. This will, of course, be in the
interest of ~ nations.
In the legislative area, the President has made tax
reform and equitable tax administration two of his principal
objectives, and I have assured Chairman Mills of the Ways
and Means Committee that Treasury will work closely with
his Committee.
We have reviewed the reform proposals done at Treasury
under the Johnson Administration, and feel that they would
fall short of the desired goals. For one thing, they aim
too much at dealing with symptoms of a bad tax structure,
rather than with the many preferences that distort our system
and prevent tax equity ••••
We are also studying the use of tax incentives to help
solve the problems of the cities and of our disadvantaged
citizens. Private business can be of tremendous help in
improving economic and social conditions in poverty areas,
and I hope that we can encourage business to participate to
a greater extent by a responsible use of tax incentives.
I wish I could hold out the promise of dramatic progress
BOon toward ending inflation, solving our balance of payments
difficulties, and eliminating all inequities from our present
tax system. Unfortunately, the problems are well dug in, and
progress will probably be achieved gradually.
However, I can assure you that the President and the
entire Administration are determined to press for solutions
with resolve and.with persistence. We need the help and
understanding of the entire Nation, and especially of the
business community. I am confident you will give it to us.
000

TREASURY DEPARTMENT
WASHINGTON, D.C.
IR RELEASE 6: 30 P.M.,
,nday, March 24, 1969.

RESULTS OF TREASURY'S WEEKLY BILL OFF.ERI1fG
'lhe Treasury Department announced that the tenders tor two serie a ot Treasury
11s, one aeries to be an additional issue ot the bills dated December 26, 1968, and
e other series to be dated March 27, 1969, which were offered on March 19, 1969, were
ened at the Federal Reserve Banks today. ienders were illT1ted tor $1,600,000,000,
thereabouts, ot 91-day bills aDd tor $1,100,000,000, or thereabouts, ot l82-day
11s. '!'be details of the two series are as tollows:
lfGE OF ACCEPTED

MPETI1!rVE BIDS:

High
Low
Average

91-day Treasury bills
maturing June 26 2 1969
Approx. Equiv.
Price
Annual Rate
98.503
5.922~
98.493
5.96~
98.497
5.946~

182-day Treasury bills
25 2 1969
Approx. Equi v •
Price
AJmual Rate
96.932
6.06!ij
96.912
6.108
96.918
6.096~

~turi~~~te~r

3'2$ of the amount ot 91-day bills bid tor at the low price was accepted
7(11" of the amount ot 182-day bills bid tor at the low price was aCt.'epted
W,

TENDERS APPLIED FOR AIm ACCEP'lED BY FEDERAL RESERVE DIS'l'RIC'l'S:

)1strict
Joston
lew York
Jtlllade lpbia
:ieveland
11chmond
.tla.nta
hlcago
it. LOUis
l1Dneapol1s
ansas City
lallas
an Francisco

Applied For
$ 27,444,000
1,876,117,000
32,722,000
38,857,000
17,075,000
53,944,000
456,446,000
60,854,000
30,478,000
44,267,000
27,805,000
146 2 704.2°00

roTALS

$2,812,713,000

Acce~ted

17,349,000
960,003,000
17,722,000
31,827,000
17,075,000
31,096,000
337,359,000
49,414,000
21,418,000
37,911,000
19,125,000
59 2 824 2 °°0

AEElied For
$
5,763,000
1,781,864,000
14,988,000
39,888,000
6 ,86S ,'1000
41,905,000
126,348,000
34,254,000
21,902,000
23,194,000
22,751,000
1242 678.2 000

$1,600,123,000

!I $2,244,400,000

Acce~ted

5,763,000
833,516,000
4i88$~OOO

27, 176 j 001"'
6;- 775;. (Y',o
17, 555, OOf'
77,74.8~00-0

28,904,000
11,502,00ft
18,162 1 000
12,4n,(;~

~_5.§) f,562P{Jf~:

$1,100,616,000 ~

Includes $339,144,00()lOncam:petitive tenders accepted at the average price ot 98.497
Includes $157,686,()(J)noncompetitive teDders accepted at the average price ot 96.918
ihese rates are on a bank discount basis. 1he equivalent coupon issue yields are
6.l~ for the 91-day bills, and 6. 38~ tor the 182-day bills.

" Q

STATEMENT OF THE HONORABLE
DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
MARCH 24, 1969
10 A.M. EST
Mr. Chairman and Members of the Committee;
I appreciate the opportunity to appear before your
Committee in regard to our request for action to raise the
limit on the public debt.

It is especially urgent that we

secure prompt action on this request as we otherwise could
be above the legal ceiling during the mid-April period.
The situation is illustrated by our experience in
March.

On the 14th of March we had securities outstanding

in the amount of $364,717 million.

We were within $283

million of the statutory ceiling, not much more than a third
of one day's expenditures.

We were able to do this only by

reducing our cash balance to a level of $2.4 billion, far
below the daily average of $5.1 billion in the fiscal year
1968.

The position has improved somewhat, but we will be

going into a far tighter situation in early April.

April 15, with the conventional $4.0 billion cash balance
assumption used in these hearings in the past, our projections
K-42

- 2 indicate that we will be over the ceiling by $2.2 billion.
We can stay under the existing $365 billion ceiling only by
drawing down our cash balances to a level of $1.8 billion.
I might add that the ceiling is even tighter on the day
before the mid-month point.
It is possible, by finer adjustment of our borrowing
through daily drawings on the Federal Reserve System, that
we could get through the April problem, but we will have
no margin for any contingencies.

With receipts and

expenditures averaging nearly $750 million a day, you
can see how any change in timing of either receipts or
expenditures carries the risk of putting us over the
statutory limit with the only alternative being a failure
to pay our bills.
I hesitate to contemplate as I am sure you do, the
potential harm to the Nation's economy and to our position
in the world economy from a failure to pay our legal and
contractual obligations.

Unless the debt limit is increased

promptly, we face this prospect as a real possibility.
We are asking at this time for a revision in the debt
limit to a permanent ceiling of $365 billion and a temporary

- 3 -

allowance above that permanent ceiling of $12 billion through
June 30, 1970.

This was the bill that passed the House of

Representatives

Because the April problem is almost upon us

there is little time for action.
According to our projections for FY 1970, the debt
outstanding on March 15 will total $374.0 billion with an
assumed cash balance of $4.0 billion.

The bill before you

provides a minimal leeway of $3 billion above that amount.
I believe that a larger allowance for contingencies than $3
billion can be justified.

However, we are willing to try

on this basis to meet the problems in FY 1970 -- fully aware
that we may be back before this Committee a year from now
with another request for an increase in the debt limit.
The debt projections used in the attached tables are
based on the January Budget as presented by the previous
Administration

As you know, that Budget provided for a

continuation of the surtax on individuals and corporations,
which is scheduled to expire on June 30, 1969.

It also

included $10.7 billion of higher revenues attributable
primarily to higher individual and corporate income from
economic growth and inflation.

PUBLIC DEBT SUBJECT TO PRESENT LIMITATION
FISCAL YEAR 1969
(In billions)
Operating
Cash Balance
(excluding free gold)
ACT

Public Debt
Subj ect to
Limitation
U

1968
june 30

$5.2

$350.7

july 15
july 31

5.6
5.9

354.8
354.3

Au~ust 15

August 31

5.4
4.5

357.2
357.5

September 15
September 30

1.3
8.5

358.7
357.9

October15
October 31

4.4
6.4

358.9
360.4

November 15
November 30

2.0
2.7

360.5
360.1

December15
December 31

1.0
4.6

363.4
361. 2

1.8
7.1

362.9
362.6

4.0
4.8

362.9
362.0

1969
january 15
january 31
january 15
january 28

March14
March 17

2.4
2.1

364.7
364.1
EST I MAT E D
(Based on constant minimum operating cash'balance of $4.0 billion)
ch 31
4.0
362.1
i1 15
4.0
367.2
i1 30
4.0
356.9
15
4.0
361.1
31
4.0
361. 9
e 15
4.0
362.7
e 30
4.0
354.6
March 21, 1969

ESTIMATED PUBLIC DEBT SUBJECT TO PRESENT LIMITATION
(Based on constant minimum operating cash balance of $4.0 billion)
FISCAL YEAR 1970
(In billions)
Operating
Cash Balance
(excluding free gold)

Public Debt
Subject to
Limitation

Allowance to Provide
Flexibility in
Financing and for
Contingencies
$

1969

3.0

8.0

june 30

$4.0

$354.6

357.6

362.6

july 15
july 31

4.0
4.0

359.4
358.3

362.4
361. 3

367.4
366.3

August 15
August 31

4.0
4.0

362.8
363.3

365.8
366.3

370.8
371. 3

September 15
September 30

4.0
4.0

367.6
360.6

370.6
363.6

375.6
368.6

October 15
October 31

4.0
4.0

365.9
366.0

368.9
369.0

373.9
374.0

November 15
November 30

4.0
4.0

370.7
368.4

373.7
371.4

378.7
376.4
,

4.0
4.0

373.3
366.6

376.3
369.6

381. 3
374.6

january 15
january 31

4.0
4.0

371.7
367.3

374.7
370.3

379.7
375.3

E~bruary
E~bruary

4.0
4.0

370.2
368.7

373.2
371. 7

378.2
376.7

March 15
March 3l

4.0
4.0

374.0
369.5

377.0
372.5

382.0
377.5

April 15
April 30

4.0
4.0

373.7
365.4

376.7
368.4

381. 7
373.4

May 15
May 31

4.0
4.0

370.6
369.2

373.6
372.2

378.6
377.2

june 15
june 30

4.0
4.0

368.3
361.4

371. 3
364.4

376.3
369.4

December 15
December 31

illQ

15
28

March 21, 1969

T'REASURY DEPARTMENT
t

WASHINGTON. D.C.
March 24, 1969

MEMORANDUM FOR THE PRESS:
The attached material -- embargoed for 3:30 p.m. March 24 -releases information on the Administration's proposed legislation
In one-bank holding companies. It consists of six parts:

1. Copy of a letter from Secretary of the Treasury
David M. Kennedy to the President of the Senate
transmitting the legislation. (Identical letter
sent to Speaker of the House)
2. A copy of the proposed basic bill.
3. A copy of the proposed bill on OBHC tax aspects.
4. An analysis of the bill.
5. A comparison of the language of the proposed
measures and existing statute.
6. A simplyfied explanation of the problem to which
the proposal is addressed and the proposal itself.

000

CAUTION:

THIS MATERIAL IS NOT TO BE RELEASED, QUOTED
OR REFERRED TO IN ANY WAY BEFORE 3:30 P.M.,
MARCH 24.

•

: .... -:

THE SECRETARY OF' THE TREASURY

WASHINGTON

March 24, 1969

Dear Mr. President:
There is transmitted herewith a draft of a proposed
bill, "To broaden the definition of bank holding companies,
and for other purposes."
The proposed legislation would reasonably but
effectively stop a trend toward the merging of banking and
commerce. This trend, just now developing, threatens to
change the nature of American private enterprise.
President Eisenhower, in signing the Bank Holding
Company Act of 1956, noted that the legislation did not
go far enough, and that further attention of the Congress
would be necessary to control activities which could
result from the exemptions in the Act.
The time has come for the Congress to remove those
exemptions.
The 1956 Act provided for the regulation of all holding
companies owning 25 percent or more of the stock of two
or more banks. This means that a holding company controlling
.only one bank is immune to the Act, particularly that
central provision which, in keeping with American business
tradition; prohibits the mixing of banking and commerce
within one corporate structure.
For a decade, the 1956 Act worked satisfactorily.
The 117 one-bank holding companies in existence when the Act
was passed were increased by an average of 40 per year, and
in most cases these were small banks.
By 1968, however, President Eisenhower's foresight of
twelve years before was coming true -- and with it a
direct threat to the American economic structure. By the
end of the year, the rate of formations had tripled -bringing the number of one-bank holding companies existing
and proposed to about 800. Even more significant is the
size of the banks involved: these 800 controlled nearly a

fourth of all commercial bank deposits in the nation -whereas the small one=bank holding companies existing in
mid=1965 accounted for only one=twentieth of the total.
In 1965, more than 80 percent of the banks owned
by existing one=bank holding companies had total deposits
of less than $30,000,000. In 1968, however, nine of the
nation's twelve largest banks -= with deposits ranging
from $6 billion to over $20 billion == announced their
intention to create one=bank holding companies.
Clearly the situation has changed markedly in just
the past year.
Corporate conglomerates are increasing their
interest in acquiring banks, and some of the bank=dominated
one-bank holding companies now plan to diversify into
nonfinancial fields. If such acquisitions are permitted
to continue, there will be a growing number of mergers
between large banks and large nonfinancial companies,
thereby putting our system of free and competitive
enterprise in jeopardy.
Our free enterprise economy, in which commercial and
financial power is separated and dispersed, would undergo
a drastic change within a few years. We would find
ourselves in a structure dominated by some 50 to 75 huge
centers of economic and financial power -- each of which
would consist of a corporate conglomerate controlling a
large bank or a multi=billion dollar bank controlling a
large nonfinancial conglomerate.
This emerging trend -= this tip of the iceberg -- adds
a new and highly disturbing dimension to the conglomerate
movement which is now under study, both in the Congress
and the Executive Branch.
Historically, the principles that maintain the wall of
separation between financial power and industrial-commercial
power go back to the early years of the Republic. They
were most recently reaffirmed by the Bank Holding Company
Act of 1956. To rebuild that wall, the proposed Bank Holding

- 3 Company Act of 1969 would:
amend the Bank Holding
1956 to extend Federal
bank holding companies
which control only one

Company Act of
regulation of
to those companies
bank.

require all corporations which have
affiliated with banks since June 30, 1968
to confine their activities to the
financial, fiduciary or insurance functions
specified in the 1956 Act.
This proposed legislation is in the best interests
of an independent banking system and a free, competitive
economy. I strongly recommend prompt and effective action.
It would be appreciated if you would lay the proposed
bill before the Senate. An identical bill has been
transmitted to the Speaker of the House of Representatives.
The Department has been advised by the Bureau of the
Budget that enactment of the proposed legislation would be in
accord with the program of the President.
Sincerely yours,

/s/

The Honorable
Spiro T. Agnew
President of the Senate
Washington, D. C.
20510

David M. Kennedy

A BILL

To broaden the definition of bank holding companies,
and for other purposes.
Be it enacted by the Senate and House of Representatives of the United
states of America in Congress assembled,
the

That this Act may be cited as

"Bank Holding Company Act of 1969. II

Sec. 2.

The Bank Holding Company Act of 1956, as amended, is hereby

further amended as follows:
(1) Section 2 is amended
(a) by amending subsection (a) to read as follows:
"(a) 'Bank holding cOllpany' Ileans an)" company (1) that
directly or indirectly owns, controls, or holds with
power to vote 25 per centum or Ilore of the voting shares
of any bank or of a company that is or becomes a bank
holding company by virtue of this Act, (2) that controls
in any manner the

e~tion

of a maJority of the directors

of any bank, or (3) that has the power directly or
indirectly to direct or cause the direction of the management or policies of any bank; and, for the purposes of
this Act, any successor to any such company shall be
deemed to be a bank holding campaay from. the date as of
which such predecessor company became a bank holding company.
Notwithstanding the foregoing, (A) no bank and no company
owning or controlling voting shares of a bank shall be
a bank holding company by virtue of such bank's ownership
or control of shares in a fiduciary capacity except where
such shares are held under a trust that constitutes a

- 2 company as defined in subsection (b) of this section, or

pro-

vided in paragraphs (2) and (3) of subsection (g) of this seetion,
(B) no canpany shall be a bank holding callpany by virtue of it'
ownership or control of shares acquired by it in connection with
its underwriting of securities if such shares are held only for
such period of time as will permit the sale thereof on a re&8onable
basis, and (C) no company formed for the sole purpose of participating in a proxy solicitation shall be a bank holding company by
virtue of its control of voting rights of shares acquired in the
course of such solicitation."
(b) by amending subsection (b) by inserting "partnership," immediately
after "corporation," by striking "(l)"and by striking", or (2) any
partners hip" •
(c)

by amending subsection (d) by striking "or" immediately pre-

ceding "(2

and by substituting a semicolon for the period at the end

thereof and adding the following:
"or (3) any company, whose management or policies such bank
holding company has the power directly or indirectly to cause the
direction of or direct.
" 'Total banking assets held by its subsidiary banks' as used
in subsection (h) of this section shall include assets held by the
bank holding company if it is a bank."
(d)

by redesignating subsection (h) as subsection (i), and by

inserting immediately before it a new subsection to read as follows:
"(h) 'Appropriate banking agency' means
(1) The Comptroller of the Currency with respect to
any

bank holding company of which the total banking

- 3 assets held by its subsidiary banks which are national
banks or district banks exceed the total banking
assets held by its subsidiary banks Yhich are Statechartered members of the Federal Reserve System and
exceed the total banking assets held by its subsidiary
banks which are not members of the Federal Reserve System;
(2) The Federal Deposit Insurance Corporation with
respect to any bank holding company of which the total
banking assets held by its subsidiary banks which are
state-chartered non-members of the Federal Reserve System
but whose deposits are insured by the Federal Deposit
Insurance Corporation, exceed the total banking assets
held by its subsidiary banks which are state-chartered
members of the Federal Reserve System;

(3) The Board with respect to any bank holding
company not included under p8regrephs (1) or (2) hereof."
(e) by amending subsection (i) as designated by subparagraph (d) hereof by striking the words "the banking.
(2)

Section 3 is amended -(a) by striking the first word of subsection (a) and

inserting in lieu thereof the following:
"A company which is not a bank holding company may,
with the approval of the comptroller of the Currency, become
a bank holding company with respect to a national bank, or,
with the approval of the Federal Deposit Insurance Corporation,
become a bank holding company with respect to a state bank

whose deposits are insured by the Federal Dep08it Inluraace
corporation but which i8 not a member or the Federal
Reserve Syst..

Except a8 provided in the precediDi

sentence it".
(b) by adding in subsection (a) immediately precedima the
sentence beginning wi tb the word "liotvi tbstanding" tbe rollovilJ8

DeW

sentence:
"It shall be unlawful after .lune 30, 1971, for any CClipaDY
which becomes a bank holding company as a re8ult of the enactment
of the Bank Holding Company Act of 1969, to retain direct or
indirect ownership or control of any bank or bank holdin8 caapany
acquired after March 1, 1969, and prior to the date of eDactaent
of such Act, or of 25 per centua or more of the votins shares
of any bank or bank holding CCBpany any part of which was
acquired after March 1, 1969, and prior to the date of enactment of the Bank Holding COBpany Act of 1969, unle••• ucb
retention 1s approved in the aanner prescribed in the
tvo preceding sentences."
(c) by striking tram subsection (c) the yords "The
Board shall not approve" and insertiDg in lieu thereof "Reither
the Comptroller of the CUrrency, the Federal Deposit Insurance
Corporation, nor the Board shall approve".
(d) by strikillg from subsection (c) the words "the Board
shall take" and inserting in lieu thereof "there shall be taken".
(3)

section 4(a) is amended
(a) by striking "Board" and inserting in lieu thereof the

words "appropriate banking agency".

- 5 (b) by amending subparagraph (2) to read a8 follows:
"(2) after two years fran the date as of which
it becomes a bank holding company, or, in the case of any ccmpany
that has been continuously affiliated since May 15, 1955, with
a company which was registered under the Investment Company Act
of 1940, prior to May 15, 1955, in such a manner as to constitute
an affiliated company within the meaning of that Act, after
December 31, 1978, retain direct or indirect ownership or control
of any voting shares of any company which is not a bank or bank
holding company or engage in any businesses or activities other
than (i) those of banking or of managing or controlling banks
or of furnishing services to or performing services for any bank
with respect to which it is a bank holding company, (ii) those
specified under clause (8) of subsection (c) of this section subject
to all the conditions specified therein, or (iii) those in which
it was lawfully engaged on

,J'unll: 30. 1968.

and in which it

has been continuously engaged since that date."
(4) section 4(c) is amended (a) by amending clause (5) to read as follows:

"(5) shares acquired and held in the manner,
kinds and amounts specifically permissible for
national banks under provisions of Federal statute
law and regulations issued pursuant thereto;"
(b) by amending clause (8) to read as follows:

- 6 "(8) shares retained or acquired with the approval of the
appropriate banking agency in any company (other than a company
engaged principally in the issue, flotation, underwriting, public sale,
or distribution at wholesale or retail or through syndicate participation
of stocks, bonds, debentures, notes or other securities) engaged exclusively in activities that have been determined by unanimous agreement of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, and the Board (1) to be financial or related to finance
in

nature or of a fiduciary or insurance nature, and (2) to be in the

public interest when offered by a bank holding company or its subsidiaries.
"No retention nor acquisition may be approved under this clause
except pursuant to and in accordance with guidelines established by
unanimous agreement of the Canptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Board.

In establishing such

guidelines consideration shall be given to any potential anti-competitive
effects of a bank holding company engaging in any proposed type of activity,
and limitations on permissible activities may be established on the basis
of any relevant factors, including size of bank holding canpany or its
subsidiary banks, the size of any company to be acquired or retained,
and the size of communities in which such activities should be permitted.

- 7The appropriate banking agency shall not approve (a) any retention or acquisition under this clause
which would result in a monopoly, or which would be in
furtherance of any combination or conspiracy to monopolize
any part of trade or commerce in any part of the United
states, or
(b) any retention or acquisition under this clause whose
effect in any line of commerce in any section of the country
may be substantially to lessen competition, or to tend to
create a monopoly, or which in any other manner would be
in restraint of trade.
In every case, the appropriate banking agency shall take
into consideration the financial and managerial resources and
future prospects of the company or companies and the banks concerned,
and the convenience and needs of the community to be served."

- 8 (c) by amending clause (9) to read as follows:

" (9) shares lawfully acquired and owned on December 31,

1968, in any company organized under the laws of a
foreign country and which is engaged principally in
banking or other financial operations outside the
united states;"
(d) by changing the period at the end thereof to a semicolon
and by adding the following:
"(11) shares lawfully acquired and owned on
Jun~

30,

1968, by any company (or subsidiary thereof)

which becomes a bank holding company as a result of the
enactment of the Bank Holding Company Act of 1969, so long
as the company issuing such shares is not engaging and does
not engage in any business or activities other than those
in which it or the bank holding company (or its subsidiaries)
was lawfully engaged on

JunE';:

30, 1968.;

" (12) shares lawfully acquired and owned by a subsidiary
of a bank holding company if both the subsidiary and the
company issuing the shares are organized under the laws of
a foreign country and do not operate in the united states; or
" (13) shares retained or acquired by any canpany which
becomes a bank holding company as a result of the enactment
of the Bank Holding Company Act of 1969, but which ceases to be
a bank holding company no later than June 30, 1971, or such
other date not later than June 30, 1974, as may be fixed by
the appropriate banking agency
subsection (a) of this section."

in the manner prescribed in

- 9 (5)

section 5 is amended as follows:
(a) Subsection (a) is amended by adding at the end thereof
the following new sentence:
"Information received by the Board pursuant to this
subsection shall be made available to the Comptroller of
the Currency and the Federal Deposit Insurance Corporation
to the extent necessary to enable them to properly perform
the functions assigned to them under this Act."
(b) Subsection (b) is amended by adding at the end thereof
the following new sentence:
liThe Ccmptroller of the Currency and the Federal Deposit
Insurance Corporation are each authorized to issue such
regulations and orders as may be necessary to enable them
to properly perform the functions assigned to them under this Act."
(c) Subsection (c) is amended by adding at the end thereof the
following new sentence:
liThe authority granted herein to the Board is hereby granted
also to the Comptroller of the Currency and the Federal Deposit
Insurance Corporation to the extent necessary to enable them
to properly perform the functions assigned to them under this Act."

(6)

Section 8 is amended by striking the words "by the Board".

_10 _

(T) Section 9 is amended to read as follows:
"Sec. 9.

Any party aggrieved by an order issued under

this Act may obtain a review of such order

1n the United states

Court of Appeals within any circuit wherein such party has its
principal place of business, or in the Court of Appeals in
the District of columbia, by filing in the court, within thirty
days after the entry of the order, a petition praying that the
order be set aside.

A copy of such petition shall be forthwith

transmitted to the agency issuing the order by the clerk of the
court, and thereupon the agency shall file in the court the record
made before it, as provided in section 2112 of title 28, United
S~ates

Code.

Upon the filing of such petition the court shall

have the jurisdiction to affirm, set aside, or modif.Y the order
and to require the agency issuing such order to take such action
with regard to the matter under review as the court deems proper.
The findings of the agency as to the facts, if aupported by substantial
evidence, shall be conclusive."

- 11 -

(8) section 11 is amended
(a) by amending the first sentence of sUbsection (b)
to read as follows:
"The Board shall immediately notify the Attorney
General of any approval by it pursuant to this
Act of a proposed acquisition, merger, consolidation or other transaction by which a bank
holding company acquires a bank (hereinafter
referred to as a 'bank acquisition'), and such
a bank acquisition may not be consummated before
the thirtieth calendar day after the date of
approval by the Board."
(b) by further amending subsection (b) by striking the
words "acquisition, merger, or consolidation transaction"
at each place they appear in the second and succeeding sentences,
and inserting in lieu thereof the words "bank acquisition."
( c) by adding at the end thereof the following:
" (g) The appropriate banking agency shall notify the
Attorney General of any application received by it under
section 4(c)(8) of this Act.
"(h) Each appropriate banking agency shall include in
its annual report to the Congress a description and a
statement of the reasons for approval of each transaction
approved by it under section 4(c)(8) of this Act during the
period covered by the report."

- 12 -

Sec. 3. (a) Bo bank holding Call1paDY or subsidiary ot a bank
holding company may in any manner extend credit, lealle or lell
property of any kind, or furnish any service, or tix or vary
the consideration for any of the foregoing, on the condition,
agreement, or understanding
(A) that the custcmer shall obtain scae other
credi t, property, or service fralll the bank holding cClllpany
or subsidiary of the bank holding company; or
(B) that the customer shall not obtain credit,
property, or services fram a competitor of the bank
holding company or subsidiary of the bank holding caapany.
(b) The district courts of the united states have Jurisdiction to prevent and restrain violati0R8 of subsection (a)
of this section, and it is the duty of the United states attorneys, under the direction of the Attorney General, to institute proceedings in equity to prevent and restrain such
violations.

The proceedings may be by way of a petition

setting forth the case and praying that the violation be
enjoined or otherwise prohibited.
plained of haye

When the parties com-

been duly notified of the petition, the court

shall proceed, as soon as may be, to the hearing and determination of the case.

While the petition is pending, and before

final decree, the court may at any time make such temporary
restraining order or prohibition as it deems Just in the pr8li8el.
Whenever it appears to the court that the ends of Justice
require that other parties be brought before it, the court
may cause them to be summoned whether they reside

- 13 in the district in which the court is held or not, and
subpoenas to that end may be served in any district by
the marshal thereof.
(c) In any action brought by or on behalf of the United
states under SUbsection (a) of this section, subpoenas for
witnesses may run into any district, but no writ of
subpoena may issue for witnesses living out of the
district in which the court is held at a greater distance
than one hundred miles from the place of holding the same without the permission of the trial court being first had upon
proper application and cause shown.
(d) Any person who is injured in his business or property
by reason of anything forbidden in subsection (a) of this section
may sue therefor in any district court of the united states in
which the defendant resides or is found or has an agent, without
respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including
a reasonable attorney's fee.
(e) Any person, firm, corporation, or association may sue
for and have injunctive relief, in any court of the united states
having jurisdiction over the parties, against threatened loss
or damage by violation of subsection (a) of this section, under
the same conditions and principles as inJunctive relief against
threatened conduct that will cause loss or damage is granted

- 14 by courts of equity, under the rules governing such proceed1.Dgs.
Upon the execution of proper bond against damages tor an
injunction improvidently granted and a showing that the
danger of irreparable
injunction may issue.
(f) Any action to enforce any cause of action under this
section shall be forever barred unless commenced within tour
years after the cause ot action accrued.

THE SECRETARY OF THE TREASURY

WASHINGTON

March 24, 1969
Dear Mr. President:
There is transmitted herewith a Bill "Relating
to income tax treatment of certain distributions pursuant to the Bank Holding Company Act of 1969."
This proposed legislation is submitted in conjunction with the proposed legislation submitted today
to amend the Bank Holding Company Act of 1956. This
draft relates to the tax treatment which 'Would be
accorded distributions made pursuant to the Bank Holding
Co~pany Act amendments.
This proposed legislation would
provide generally that corporations which become bank
holding companies as a result of the ~~ Holding Company
Act of 1969 may distribute on a pro rata basis to their
shareholders, without ~~ediate tax consequences to such
shareholders, either their nonbanking assets or all their
banking assets acquired prior to J·1arch 1, 1969. Those
companies which are not required by the Bank Holding
Company Act of 1969 to divest but which, nevertheless,
choose to do so, would be permitted to distribute their
banking property tax-free if they comply with specified
requirements.
It would be appreciated if you would lay the proposed
legislation before the senate. A similar communication
has today been addressed to the Speaker of the House.
The Department has been advised by the Bureau of the
Budget that enactment of the proposed legislation 'Would be
in accord with the program of the President.
Sincere~

/s/
The Honorable
Spiro T. ,Agnew
President of the senate
Washington, D. C. 20510
Enclosure

yours,

David M. Kennedy

A BILL

Relating to the income tax treatment of certain distributions
pursuant to the Bank Holding Ccmpany Act of 1969
Be it enacted by the Senate and House of Representatives of the
Uhited States of America in Congress assembled, That section 1102 of the
Internal Revenue Code of 1954 (relating to special rules for the income
tax treatment of distributions pursuant to the Bank Holding Company Act
of 1956) is amended by adding at the end thereof the following new subsection:
"(f)

CERTAIN OTHER BANK HOLDING COMPANIES.--This part shall

apply in respect of any company which becomes a bank holding company
as a result of the enactment of the Bank Holding Company Act of 1969,
with the following modifications:
(1)

Subsections (a)(3) and (b)(3) of section 1101

shall not apply.
(2)

Subsections (a)(l) and (2) and (b)(l) and (2) of

section 1101 shall apply in respect of distributions to
shareholders of the distributing bank holding corporation
only if all distributions to each class of shareholders
which are made-(A) after March 1, 1969, and
(B) on

01'

before the date on which the appropriate

banking agency (as defined in section 1103(f» makes
its final certification under section 1101
are pro rata.

(e),

For purposes of the preceding sentence, any

- 2 redemption of stock made in whole or in part with property
other than money shall be treated as a distribution.
(3)

In applying subsections (c) and (d) of section 1101

and subsection (b) of 1103, the date ''March 1, 1969" shall be
substituted for the date ''May 15, °1955."
(4)

In applying subsection (d)(3) of section 1101, the

date of enactment of this subsection shall be treated as the
date of enactment of this part.
(5)

In applying this part, the references to the Bank

Holding Company Act of 1956 shall be treated as referring
to such Act as amended by the Bank Holding Company Act of 1969.
(6)

In applying this part, the term "Beard" shall be

treated as referring to the appropriate banking agency
(as defined in section 1103(f».

(1) In applying subsections (b) and (c)(3) of section 1101,
the term 'prohibited property' shall include property which
would otherwise be prohibited property (within the meaning
of section 1103(c»

except for the application of section 4(c){1l)

of the Bank Holding Company Act of 1956."
Sec. 2.

Section 1103 of the Internal Revenue Code of 1954 (relating

to certain definitions) is amended by adding at the end thereof the
following new SUbsection:
"(f)

APPROPRIATE BANKING AGENCY.--For purposes of this part,

the term 'appropriate banking agency' shall have the same definition
as in section 2(h) of the Bank Holding Company Act of 1956. II

ANALYSIS
BANK HOLDING COMPANY ACJr OF 1969

The first section would designate the Act as the Bank Holding Company
Act of 1969.
section 2 is divided into eight subparagraphs, all of which would a..nd
the Bank Holding Company Act of 1956.

The amendments are as follon:

Paragraph (1) would amend section 2 containing definitions.
It would redefine "bank holding company" to include any compaoy
which owns or controls one bank, and to include any company
which in fact has power to control the management of any bank;
it would provide a definition of "appropriate banking agency";
finally, it would make clear that the Act is not intended to have
extraterritorial application.
Paragraph (2) would provide that any company which wishes
to become a bank holding company may do so with the approval of
the Comptroller of the Currency if it seeks to acquire a national
bank, with the approval of the Federal Deposit Insurance Corporation
if it seeks to acquire a nonmember insured bank, and with the
approval of the Federal Reserve Board for any other bank acquisition.
It would also require retroactive approval for any acquisition of one
bank by any company (other than a bank holding canpany) made after
lwBrch 1, 1969, and before the date of enactment.

- 2 Paragraph (3) would amend the Act to permit any company which
under the Act would become a one-bank holding company to continue
to engage in any businesses or activities in which it was engaged
on June 30, 1968.
Paragraph (4) would amend section 4( c) in several respects.

would make a technical amendment to insure that bank holding companies
would have to get the same type of approval as national banks for the
acquisition of corporate shares that national banks are permitted to
acquire.

It would require federal approval for the acquisition after

December 31,

1968,

of the shares of any bank organized in a foreign

country and engaged in the banking business outside the United states.
It would permit one-bank holding companies to keep other companies
which they owned on June 30,
not engage in new businesses.

1968,

so long as those companies did

It would provide that foreign sub-

sidiaries of bank holding companies could retain and.

acq~.lire

in other foreign corporations which do not operate in the United

states.

It would permit a one-bank holding company to retain or

acquire shares in any company until June 30, 1911, provided that it
disposes of its banks no later than that date.

This period of time

could be extended by the appropriate banking agency for an additional
three years, but no extension could be for more than one year at a
time.

- 3 Paragraph (4) would also permit bank holding companies to
retain or acquire shares in other companies engaged exclusively
in activities that have been detennined by unanimous agreement
of the comptroller of the Currency, the Federal Deposit Insurance
corporation, and the Federal Reserve Board to be financial or
related to finance in nature or of a fiduciary or insurance nature,
and to be in the public interest when offered by a bank holding
company. (This would not include engaging in the securities business.)
The retention or acquisition of shares under this authority
would. have to be approved by the appropriate banking agency, which
would be the Comptroller of the Currency in the case of a bank
holding company having primarily national banks, the Federal Deposit
Insurance Corporation in the case of a bank holding company having
primarily nonmember insured banks, and by the Federal Reserve in
all other cases.

The approval authority would have to be exercised

under guidelines established by unanimous agreement of the three bank
supervisory agencies.

In the establishment of the guidelines consider-

ation would have to be given to potential anticompetitive effects, and
the guidelines could include limits based on size either of companies
or banks involved or of communities involved.

Also, in considering

applications the banking agencies would have to apply anticompetitive
and banking standards similar to those contained in the Bank Merger
Act of 1960 as amended in 1966.

- 4Paragraph (5) would make technical. changes in the sections of
the Bank Holding Company Act dealing with administration.

All bank

holding companies, including one-bank holding companies, would have
to register with the Federal Reserve Board, but the Comptroller of
the CUrrency and the Federal Deposit Insurance Corporation would
each have access to necessary information, and each would be authorized to issue regulations and orders, to require reports under oath
and to make examinations.
Paragraph (6) would extend criminal penalties contained in the
Bank Helding Company Act of 1956, to violations of any regulation or
order issued by any of the three bank supervisory agencies.
Paragraph (1) would provide for judicial review of any order
issued by any of the three agencies.
Paragraph (8) would require that the Attorney General be notified
of any application for the acquisition by a bank holding company of
shares in any company other than a bank; and would require that each
application approved be described in the agency's annual report.

Section 3 of the bill would prohibit tie-in arrangements which
would condition the furnishing of any service on the obtaining of any
other service.

The district coorts would have jurisdiction to restrain

violat ions of this provis ion and suit for that purpose could be
brought by the Attorney General.
Section 4 of the bill would amend sections 1102 and 1103
of the Internal Revenue Code of 1954 to provide generally

- 5 that corporations which become bank holding companies as a result of
this bill

may

distribute on a pro rata basis to their shareholders,

without tax consequences to such shareholders, either their nonbanking
assets or all their banking assets acquired prior to March 1, 1969.
This is very similar to the treatment afforded corporations which
became bank holding companies as a result of the Bank Holding Company
Act of 1956 or the amendments thereto enacted in 1966.

Those companies

which are not required by this bill to divest but which, nevertheless,
choose to do so, are permitted to distribute their banking property
tax-free if they comply with all the applicable requirements of
sections 1101-1103, including obtaining a determination of the appropriate
banking agency that such distribution is appropriate to effectuate the
policies of the Bank Holding Company Act of 1956, as amended.

COMPARATIVE TYPE SHOWING CHANGES IN EXISTING LAW
MADE BY PROPOSED BILL

Changes in existing law proposed to be made by the bill are
shown as follows, existing law proposed to be omitted is enclosed
in brackets and new matter is underscored:

THE BANK HOLDING COMPANY ACT OF 1956, AS'

~NDED

(70 stat. 133; 12 U.S.C. 1841 et. seq.)

DEFINITIONS
Sec. 2. (a) "Bank holding company" means any company (1) that
directly or indirectly owns, controls, or holds with power to vote
25 per centum or more of the voting shares of [each of two or more
banks] any bank or of a company that is or becomes a bank holding
company by virtue of this Act, or (2) that controls in any manner the
election of a majority of the directors of [each of two or more banks]
any bank, or (3) that has the power directly or indirectly to direct or
cause the direction of the management or policies of any bank; and,

- 2 -

for the purposes of this Act, any successor to any such company
shall be deemed to be a bank holding company from the date as of
which such predecessor company became a bank holding
withstanding the foregoing,

compar.~

Not-

(A) no bank and no company owning or

controlling voting shares of a bank shall be a bank holding company
by virtue of such bank's ownership or control of shares in a
fiduciary capacity[,] except where such shares are held under a trust
that constitutes a company as defined in subsection (b) of this
section, or as provided in paragraphs (2) and (3) of subsection (g)
of this section, (B) no company shall be a bank holding company by
virtue of its ownership or control of shares acquired by it in
connection with its underwriting of securities if such shares are
held only for such period of time as will permit the sale thereof
on a reasonable basis, and (C) no company formed for the sole purpose
of participating in a proxy solicitation shall be a bank holding company by virtue of its control of voting rights of shares acquired in
the course of such solicitation.
(b) "Company" means any corporation, partnership, business trust,
association, or similar organization, or any other trust unless by its
terms it must terminate within twenty-five years or not later t 113.n
one years and

:_'IIr,rlt~

ten months after the death of individuals living on the

effective date of the trust, but shall not include [(1)] any corporation
the majority of the shares of which are oy:ned by
State[, or (2) any partnership].

tz.,E'

Unii::ed states or by any

3 -

(c) "Bank" means any institution that accepts deposits that
the depositor has a legal right to withdraw on demand, but shall
not include any organization operating under section 25 or section
25(a) of the Federal Reserve Act, or any organization that does not
do business within the United States.

"District bank" means any

bank organized or operating under the Code of Law for the District
of Columbia.
(d) "Subsidiary", with respect to a specified bank holding
company, means (1) any company 25 per centum or more of whose
voting shares (excluding shares owned by the United States or by
any company wholly owned by the United States) is directly or
indirectly owned or controlled by such bank holding company, or is
held by it with power to vote; [or]

(2) any company the election

of a majority of whose directors is controlled in any manner by
such bank holding companYLor (3) any company, whose management or
policies such bank holding company has the power directly or
indirectly to cause the direction of or direct.
"Total banking assets held by its subsidiary banks" as used
in subsection (h) of this section shall include assets held by the
bank holding company if it is a bank.
(e) The term "successor" shall include any company which
acquires directly or indirectly from a bank holding company shares
of any bank, when and if the relationship between such company and

- 4 -

the bank holding company is such that the transaction effects no
substantial change in the control of the bank or beneficial ownership of such shares of such bank.

The Board may, by regulation,

further define the term "successor" to the extent necessary to
prevent evasion of the purposes of this Act.
(f) "Board"

mean~the

Board of Governors of the Federal Reserve

System.
(g)

For the purposes of this Act--(1) shares owned or controlled by any subiidiary of a bank

holding company shall be deemed to be indirectly owned or
controlled by such bank holding company;
(2) shares held or controlled directly or indirectly by
trustees for the benefit of (A) a company, (B) the shareholders
or members of a company, or (C) the employees (whether exclusively
or not) of a company, shall be deemed to be controlled by such
company; and
(3) shares transferred after January 1, 1966, by any bank
holding company (or by any company which, but for such transfer,
would be a bank holding company) directly or indirectly to any
transferee that is indebted to the transferor, or has one or
more officers, directors, trustees, or beneficiaries in common
with or subject to control by the transferor, shall be deemed
to be indirectly owned or controlled by the transferor unless

5 -

the Board, after opportunity for hearing, determines that the
transferor is not in fact capable of controlling the transferee.
(h) "Appropriate banking agency" means (1) The Comptroller
of the Currency with respect to any bank holding company of which
the total banking assets held by its subsidiary banks which are
national banks or district banks exceed the total banking assets
held by its subsidiary banks which are State-chartered members
of the Federal Reserve System and exceed the total banking assets
held by its subsidiary banks which are not members of the Federal
Reserve System; (2) The Federal Deposit Insurance Corporation with
respect to any bank holding company of which the total banking
assets held by its subsidiary banks which are State-chartered nonmembers of the Federal Reserve System but whose deposits are insured
by the Federal Deposit Insurance Corporation, exceed the total
banking assets held by its subsidiary banks which are State-chartered
members of the Federal Reserve System; (3) The Board with respect to
any bank holding company not included under

p~ragraphs

(1) or (2)

hereof.
!(h)] (i) The application of this Act and of section 23A of the
Federal Reserve Act (12 U.S.C. 371), as amended, shall not be affected
by the fact that a transaction takes place wholly or partly outside
the United States or that a company is organized or operates outside
the United States:

ppovided, howevep, That the prohibitions of

section 4 of this Act shall not apply to shares of any company organized

- 6 -

under the laws of a foreign country that does not do any bU8iness
within the United States, if such shares are held or

a~quired

a bank holding company that is principally engaged in [the banking]
business outside the United States.
ACQUISITION OF BANK SHARES OR ASSETS
Sec. 3. (a) [It] A company which is not a bank holding company
may, with the approval of the Comptroller of the Currency, become
a bank holding company with respect to a national bank, or with the
approval of the Federal Deposit Insurance COrporation, become a
bank holding company with respect to a state bank whose deposits
are insured by the Federal Deposit Insurance Corporation but which
is not a member of the Federal Reserve System.

Except as provided

in the preceding sentence it shall be unlawful, except with the
prior approval of the Board, (1) for any action to be taken that
causes any company to become a bank holding company; (2) for any
action to be taken that causes a bank to become a subsidiary of a
bank holding company; (3) for any bank holding company to acquire
direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, such company will directly or
indirectly own or control more than 5 per centum of the voting
shares of such bank;

(4) for any bank holding company or subsidiary

thereof, other than a bank, to acquire all or substantially all of the
assets of a bank; or (5) for any bank hOlding company to merge or

7 -

consolidate with any other bank holding company.

It shall be

unlawful after June 30, 1971, for any company which becomes a
bank holding company as a result of the enactment of the Bank
Holding Company Act of 1969, to retain direct or indirect ownership
or control of any bank or bank holding company acquired after March 1,
1969, and prior to the date of enactment of such Act, or of 25 per
centum or more of the voting shares of any bank or bank holding company
any part of which was acquired after March 1, 1969, and prior to the
date of enactment of the Bank Holding Company Act of 1969, unless
such retention is approved in the manner prescribed in the two preceding
sentences.

Notwithstanding the foregoing this prohibition shall not

apply to (A) shares acquired by a

ban~,

(i) in good faith in a fiduciary

capacity, except where such shares are held under a trust that constitutes a company as defined in section 2(b) and except as provided
in paragraphs (2) and (3) of section 2(g), or (ii) in the regular
course of securing or collecting a debt previously contracted in good
faith, but any shares required after the date of enactment of this Act
in securing or collecting any such previously contracted debt shall be
disposed of within a period of two years from the date on which they
were acquired; or (B) additional shares acquired by a bank holding
company in a bank in which such bank holding company owned or controlled
a majority of the voting shares prior to such acquisition.
(b)

Upon receiving from a company any application for approval

under this section, the Board shall give notice to the Comptroller of
the Currency, if the applicant company or any bank the voting shares or
as~ets

of which are sought to be acquired is a national banking

- 8 -

association or a District bank, or to the appropriate supervi80ry
authority of the interested State, if the applicant company or any
bank the voting shares or assets of which are sought to be acquired
is a State bank, and shall allow thirty days within which the views
and recommendations of the Comptroller of the Currency or the State
supervisory authority, as the case may be, may be submitted.
Comptroller of the Currency or the State supervisory authority

If the
10

notified by the Board disapproves the application in writing within
said thirty days, the Board shall forthwith give written notice of
that fact to the applicant.

Within three days after giving 8uch

notice to the applicant, the Board shall notify in writing the
applicant and the disapproving authority of the date for commencement
of a hearing by it on such application.

Any such hearing shall be com-

menced not less than ten nor more than thirty days after the Board has
given written notice to the applicant of the action of the disapproving
authority.

The length of any such hearing shall be determined by the

Board, but it shall afford all interested parties a reasonable opportunity
to testify at such hearing.

At the conclusion thereof, the Board shall by

order grant or deny the application on the basis of the record made
at such hearing.
(c)

[The Board shall not approve] Neither the Comptroller of

the Currency, the Federal Deposit Insurance Corporation, nor the
Board shall approve

- 9 -

tl) any acquisition or merger or consolidation under
this section which would result in a monopoly, or which
would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of
banking in any part of the United States, or
(2) any other proposed acquisition or merger or consolidation under this section whose effect in any section of the
country may be substantially to lessen competition, or to
tend to create a monopoly, or which in any manner would be
in restraint of trade, unless it finds that the anticompetitive effects of the proposed transaction are clearly outweighed
in the public interest by the probable effect of the transaction
in meeting the convenience and needs of the community to be
served.
In every case, Ithe Board shall take] there shall be taken into
consideration the financial and managerial resources and future
prospects of the company or companies and the banks concerned, and
the convenience and needs
(d)

of the community to be served.

Notwithstanding any other provision of this section, no

application shall be approved under this section which will permit
any bank holding company or any subsidiary thereof to acquire,
directly or indirectly, any voting shares of, interest in, or all or
substantially all of the assets of any additional bank located
outside of the State in which the operations of such bank holding
company's banking subsidiaries were principally conducted on the

- 10 -

effective date of this amendment or the date on which luch
company became a bank holding company, whichever i. later, unl •••
the acquisition of such .hares or aasets of a state bank by an
out-of-State bank holding company i. specifically authorized by
the statute laws of the State in which such bank is located, by
language to that effect and not merely by implication.

For the

purposes of this section, the state in which the operations of a
bank holding company's subsidiaries are principally conducted i8
that State in which total deposits of all such banking subsidiariel
are largest.
INTERESTS IN NONBANKING ORGANIZATIONS

Sec. 4.

(a) Except as otherwise provided in this Act, no

bank holding company shall--(1) after the date of enactment of this Act acquire
direct or indirect ownership or control of any voting shares
of any company which is not a

ban~or

(2) after two years from the date as of which it becomes
a bank holding company, or, in the case of any company that has
been continuously affiliated since May 15, 1955, with a company
which was registered under the Investment Company Act of 1940,
prior to May 15, 1955, in such a manner as to constitute an
affiliated company Within the meaning of that Act, after

11 -

December 3lt 1978, retain direct or indirect ownership or
control of any voting shares of any company which is not
a bank or a bank holding company or engage in any [business
other than that of banking or of managing or controlling
banks or of furnishing services to or performing services
for any bank of which it owns or controls 25 per centum or
more of the voting shares] businesses or activities other than
(i) those of banking or of managing or controlling banks or
of furnishing services to or performing services for any bank
with respect to' 'which it is a bank holding company, (ii)
those specified under clause (8) of subsection (c) of this
section subject to all the conditions specified therein,
9r (iii) those in which it was lawfully engaged on June 30,
1968, and in which it has been continuously engaged since that

date.

- 12 -

lBoard]
The/appropriate banking agency is authorized, upon application by
a bank holding company, to extend the period referred to in paragraph (2) above from time to time as to such bank holding company
for not more than one year at a time, if, in its judgment, such
an extension would not be detrimental to the public interest, but
no such extensions shall in the aggregate exceed three years.
(b) After two years from the date of enactment of this Act,
no certificate evidencing shares of any bank holding company shall
bear any statement purporting to represent shares of any other
company except a bank or bank holding company, nor shall the
ownership, sale, or transfer of shares of any bank holding company
be conditioned in any manner whatsoever upon the ownership, sale, or
transfer of shares of any other company except a bank or bank holding
company.
(c) The prohibitions in this section shall not apply to any
bank holding company which is a labor, agricultural, or horticultural
organization and which is exempt from taxation under section 501 of
the Internal Revenue Code of 1954, and such prohibitions shall not,
with respect to any other bank holding company, apply to--(1) shares of any company engaged or to be engaged solely in
one or more of the following acti vi ties:

(A) holding or operating

properties used wholly or substantially by any banking

subsidi~

of such bank holding company in the operations of such banking

13-

subsidiary or acquired for such future use; or (B) conducting
a safe deposit business; or (C) furnishing services to or
performing services for such bank holding company or its banking
subsidiaries; or (D) liquidating assets acquired from such
bank holding company or its banking subsidiaries or acquired
from any other source prior to May 9, 1956, or the date on
which such company became a bank holding company, whichever
is later;
(2) shares acquired by a bank in satisfaction of a debt
previously contracted in good faith, but such bank shall
dispose of such shares within a period of two years from the
date on which they were acquired, except that the Board is
authorized upon application by such bank holding company to
extend such period of two years from time to time as to
such holding company for not more than one year at a time if,
in its judgment, such an extension would not be detrimental
to the public interest, but no such extensions shall extend
beyond a date five years after the date on which such
shares were acquired;
(3) shares acquired by such bank holding company from any
of itssubsidiaries which subsidiary has been requested to
dispose of such shares by any Federal or state authority

- 14 -

having statutory power to examine such subsidiary, but
such bank holding company shall dispose of such shares within
a period of two years from the date on which they were acquired;
(4) shares held or acquired by a bank in good faith in a
fiduciary capacity, except where such shares are held under a
trust that constitutes a company as defined in section 2(b)
and except as provided in paragraphs (2) and (3) of section 2(g);
r(5)

shares which are of the kinds and amounts eligible

for investment by national banking associations under the provisions of section 5136 of the Revised statutes;]
(5) shares acquired and held in the manner, kinds and
amounts specifically permissible for national banks under
provisions of Federal statute law and regulations issued
pursuant thereto;
(6) shares of any company which do not include more than
5 per centum of the outstanding voting shares of such company;
(7) shares of an investment company which is not a bank
holding company and which is not engaged in any business
other than investing in securities, which securities do not
include more than 5 per centum of the outstanding voting shares
of any company;

- 15 _

1(8) shares of any company all the activities of which
are or are to be of a financial, fiduciary, or insurance nature
and which the Board after due notice and hearing, and on the
basis of the record made at such hearing, by order has determined
to be so closely related to the business of banking or of
managing or controlling banks as to be a proper incident thereto
and as to make it unnecessary for the prohibitions of this
section to apply in order to carry out the purposes of this
Act; ]
(8)

shares retained or acquired with the approval of the

appropriate banking agency in-any company (other than a company
engaged principally in the issue, flotation, underwriting,
public sale, or distribution at wholesale or retail or through
syndicate participation of stocks, bonds, debentures, notes
or other securities) engaged exclusively in activities that
have been determined by unanimous agreement of the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, and
the Board (1) to be financial or related to finance in nature or
of a fiduciary or insurance nature, and (2) to be in the public
interest when offered by a bank holding company or its subsidiaries.
No retention nor acguisition may be approved under this clause
except pursuant to and in accordance with guidelines established by
unanimous agreement of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Board.

In establishing

such guidelines consideration shall be given to any potential anticompetitive effects of a bank holding company engaging in any

- 16 -

proposed type of activity, and limitations on permissible
activities may be established on the basis of any relevant
factors, including size of bank holding company or ita Bub8idiuy
banks, the size of any company to be acquired or retained, and the
size of communities in which such activities should be permitted.
The appropriate banking agency shall not approve (a) any retention or acquisition under this clause which
would result in a monopoly, or which would be in furtherance of
any combination or conspiracy to monopolize any part of trade or
commerce in any part of the United states, or
(b) any retention or acquisition under this clause whose
effect in any line of commerce in any section pf the country may
be substantially. to lessen competition, or to tend to create a
monopoly, or which in any other manner would be in restraint of
trade.
In every case, the appropriate banking agency shall take
into consideration the financial and managerial resources and
f~ture prospects of the company or companies and the banks concerned,

and the convenience and needs of the community to be served.
K9) shares of any company which is or is to be organized

under the laws of a foreign country and which is or is to be
engaged principally in the banking business outside the
United States1 or]
(9) shares lawfully acquired and owned on December 31,
1968, in any company organized under the laws of a foreign

- 17 -

country and which is engaged principally in banking or
other financial operations outside the United states;
(10) shares lawfully acquired and owned prior to May 9,
1956, by a bank which is a bank holding company, or by any
of its wholly owned subsidiariesI.];
(11) shares lawfully acquired and owned on June 30,
1968, by any company (or subsidiary thereof) which becomes
a bank holding company as a result of the enactment of the

Bank Holding Company Act of 1969, so long as the company
issuing such shares is not engaging and does not engage in
any business oractivities other than those in which it or
the bank holding company (or its subsidiaries) was lawfully
ani.,ed on

~Ufte

3~,

1968;

(12) shares lawfully acquired and owned by a subsidiary
of a bank holding company if both the subsidiary and the
company issuing' the shares are organized under the laws of
r

a foreign country and do not operate in the United States;
or
(13) shares retained or acquired by any company which
becomes a bank holding company as a result of the enactment
of the Bank Holding Company Act of 1969, but which ceases to
be a bank holding company no later than June 30, 1971, or
such other date not later than June 30, 1974, as may be
fixed by the appropriate banking agency in the manner prescribed
in subsection (a) of this section.

- 18 -

(d) With respect to shares which were not subject to the
prohibitions of this section as originally enacted by reason of any
exemption with respect thereto but which were made subject to such
prohibitions by the subsequent repeal of such exemption, no bank
holding company shall retain direct or indirect ownership or

con~l

of such shares after five years from the date of the repeal of such
exemption, except as provided in paragraph (2) of subsection (a).
Any bank holding company subject to such five-year limitation on
the retention of nonbanking

asse~s

shall endeavor to divest itself

of such shares promptly and such bank holding company shall report
its progress in such divestiture to the Board two years after repeal
of the exemption applicable to it and annually thereafter.
ADMINISTRATION
Sec. 5. (a)

Wi thin one hundred and eighty days after the date

of enactment of this Act, or within one hundred and eighty days after
becoming a bank holding company, whichever is

l.~.l',

each bank holding

company shall register with the Board on forms prescribed by the
Board, which shall include such information with respect to the
financial condition and operations,

man~gement,

and intercompany rela-

tionships of the bank holding company and its subsidiaries, and related
matters, as the Board may deem necessary or appropriate to carry out
the purposes of this Act.

The Board may, in ita discretion, extend the

time wi thin which a bank holding company shall register and file the

- 19 -

requisite information.

Information received by the Board

pursuant to this subsection shall be made available to the
Comptroller of the Currency and the Federal Deposit Insurance
Corporation to the extent necessary to enable them to properly
perform the functions assigned to them under this Act.
(b) The Board is authorized to issue such regulations and
orders as may be necessary to enable it to administer and carry
out the purposes of this Act and prevent evasions thereof.

The

Comptroller of the Currency and the Federal Deposit Insurance
Corporation are each authorized to issue such regulations and
orders as may be necessary to enable them to properly perform
the functions assigned to them under this Act.
(c) The Board from time to time may require reports under oath
to keep it informed as to whether the provisions of this Act and
such regulations and orders issued thereunder have been complied
with; and the Board may make examinations of each bank holding
company and each subsidiary thereof, the cost of which shall be
assessed against, and paid by, such holding company.

The Board

shall, as far as possible, use the reports of examinations made by
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, or the appropriate State bank supervisory authority
for the purposes of this section.

The authority granted herein

to the Board is hereby granted also to the Comptroller of the

- 20 -

Currency and the Federal Deposit Insurance Corporation to the
extent necessary to enable them to properly perform the function.
assigned to them under this Act.
(d) Before the expiration of two years following the date of
enactment of this Act, and each year thereafter in the Board's
annual report to the Congress, the Board shall report to the
Congress the results of the administration of this Act, stating what,
if any, substantial difficulties have been encountered in carrying
out the purposes of this Act, and any recommendations as to changes
in the law which in the opinion of the Board would be desirable.
RESERVATION OF RIGHTS TO STATES
Sec. 7.

The enactment by the Congress of the Bank Holding

Company Act of 1956 shall not be construed as preventing any state
from exercising such powers and jurisdiction which it now hal or
may hereafter have with respect to banks, bank holding companies,
and subsidiaries thereof.
PENALTIES
Sec. 8.

Any company which willfully

vial~t.s

any provilion

of this Act, or any regulation or order ~ssued [by the Board] purs~t
thereto, shall upon conviction be fined not more than $1,000 for each
day during which the violation continues.

Any individual who willfully

participates in a violation of any provision of this Act shall upon
conviction be fined not more than $10,000 or imprisoned not more t~

- 21 -

one year, or both.

Every officer, director, agent, and employee

of a bank holding company shall be subject to the same penalties
for false entries in any book, report, or statement of such bank
holding company as are applicable to officers, directors, agents,
and employees of member banks for false entries in any books,
reports, or statements of member banks under section 1005 of
title 18, United states Code.
JUDICIAL REVIEW

Sec. 9.

Any party aggrieved by an order [of the Board] issued

under this Act may obtain a review of such order in the United States
Court of Appeals within any circuit wherein such party has its principal place of business, or in the Court of Appeals in the District of
Columbia, by filing in the court, within thirty days after the entry
of the IBoardts] order, a petition praying that the order [of the
Board] be set aside.

A copy of such petition shall be forthwith

trans~

mitted to the [Board] agency issuing the order by the clerk of the court,
and thereupon the {Board] agency shall file in the court the record made
before Ithe Board] it, as provided in section 2112 of title 28, United
States Code.

Upon the filing of such petition the court shall have the

jurisdiction to affirm, set aside, or modify the order [of the Board]
the
and to require/IBoard] agency issuing such order to take such action with
regard to the matter under review as the court deems proper.
of the IBoard] agency as to

~he

evidence, shall be conclusive.

The findings

facts, if supported by substantial

- 22 -

SAVING PROVISION
Sec. 11. Ca} Nothing herein contained shall be interpreted or
construed as approving any act, action, or conduct which is or has
been or may be in violation of existing law, nor shall anything
herein contained constitute a defense to any action, suit, or proceeding pending or hereafter instituted on account of any prohibited

antitrust or monopolistic act, action, or conduct, except as specifically
provided in this section.

- 23 -

The Board shall immediately notify the Attorney

General of any approval by it pursuant to this Act of a proposed
acquisition, merger, [or] consolidation or other transaction,

£l

which a bank holding company acquires a bank (hereinafter referred
to as a "bank acquisition"), and such [transaction] a bank acquisition
may not be consummated before the thirtieth calendar day after the
date of approval by the Board.

Any action brought under the anti-

trust laws arising out of an [acquisition, merger, or consolidation
transaction] bank acquisition shall be commenced within such thirtyday period.

The commencement of such an action shall stay the

effectiveness of the Board's approval unless the court shall otherwise
specifically order.

In any such action, the court shall review de

novo the issues presented.

In any judicial proceeding attacking any

Iacquisition, merger, or consolidation transaction] bank acquisition
approved pursuant to this Act on the ground that such transaction alone
and of itself constituted a violation of any antitrust laws other than
section 2 of the Act of July 2, 1890 (section 2 of the Sherman Antitrust
Act, 15

u.s.c.

2), the standards applied by the court shall be identical

- 24 -

with those that the Board is directed to apply under section 3
of this Act.

Upon the consummation of an {acquisition, merger, or

consolidation transaction] bank acquisition in compliance with this
Act and after the termination of any antitrust litigation commenced
within the period prescribed in this section, or upon the termination
of such period if no such litigation is commenced therein, the
transaction may not thereafter be attacked in any judicial proceedings
on the ground that it alone and of itself constituted a violation
of any antitrust laws other than section 2 of the Act of July 2,
1890 (section 2 of the Sherman Anti trust Act, 15 U. s. C. 2), but nothing
in this Act shall exempt any bank holding company involved in such
a transaction from complying with the antitrust

laws after the

consummation of such transaction.
(c) In any action brought under the antitrust laws arising out
of any acquisition, merger, or consolidation transaction approved by
the Board pursuant to this Act, the Board and any state banking
supervisory agency having jurisdiction within the State involved,
may appear as a party of its own motion and as of right, and be
represented by its counsel.
(d) Any acquisition, merger, or consolidation of the kind
described in section 3(a) of this Act which was consummated at any
time prior or subsequent to May 9, 1956, and as to which no litigation
was initiated by the Attorney General prior to the date of enactment
of this amendment, shall be conclusively presumed not to have been
in violation of any antitrust laws other than section 2 of the Act

- 25 -

of July 2, 1890 (section 2 of the Sherman Antitrust Act, 15
U.S.C. 2).
(e) Any court having pending before it on or after the date
of enactment of this amendment any litigation initiated under the
antitrust laws by the Attorney General with respect to any acquisition,
merger, or consolidation of the kind described in section 3(a) of
this Act shall apply the substantive rule of law set forth in section 3
of this Act.
(f) For the purposes of this section, the term "antitrust laws"
means the Act of July 2, 1890 (the Sherman Antitrust Act, 15 U.S.C.
1-7), the Act of October 15, 1914 (the Clayton Act, 15 U.S.C. 12-27),
and any other Acts in pari materia.
(g) The appropriate banking agency shall notify the Attorney
General of any application received by it under section 4(c) (8) of
this Act.
(h) Each appropriate banking agency shall include in its
annual report to the Congress a description and a statement of the
reasons for approval of each transaction approved by it under section
4(c) (8) of this Act during the period covered by the report.
SEPARABILITY OF PROVISIONS
Sec. 12.

If any provision of this Act, or the application of

such provision to any person or circumstance, shall be held invalid,

26 -

the remainder of the Act, and the application of such provision
to persons or circumstances other than those to which it is held
invalid, shall not be affected thereby.

INTERNAL REVENUE CODE OF 1954
SEC. 1102. * * *

*
(f)

CERTAIN OTHER BANK HOLDING COMPANIES.--This part shall

apply in respect of any company which becomes a bank holding company
as a result of the enactment of the Bank Holding Company Act of 1969,
with the following modifications:
(1)

Subsections (a) (3) and (b) (3) of section 1101

shall not apply.
(2)

Subsections (a) (1) and (2) and (b) (1) and (2) of

section 1101 shall apply in respect of distributions to
shareholders of the distributing bank holding corporations
only if all distributions to each class of shareholders
which are made-(A) after March 1, 1969, and
(Bl on or before the date on which the

appro~riate

banking agency (as defined in section 1103(f»

~ake5

its =ina1 certification under section 1101 (el,
are pro rata.

For purposes of the preceding sentence, any

- 27 -

redemption of stock made in whole or in part with property
other than money shall be treated as a distribution.
(3)

In applying subsections (c) and (d) of section 1101

and subsection (b) of 1103, the date "March 1, 1969" shall be
substituted for the date "May 15, 1955."
(4)

In applying subsection (d) (3) of section 1101, the

date of enactment of this subsection shall be treated as the
date of enactment of this part.
(5)

In applying this part, the references to the Bank

Holding Company Act of 1956 shall be treated as referring
to such Act as amended by the Bank Holding Company Act of 1969.
(6)

In applying this part, the term "Board" shall be

treated as referring to the appropriate banking agency (as
defined in section 1103(f)).
(7)

In applying subsections (b) and (c) (3) of section 1101,

the term "prohibited property" shall include property which would
otherwise be prohibited property (within the meaning of section
1103(c)) except for the application of section 4(c) (11) of the
Bank Holding Company Act of 1956.
SEC. 1103.

* * *

*
(f)

APPROPRIATE BANKING AGENCY. -- For purposes of this part,

- 28

the term

appropriate banking agency" shall have the same definition

as in section 2(h) of the Bank Holding Company Act of 1956.

- 29 -

NEW LAW
BANK HOLDING COMPANY ACT OF 1969

Sec.

3. <a>

baak hold1q c<apaJlJ or .ub.1d1a1"7 ot a bank

c~ '11&1

llold1llg

..uer extead cr.d1t, lea.e or ••11

,ro,.rty ot U'1 k1Ja4, or turai.a aD1 '."ice, or tix or TarT
t~e

couitentioa tor &Dl of the tor.soiDI,

ap-etaeat, or ua4entaJ:adi1ll
(A) that the cuatcaer .hall o.ta1n

OIl

.ea.

the ccmd1tiOll,

other

cretit. property. or .e"ice trca th. bdk holtill& caape.DY
or .u\.i'iary ot the bank holdiD& ea.paay; or
(I) t_t the cuatca.r .ball .ot obtai. cr.tit,
Iropert7, or ••"ice. tram a caIf.titor ot tb.

~aak

holdiaC c""-J or .Ub.i41arr of tb. baak .014i'l c....'Y.

i. > fte

"i.trict court. ot tb. U.i te4

stat..

lIaT. Juri.-

tict10a W 'mat ..... ".tni. Tiolatiou ot .1I•••ct1oa <a>

ot tbb .eeti_, .... it 18

t~e

...t, ot th. hit... stat•• M-

tOrM,., ud.r t •• 'traction ot
.titut.

~HtiaI. 18

vioati_.

t~.

Attora.,

(Ie••ral,

quit,. t. '""_t .... natnia

'rart.i

.. Jol.... or at••nr1..e probi.it.,.
paill... ot....

b ...

"ull

tllat tke Tioatioa De

n .. th. parti ••

Il1aatioa ot t .. ea...

COll-

Dotlti.d ot tla. ,.titi.. ,

...11 ,roe .... , . . .eu a. II&Y .e, to t •• ~.arac

'COI'M,

~t ot~r

court

nile tile pet1t1ca i. ,....UC, ..... betore

the court . , at &Ill t:1a. uk• •ue~

.......er it ..,ear. to

t~.

.... d.tert..,.~

reatni.tII ori.r or prolaibltioa .. it , .... J..t 1a

r ...1r.

.1lC.

.,. 'roc....1a&• ..,. •••, ...., ot a ,.titiOll

.ettl.. t.rt. ta. ca.. .....

tiDal

to 1a-

t~e COllrt

tllat

t~. . . . .

t~.

'rea1•••.

• t Jutl0.

parti••••• r~t ••tore it,

t~.

II&l CA•• tJa.. to •• '~OIIM "aet... tlMJ rea1 ..

eo.rt

30 -

in the district in which the court is held or not, and subpoena.
to that end may be served in any district by the . .rabal thereot.
(c) In any action brought by or on behalf of the United
States under subsection (a) ot this section, subpoenas tor
witnesses may run into any district, but no
writ of subpoena may issue for witnesses living out of the
district in which the court il held at a greater distance than
one hundred miles frail the place of holding the I.e without the
permilsion of the trial court being first had upon proper
application and cause shown.
(d) Any person who is injured in hil business or property
by reason of anything forbiddeD in 8ubsection (a) of this section
may sue therefor in any district court of the United States in

which the defendant resides or is found or has an 86ent, without
respect to the amount in controversy, and shall recover threefold
the damages by htm sustained, and the cost of suit, including a
reasonable attorney's tee.
(e)

AJry

person, firm, corporation, or association "Y' lue

for and have injunctive relief, in any court ot the UDited statel
baving Jurisdiction over the parties

aga1Jl8t threatened lOIS

or damage by violation ot subsection (a) of this section, under
the same conditions and principles as injunctive relief asainat
threatened conduct that vill cause 10.. or daaage is granted
by cou....-ts of equity, under the rules governiDS .uch proceedings.
Upon the eJtecution of proper bond against dulage. tor aD 1JlJunct1'2!
1mprovid~ntly
1088

granted and a showing that the daDger of irreparable

or damage is immediate, a

prel~ry

inJunction . .y iSlue.

- 31 -

(f) Any action to enforce any cause of action under this
section shall be forever barred unless commenced within four years
after the cause of action accrued.

TREASURY DEPARTMENT
SUMMARY OF TI-IE BACKGROUND OF DEVELOPMENT OF 1HE ONE-BANK
HOLDING COMPANY PROBLEM AND A GENERAL OlJI'LINE OF 1HE
PRINCIPLE POINTS TO BE INCLUDED IN A LEGISLATIVE RESOLUTION
OF THIS PROBLEM
BACKGROUND
In 1956 the Congress enacted and President Eisenhower
approved the Bank Holding Company Act of 1956, providing the first
comprehensive Federal regulation of all corporations holding
25 percent or more of the stock of two or more commercial banks.
The regulatory authority provided by-that Act is vested in the
Federal Reserve Board. The Act requires (1) that all holding
companies holding 25 percent or more of the stock of two or more
commercial banks must register with the Federal Reserve Board;
(2) that all such registered companies divest themselves of control
of all non-banking and non-bank-related corporations; and
(3) that all registered companies file annual reports with and
submit to examination by the Federal Reserve Board.
By definition the 1956 Act exempts from its coverage any
company holding 25 percent or more of the stock of one commercial
bank. In 1956 the Federal Reserve Board objected to-this
definitional exemption and in the 89th Congress (1965-1966) the
Board sought unsuccessfully to have this "loophole" closed.
Thus, at present, there is no Federal
on non-banking holdings or acquisitions by
company (OBHC's). By the same token there
acquisition of one bank by a commercial or
by a conglomerate.

statutory proscription
one-bank holding
is no ban against the
industrial company or

EMERGENCE OF TI-IE PROBLEM
In 1955 there were 117 OBHC's controlling bank deposits of
about $12 billion. Ten years later the number of such companies
had grown significantly to 550. But that this growth
had occurred primarily in the form of small companies is
reflected in the fact that the bank deposit figure had risen to
a total of only $15 billion.

,-')

The fact that the average bank deposit figure for OBHC's
as of 1965 was less than $30 million supports the Congressional
viewpoint in 1966 tha~ the ?ne-bank "loophole" in the Bank Holding
Company Act had not gIven bIrth to any dangerous transformation
in our economic structure.
However, the past 12 months have produced dramatic changes.
Taking into consideration announcements of intention to create
OBHC's, the figures at the end of 1968 showed growth to almost
800 companies controlling bank deposits in excess of $100 billion.
THo principal forces are responsible for the sharp expansion
of banking assets controlled by unregulated holding companies.
Certainly the most influential force, to date, has been the move
by many of the nation's major multi-billion dollar banks to
create bank-dominated OBHC's. Among the many motivating factors
are (1) a more efficient corporate structure for the application
of modern management techniques; (2) a more flexible format for
the offering of financially related services; and (3) a means for
offering certain financial services through affiliates and thus
avoiding legal challenge from competitors should those identical
services be established departmentally within the bank. (In this
last respect, it should be noted that commercial banks are
currently being challenged on the sale of computer services,
travel agency operations, action as insurance agents, and the
sale of shares in a mutual fund.)
The other major force in the shift of bank assets to the
control of unregulated holding companies has been "tender offer"
acquisitions of banks by other corporations, including
conglomerates. While the number of such acquisitions is not yet
large, the trend is accelerating and the potential to effect
significant change in our economic structure is great. In fact,
this mixing of non-financial activities with financial
activities was one of the principal concerns underlying the Bank
Holding Company Act of 1956.
1HE PROBLEM

While the vast majority of the new large bank-dominated
OBHC's have expressed an intention to limit their activities to
banking on financially related services (leasing, factoring,
mortgage servicing, data processing, etc.), there is a clear and
present danger that bank acquisitions by industrial conglomerates
could force a change in these intentions. Should this occur, it

- 3 -

seems predictable that our economy could shift within the next
5 to 10 years from one in which economic power is rather widely
dispersed into one dominated by 50 or so major power centers,
each comprising a major industrial-financial complex.
Also disturbing is the more immediate destructive impact on
banking which can result from an increase in "tender offers" for
banks. Any significant increase in the mnnber of such
acquisitions has an ominous potential for causing bank management
to give undue attention to price-earnings ratios with a concomitant
shift into speculative, high-yielding loans and investments.
The protection of sound banking practice and the preservation
of our basic economic structure would therefore seem to demand the
immediate needtbr reasonable legal restraints on the formation
and operation of one-bank holding companies.
FACTORS TO CONSIDER IN FORMULATION OF LEGISLATIVE POLICY
Small Conglomerate Companies
Many of the small OBHC's in existence in 1956,
as well as many formed thereafter, are in fact
conglomerate in nature. For example, a lumber yard,
an insurance agency, and a bank may be operated within
a small holding company structure. There is no
evidence that these small conglomerates have caused
any economic abuses. New legislation should accommodate
the existence of these "traditional" OBHC's.
Large Conglomerate Companies
The transformation of conglomerate corporations into
OBHC's poses the most serious economic threat and should
be prohibited. However, since the banks thus far acquired
are not large, there would seem to be no clear need to
require divestiture of the banking holdings provided the
company does not continue to diversify.

- 4 -

Bank Dominated One-Bank Holding Companies
For many banks seeking to offer broadly-based, lowcost financial services to the public the holding company
structure is unquestionably an efficient and flexible
format which should continue to remain available. Thus
legislation should retain this option to establish a
financial congeneric under adequate Federal regulation
while at the same time prohibiting the evolution into
a bank-dominated conglomerate.
Multiple Bank Holding Companies
These are the companies currently subject to the
1956 Act. Obviously any changes in that Act making
it applicable to OBHC's must be carried out in a
manner assuring full parity of treatment as between
these two general types of bank dominated holding
companies. Accordingly, the existiijg registered
companies should be granted the same flexibility as
to their right to acquire, establish, and operate
affiliates to provide financially related services.
Other Banks
Nothing in the legislation should have the implied
effect of restricting the ability of individual banks
to offer financially related services similar to those
which might be possible for a bank holding company.
Our rapidly evolving economy with its application of
new technology ideas and techniques, such as the
electronic transfer of payments, demand that all banks
be accorded such flexibility of action as may be
accorded bank holding companies.
Partnerships
In recent years, partn8rships ha\Te been established. t?
acquire and operate banks; the)T are exempt from the provlslons
of the Bank Holding Company Act. The new legislatio~ ~h?uld
cover partnerships, both to regulate their bank acqulsltlOns.
and to bring their non-bank affiliations under Federal scrutmy,
just as in the case of corporations.

- 5 -

Activities Now Prohibited to Banks Under Statute
Nothing in the legislation should be construed as permitting
commercial banks, directly or through affiliates, to offer services
now prohibited by law. The most important of these activities relate
to the securities business. In particular, the new legislation would
have no significance for the proscriptions now provided for in the
Glass-Steagall Act, the Banking Act of 1933 and 1935, or the
various securities acts.
Applicability of Sherman and Clayton Acts to Congeneric Acquisitions
Enactment of the new legislation should in no way be implied as
diluting the authority of the Justice Department in its anti-trust
enforcement under the Sherman and Clayton Acts. It should be made
clear that any action by a Federal banking agency in approving
acquisition by a registered bank holding company shall in no sense
be viewed as estopping anti-trust action by the Justice Department.
The legislation would require the banking agencies bnffiediately to
notify the Justice Department as to the receipt of any application
for acquisition or creation de novo of a service affiliate by a
bank holding company.
- -In addition, the banking agencies should be required to
consider competitive factors in approving acquisitions or de novo
addition of activities.
Tie-In Sales
"Tie-in sales" between any bank or other affiliate of a
bank holding company should be prohibited.
Definition of a Registered Bank Holding Company
Inasmuch as control of a bank whose stock is widely held might
be effected with considerably less than 25 percent of the stock
ownership, the legislation should strengthen the authority of the
banking agencies to rule, on the basis of substantial evidence, that
control in fact may exist even though less than 25 percent stock
ownership exists.

- 6 GIVEN 1lffiSE FACTORS OF CXJ.5 I DERATION , 1HE FOLLCJIlING ARE TIlE KEY
PROVISrCJIJS OF '!HE AIMINISTRATION PROPOSAL ON ONE-BAN)( HOLDING
CCMPANIES:

1. Expand the definition of the Bank Holding Canpany
Act of 1956 to include:

(a)

any company owning 25 percent or more of
the shares of any ~ commercial bank;

(b)

any company -- regardless of the percentage
of stock owned -- which has the power directly
or indirectly to direct or cause the direction
of the management on policies of any bank.

(c)

partnerships -- by amending the Act's definition
of "cClllpany" to include partnerships.

(d)

trusts which meet the ownership tests and which
have certain other characteristics.

Substitute a new Congressional mandate for the current
provision of subparagraph 4(c) (8) of the 1956 Act,
which now permits registered bank holding companies
to acquire "shares of any company, all the activities
of which are of a financial, fiduciary, or insurance
nature ~~d which the [Federal Reserve] Board •.. has
determined to be so closely related to the business
of banking ..• as to be proper incident thereto ... "
The amendment of 4(c)(8) would permit registered
bank holding companies to acquire sharES of any
company engaged exclusively in activities that have
been determined by the unanimous agreement of the
three Federal banking agencies "to be financial or
related to finance in nature or of a fiduciary or
insurance nature •.. "

(a)

procedurally the mandate of 4(c)(8) would be
implemented through guidelines established
by the three Federal banking agencies on the
basis of unanimous agreement.

(b)

in establishing guidelines for accepted
activities, the three banking agencies would
have to agree unanimously that any particular
activity was "in the public interest when
offered by a bank-holding company on its
subsidiaries".

- 7 (c)

specifically excluded from the list of accepted
activities would be any company "engaged principally in the issue, flotation, underwriting,
public sale, or distribution at wholesale or
retail,or through syndicate participation of
stocks, bonds, debentures, notesor other securities ...

(d)

in establishing the guidelines the three agency
group would be obliged to give consideration
to any anticompetitive effects which might
result from the approval of any particular
activity for a bank holding company or its
subsidiaries. Additionally, the proposed statute
directs the banking agencies in considering a
specific application for an acquisition or
creation de novo not to approve any application
that woulo-substantially lessen competition.

(e)

the authority to administer those guidelines
on a case by case basis would be dispersed
among the three Federal banking agencies along
traditional jurisdictional lines. That is, the
Comptroller of the Currency would have supervisory responsibility for the 4(c)(8) activities
for all registered bank holding companies in
which the dominant banking assets were of
national banks; the Federal Reserve Board, for
those in which the dominant banking assets
were of State member banks of the Federal
Reserve System; and the FDIC, for those in
which the dominant banking assets were of
insured state banks not members of the Federal
Reserve System.
(Note: This approach provides for uniformity
of standards in administration of the new Act
without disrupting the jurisdictional areas of
Federal bank supervision and without the forced
consolidation of the agencies, a step which
Congress has refused to take. In fact, with
the exception of the Bank Holding Comp:ln:' ''\ct
of 1956, all bank regulatory statutes of recent
years have in fact dispersed the supervisory
authority in this way.

- 8 (This provision can be viewed as a st,atutory
extension of the efforts of the past and current
administrations to coordinate bank supervision,
within the three agency approach. The Coordinating
Committee on Bank Supervision which was established
by President Johnson has been effectively working
for coordinated actions without forced consolidation.)
4.

Require the three Federal banking agencies to file annual
reports with the Congress concerning their administration
of 4(c) (8).
(Note: It is recognized that the powers granted the
agencies to interpret 4(c) (8) would be significant,
and that their interpretation should be subject to
continuing Congressional scrutiny. The requirement
of unanimous agreement among the three agencies and
annual reports to the Congress should assure that
the mandate is interpreted according to Congressional
intent. )

Provide a grandfather clause with an effective date of
Jtme 30, 1968. This means that the structure of a
one-bank holding company as of that date would be left
tmdisturbed with no divestitures required. However,
all acquisitions by any registered bank holding company
after the effective date of the grandfather clause
would require the prior approval of the relevant
Federal banking agency, and this approval would have
to be consistent with the new mandate in 4(c) (8) as
interpreted by the joint interagency banking group.
(Note: This means that a conglomerate corporation
that already owns one bank as of Jtme 30, 1968, would
in effect be prevented from any acquisitions in new
lines of activity in the future, which could not meet
the test of the amended 4(c)(8), and would have to
divest any such acquisitions that occurred between
Jtme 30, 1968 and the date of enactment of the bill.)

Continue the authority presently provided for in the
1956 Act for the Federal Reserve Board to be the sole
regulator with respect to bank acquisitions by multibank holding companies.

- 9 -

(Note: Although the financial or financially-related
non-bank acquisitions under 4(c)(8) would be dispersed
among the three agencies along traditional jurisdictional
lines, it is believed that, in keeping with the desire
not to disturb the basic existing regulatory structure
in this bill, it is better to permit the Federal Reserve
to continue to administer this part of the Act, which
it has done since 1956.)
7.

Explicitly prohibit "tie-in sales" between any bank
or other affiliate of a bank holding company. Enforcement authority of this provision should be vested in
the Justice Department and the relevant banking agency.

Require the Federal banking agencies bnffiediately to
notify the Justice Department as to the receipt of any
application for acquisition or creation de novo of a
service affiliate by a registered bank harding company.
This proposal would facilitate timely Justice Department
intervention if the proposed acquisition appeared to
violate the anti-trust provisions of either the Sherman
or Clayton Acts.

10.

Authority is included permitting a one-bank holding
company to retain or acquire shares in ~y company
until June 30, 1971, provided that it dIsposes of its
bank no later than that date. This grace period is
designed to permit a diversified company, which wishes
to continue to diversify, to have a reasonable period
of time in which to dispose of its bank holdings.
With the specific approval of the appropriate banking
agency this grace period could be extended for up to
an additional three years, but no approved extension
could be for more than one year at a time.
Provision is made for equitable tax treatment of those
companies which divest either banking or nonbanking
assets in keeping with the requirements and policies
of the Act. Companies would be permitted to distribute
the assets of such a divestiture without tax consequences
provided the assets are fully distributed among shareholders on a pro rata basis. This treatment is similar
to that provided in the 1956 Bank Holding Company Act.

1f'')

-..0",-

COMPARISON OF ADMINISTRATION, PATMAN AND llROXMIRE
BILLS ON BANK HOLDING COMPANIES

Definitions
Patman Bill - Would define bank holding company to mean any company
B.R. 6118
that has control over any bank or bank holding company.
Proxmire
Bill S. 1052

Would define bank holding company to mean any company
that owns or controls 25% or more of the stock of any
bank, or that controls the election of a majority of
the directors of any bank.

Administration
Bill Would define bank holding company to include any company
that owns or controls 25% or more of the stock of any bank,
or that controls the election of a majority of the directors
of any bank, or that has the power to direct the management or policies of any bank.
Partnerships
Patman Bill - Would include partnerships as bank holding companies.
Proxmire
Bill -

Would include partnerships as bank holding companies.

Administration
Bill Would include partnerships as bank holding companies.
Acquisition of Bank Shares or Assets
Patman Bill - A company which desires to acquire a controlling interest
in a bank or a bank holding company would have to secure

- 2 -

the approval of the Board of Governors of the Federal
Reserve System.
ProXmire
Bill -

A company which desires to acquire controlling interest
in a bank or bank holding company, would have to secure
the approval of the Board of Governors of the Federal
Reserve System.

Administration
Bill A company which desires to acquire a controlling interest
in a bank or a bank holding company would have to secure
the approval of the appropriate banking agency which
would be the Comptroller of the Currency in the case of
a national bank, the FDIC in the case of an insured nonmember bank, and the Board of Governors of the Federal
Reserve System in the case of all other banks.
Retroactive Approval
Patman Bill - No provision
Proxmire
Bill -

No provision

Administration
Bill Retroactive approval would have to be secured for the
acquisition by any company of any bank or bank holding
company acquired after March 1, 1969 and before the
date of enactment.

- 3 -

Divestiture

Patman Bill - No provision.

Under the Bank Holding Company Act of

1956 a company which becomes a bank holding company
must within two years (with possible extensions to five
years) divest itself of its non-banking assets.
Proxmire
Bill -

A company which becomes a one-bank: holding company
would be permitted to continue to engage in any business
or activities, or to retain shares in any company, in
which it was lawfully engaged on or which it lawfully held
prior to January 1, 1969, provided that neither the
company nor any of its subsidiaries engages in any
additional activities.

Administration
Bill A company which becomes a one-bank holding company
would be permitted to continue to engage in any business
or activities, or to retain shares in any company, in
which it was lawfully engaged on or which it lawfully held
on June 30, 1968, provided that neither the company nor
any of its subsidiaries engages in any additional activities.
Bank Mergers
Patman Bill - Would require Federal Reserve approval in addition to
usual supervisory approval for a bank merger

res~lting

in the acquisition of bank assets by a subsidiary bank
of a bank holding company.

- 4 -

Proxmire
Bill -

No comparable provision.

Administration
Bill No comparable provision.
Exemptions
Patman Bill - Would eliminate exemptions from the prohibitions
against owning non-banking assets for labor,
agriculture, or horticultural organizations exempt
from taxation.
Proxmire
Bill -

No comparable provision.

Administration
Bill No comparable provision.
Financially Related Activities
Patman Bill - Would make only a procedural change in present law
which permits bank holding companies to own shares
in companies whose activities are of a financial,
fiduciary, or insurance nature, determined to be so
closely related to banking as to be a proper incident
thereto.
Proxmire
Bill -

Does not change present law.

Administration
Bill Would permit bank holding companies to own shares in any
company engaged in activities determined by unanimouS
agreement of the three bank supervisory agencies to be

FOR IMMEDl.ATE RELEASE

W·RCH 2.4, 1969

Office of the White House Press Secretary

---------------------------------------------------------------------THE WHITE HOUSE
STATEMENT EY THE FRESIDENT
ON BANK HOLD COMFANIES

The Secretary of the Treasury, with my approval, has today transmitted to
the Congress proposed legislation on the further regulation of bank holding
companies.
Legislation in this area is important because there has been a disturbing
trend in the past year toward erosion of the traditional separation of powers
between the suppliers of money -- the banks -- and the users of money -comme rce and industry.
Left unchecked, the trend toward the combining of banking and business
could lead to the formation of a relatively small number of power centers
dominating the American economy. This must not be permitted to happen;
it would be bad for banking, bad for business, and bad for borrowers and
consumers.
The strength of our economic system is rooted in diversity and free
competition; the strength of our banking system depends largely on its
independence. Banking must not dominate commerce or be dominated by
it.
To protect competition and the separation of economic powers, I strongly
endorse the extension of Federal regulation to one -bank holding companies
and urge the Congress to take prompt and appropriate action.

# # # # #

TREASURY DEPARTMENT
WASHINGTON, D.C.
RELEASE 6:30 P.M.,
sda)" March 25, 1969.
RESULTS OF OFFERIBG OF $1.8 BILLION STRIP OF '1'REASORY BILLS
1!le 'l!reasury Department announced that tenders for additioml amounts of six
Les of 'l!reasury bills to an aggregate amount of $1,800,000,Ooq or thereabouts,
)e issued March 31, 1969, which were offered on March 18, 1969, were opened at
Federal Reserve Banks today. '!be amount of accepted tenders will be equally
Lded among the six issues of outstanding Treasury bills _turing May 8, May 15,
22, May 29, June 5, and June 12, 1969. ~ details of the offering are as
laws:

11 applied tor - $5,183,990,000
11 accepted
- 1,800,528,000

:IE OF ACCEPTED
PE'l'!'l'!VE BIDS:
High
Low
Average

Price
99.250
99.207
99.225

(includes $97 ,6~,,000 entered on a noncompetitive
basis and accepted in ttlll at the average price
shown be low )

Approximate equivalent annual rate of disccunt based
on 55.5 days (average DUllber of days 1x> 118 turi ty )
4:.865,
5.l"~
5.027~ Y

Excepting one tender of $54:0,000

2l~ of the amount bid for at the low price was accepted

At TENDERS APPLIED FOR AIm ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
lew York
Philadelphia
Cleveland

Richmond
Atlanta
Chicago
St. LOUis

MinneapOlis
Kansas City
Dallas
San franCisco

nul

Applied For
$ 137,220,000
1,226,34:0,000
222,798,000
202,284,000
28,098,000

Acce~ted

r4l,i6o,ooo

4:16,376,000
77,610,000
235,104,000
102,288,000
226,788,000
229,824:,000

490,34:4:,000
222,798,000
170,4.84:,000
8,298,000
73,038,000
132,036,000
52,908,000
209,784:,000
78,126,000
139,188,000
89,064:,000

$3,183,990,000

$1,800,528,000

.79~260,.OOO

rate is on a ba.nlt discount basis.

~ equivalent coupon issue yield is 5.1~.

TREASURY DEPARTMENT
WASHINGTON, D.C.

March 26, 1969
FOR IMMEDIATE RELEASE
TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing
April 3, 1969,
in the amount of
$2,704,130,000,
as follows:
91-day bills (to maturity date) to be issued April 3, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated January 2, 1969,
and to
mature
July 3, 1969,
originally issued in the amount of
$1,102,883,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
dated April 3, 1969,
and to mature

or thereabouts, to be
October 2, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time,
Monday, March 31, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec"ima1s, e. g~, 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
s~bmit tenders except for their own account.
Tenders will be received
without deposit from incorporated banks and trust companies and from
K-44

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated b~
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public annOUl»'
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rej ection thereof. The Secre tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subj ect to these reservations, noncompetitive tender1:
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 3, 1969, in
cash or other immediately available funds or in a like face amo~t
of Treasury bills maturing
April 3, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed 00
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the Uhited States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thiS
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may pe obtain~
from any Federal Reserve Bank 060~ranyh.

,~~('e~n/.:::'~,

TREASURY DEPARTMENT

"'".~\..

WASHINGTON. D.C.

"
'

", ~.
/"'-.

. I ;-

lot,

RELEASE 6::30 P.M.,
lesday, March 26, 1969.

RESULTS OF TREASURY'S MONTHLY BILL OFFERING
'!he Treasury Department announced that the tenders for two series of Treasury
s, one series to be an additional issue of the bills dated December 31, 1968, and
other series to be dated March 31, 1969, which were offered on March 18, 1969, were
led at the Federal Reserve Banks today. Tenders were invited for $SOO, 000, 000, or
~abouts, of 275-day bills and for $1,000,000,000, or thereabouts, of 365-day bills.
details of the two series are as follows:
275-day Treasury bills
'ETITIVE BIDS: _ maturing Decem~r 31, 1969
Approx. Equiv.
Price
Annual Rate
-6.03~
95.387
High
95.364
6.06~
Low
95.372
6.058~
Average
~E

365-day Treasury bills
ma turi~ March 31 z 1970
Approx Equiv.
Annual Rate
Price
6.09()iJ;
93.825
6.162~
93.752
6 .132~
93.783

OF ACCEPl'ED

'];/

3~ of the amount of 275-day bills bid for at the low price was accepted

27~ of the amount of 365...(lay bills bid for at the low price was accepted

L TENDERS APPLIED FOR AIm ACCEPTED BY FEDERAL RESERVE DISTRIC'r3:
strict
ston
w York
lladelphia
eve land
lanta
1cago
. Louis
nneapol1s
nsas City
Uas
n FranCisco

A1212lied For
189,000
$
1,270,482,000
5,416,000
5,449,000
161,000
13,169,000
102,988,000
33,848,000
13,305,000
10,821,000
11,424,000
102,649,000

Acce;Eted
$
189,060
4:38,267,000
416,000
5,449,000
161,000
1,253,000
21,188,000
23,928,000
305,000
3,821,000
1,424:,000
3,649,000

roTALS

$1,569,901,000

chmond

Applied For
690, 000

1,350~418,000

12,635,000
16,827,000
1,973,000
13,626,000
112,999,000
43,714,000
10,427,000
11,090,000
12,345,000
172,619,000

500,050,000 ~/ $1,759,363,000

$ccepted

-S90,OOO

729,218,000
2,405,000
11,727,000
1,973,000
8,626,000
58,999,000
41,214.000
10,427,000
9,090,000
6,345,000
119,619,000
$1,000,333,000 ~/

Includes $17,4:32,000 noncompetitive tenders accepted at the average price of 95.372
Includes $4:4,574:,000 noncompetitive tenders accepted at the average price of 93.783
~ese rates are on a bank discount basis. The equivalent coupon issue yields are
S.37~for the 275-day billS, and 6.52~ for the 365-day bills.

STATEMENT OF HONORABLE mARLS E. W;~,!J(ER
1HE UNDER SECRETARY OF 1HE TREASURY
BEFORE 1HE SENATE BANKING AND CURRENCY Ca.1MITIEE

MARCH 26, 1969
10:00 a.m.
Interest rates are at the highest levels in modern times,
not as a result of current policies to cool an overheated
economy, but

a. result of the inadequate fiscal and monetary

policies which permitted inflation to gain control of economic
events.
It follows that interest rates should recede to more
normal levels as the economy is cooled and -- more importantly
in the short run -- inflationary expectations diminish.
It is tempting to seek out scapegoats for unpopular events.
For rising interest rates, such scapegoats include the Federal
Reserve, banks and other lenders, or the Administration in
office.
The fact is that today's ultra-high rates can be traced
directly to two significant errors in Federal economic policy:
(1) An unwillingness to pay, through taxes or lower
domestic spending, for the escalation in Vietnam, a reluctance
that handed us a huge $25 billion Federal deficit in the
last fiscal year;
(2) An excessive rate of monetary growth in 1967 and 1968
when money supply narrowly defined -- that is, demand deposits and
currency -- advanced at a rate of 6-1/2 percent, and money supply

- 2 -

broadly defined, including time deposits at commercial banks,
grew at an annual rate of 10 percent.
The contribution of Federal deficits to rising interest
rates is widely understood.

They directly raise the cost of

money as the Federal Government borrows more than it pays back.
In addition, such deficits fuel inflationary fires and lead to
the economic overheating that in turn stimulates heavy borrowing
by businesses, consumers, and State and local governments.
Less understood is the contribution of an expansive
monetary policy to rising interest rates.

In years gone by, an

easy money policy was thought to mean lower interest rates.
Today most economists think an excessively expansionary monetary
policy results in higher rates in the long run.

How does this

work?
In this way.

When employment is high and little slack

exists, additional and excessive injections of bank reserves,
leading to a high rate of monetary growth, do little to increase
production.

They result primarily in higher prices.

Rising prices and economic overheating generate still
stronger demands for funds.

They also tend to reduce the

willingness of lenders to lend.

Both actions push interest

- 3 -

rates higher.

If the Federal Reserve injects still more funds

in an attempt to slow the rise in interest rates, the result is just
the reverse. 'Rates rise even faster as inflation gains strength
and inflationary expectations mount.
One should not be too critical of the overly expansive
monetary policies during periods of high Treasury deficits.

is very difficult for the Federal Reserve to contain monetary
growth when Treasury borrowings are large and frequent.

But

in the latter part of 1968, when the Federal budget was moving
toward balance, money supply grew at an annual rate of 6 to 12
percent (depending on the definition).

This high rate of monetary

growth can be viewed as a significant factor accounting for
today's high interest rates.
The past is behind us.

What matters now is current and

future policy. What should it be?
Fiscal and monetary policies of today are appropriately
geared to the economy's needs.

The budget is in surplus and

we are determined to keep it there. Monetary policy is clearly
restrictive, and I understand that the Federal Reserve authorities are determined to maintain that posture.
But is this is correct, why do we not see some easing of
inflationary pressures, some cooling of the economy, some
fallback in interest rates?

- 4 We must be patient.

The imbalances, distortions, and

disruptive expectations resulting from four years of inflation
cannot be corrected overnight.

But they can and will be

corrected, if only we persist in restraint.
Our goal is to achieve a significant reduction in inflationary pressures this year.

But this does not mean that some

relief from current high interest rates must await that event.
The fact is that the inflationary expectations of borrowers
and lenders are what added the extra push to the interest
rate structure.

Borrowers are seeking funds now in order to

avoid both the higher prices and the higher interest rates they
expect later.

Lenders are reluctant to commit their funds so

long as they fear a combination of higher rates and lower-valued
dollars.
This means that pressures on interest rates should begin
to subside when borrowers and investors finally conclude that
this Administration is indeed determined to bring inflation to
a halt.

This conclusion on the part of market participants

could come relatively soon.
The ending of inflation and inflationary expectations is
the key to all the goals described in these hearings.
real enemy of the homebuyer is inflation because it has

The

- 5 -

raised the cost of the home he purchases by over one-sixth in
the last four years alone.

And the higher interest rates that

have resulted from that inflation have added to his burden.
Primarily, the small businessman can in the long run only
gain from a halt to inflation and the lower interest rates
that are sure to result.

As interest rates fall back, the

State and local governments which recently have been cut out of
the bond-market will be able to obtain the funds they seek.
Farmers, heavily dependent on debt, will benefit too.
To recapitulate:

The ultra-high interest rates of today

are not primarily the reflection of current policy but the
result of the inappropriate policies of the past which permitted inflation to infect the economy.

Current policies are

properly attuned, to ending that inflation.
interest rates will recede

When this occurs,

to the benefit of all groups

that rely heavily on credit.

000

TREASURY DEPARTMENT
,
WASHINGTON. D.C.
March 26, 1969

FOR IMMEDIATE RELEASE

NORTHCUTT RESIGNS AS FLORIDA SAVINGS BONDS CHAIRMAN;
COMMENDED BY SECRETARY KENNEDY FOR DEVOTED SERVICE

Secretary of the Treasury David M. Kennedy has accepted the
resignation of Victor H. Northcutt as Florida's volunteer State
Chairman for Savings Bonds. Mr. Northcutt, who is Honorary Chairman of the Board, The Broadway National Bank of Tampa, has served
the Savings Bonds Program for more than 22 years.
In accepting Mr. Northcutt's resignation, Secretary Kennedy
said, "I am sure that six other Secretaries of the Treasury under
whom you have served since October 1946 would wish to join with me
in expressing appreciation for your devotion to a program that encourages individual and family thrift, moderates inflationary pressures, and assists the government in effectively managing the
national debt."
A. Clewis Howell, President, Marine Bank and Trust Co., Tampa,
who has served with Mr. Northcutt as Co-Chairman since October 1968,
now assumes the full Chairmanship. He heads a committee of state
business, financial, labor and governmental leaders. The committee
-- working with the Savings Bonds Division -- will assist in promoting the sale of Savings Bonds and Freedom Shares throughout the
state.

000

TREASURY DEPARTMENT
,
=
WASHINGTON. D.C.

March 28, 1969
To The Press:
Secretary Kennedy today released tte following statement
on the death of President Eisenhower:
Dwight D. E~senhower' s courageous fight for life tlas
ended. The valour with which he fought to live mirrored
the tremendous strength and deep personal resources ne
applied to eaclt task in his remarkable career. It was
what we would have expected of him. As soldier, President,
author, statesman, and world leader, Mr. Eisenhower:s caree~
reached heights few men can match. Yet through it all he
was an enormously decent person whose love and compassion
for his fellow man made the world a better place in wl:tlch
to live. A great President has passed.
000

TREASURY DEPARTMENT
;
WASHINGTON. D.C.

March 28, 1969

OR RELEASE A. M. NEWSPAPERS
ONDAY , MARCH 31, 1969
TREASURY DEPARTMENT ANNOUNCES CHANGES IN COUNTERVAILING
DUTY ORDER ON SKI LIFTS AND PARTS FROM ITALY
The Treasury Department announced today that it has sent
o the Federal Register for publication, on April 1,
otification of certain reductions in countervailing duties now being
nposed on importations of ski lifts and parts from Italy.
These changes, which are based on more detailed information
2ceived from the Italian Government, are retroactive to
~nuary 10, 1969, the date new information was furnished to the
lited States by the I talian Government.
The original countervailing duty order on ski lifts and
lrts from Italy was announced by the Treasury Department on
)vember 21, 1968, and became effective on January 4, 1969.
Treasury representatives stated that countervailing
lties are intended to counteract subsidies paid on exports
I the United States.
The countervailing duties are assessed
lly on those shipments which receive benefits from subsidy
'ograms and are equivalent to the amount of the subsidy.
The original subsidy on Italian ski lifts and parts was
timated to range from $21.16 to $51.16 per short ton,
pending upon the particular parts being imported. They now
nge from approximately $12.47 to $50.58 per short ton.

000

TREASURY DEPARTMENT

WASHINGTON, D.C.

RELEASE :5 :30 P.M.,

day, April 1, 1969.
RESULTS OF TREASURY'S WEEKLY BILL OFFERlliG
The Treasury Department announced that the ten~ers for two series of Treasury
s, one series to be an additional issue of the bills dated January 2, 1969, and the
r series to be dated April 3, 1969, which were offered on March 26, 1969, 'fere
.ed at the Federal Reserve Banks today. Tenders were invited for $1,600,000,000,
.hereabouts, of 91-day bills and for $1,100,000,000, or thereabouts, of 182-day
.s. The details of the two series are as follows:
}E OF ACCEPl'ED
'ETITIVE BID S:
High

WW
Average

91-day Treasury Bills
maturing July 3 2 1969
Approx. Equi v.
Price
Annual Rate
98.475 ~
6.033~
98.459
6.096%
98.467
6.065i
Y

182-day Treasury Bills
maturing October 2~ 1969
Approx. Equiv.
Price
Annual Rate
96.906
6.120%
96.892
6.148%
96.898
6.136i

~ Excepting 2 tenders totaling $49,000
52% of the amount of 91-day bills bid for at the low price was accepted
23ft, of the amount of 182-day bills bid for at the low price was accepted

I.L TENDERS APPLIED FOR AND ACCEPl'ED BY FEDERAL RESERVE DISTRICTS:

Lstrict
)ston
~w York
1iladelphia
Leveland
ichmond
tlanta
1icago
t. wuis
inneapolis
9.nsas City
9.l1as
9.n Francisco

AEElied For
.$ 24,460,000
1,775,046,000
38,120,000
39,028,000
23,293,000
43,515,000
162,470,000
54,712,000
24,710,000
28,901,000
27,238,000
140,941,000

AcceEted
$ 14,460,000
1,117,606,000
23,120,000
39,028,000
23,293,000
41,515,000
137,065,000
50,232,000
18,710,000
26,901,000
19,238,000
90,14l,000

AEplied For
4,928,000
$
1,692,098,000
16,942,000
25,942,000
8,255,000
16,861,000
185,770,000
36,263,000
12,726,000
19,527,000
21,737,000
123,951,000

Accepted
4,763,000
$
861,546,000
6,892,000
23,051,000
8,100,000
14,310,000
105,345,000
28,063,000
5,926,000
14,727,000
11,237,000
16 ,494,000

TOTALS

$2,382,434,000

$1,601,309,000 ~/

$2,165,000,000

$1,100,454,000 c/

Includes $346,706,000 noncompetitive tenders accepted at the average price of 98.467
Includes $166,670,000 noncompetitive tenders accepted at the average price of 96.898
These rates are on a bank discount basis. The equivalent coupon issue yields are
6.24% for the 91-day bills, and 6. 42i for the 182-day bills.

TREASURY DEPARTMENT

FOR IMMEDIATE RELEASE

WASHINGTON. D.C.
April 2, 1969

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing April 10, 1969,
in the amount of
$2,707,655,000,
as follows:
9l-day bills (to maturity date) to be issued April 10, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated January 9, 1969,
and to
mature July 10, 1969,
originally issued in the amount of
$1,101,815,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
dated April 10, 1969,
and to mature

or thereabouts, to be
October 9, 19690

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, April 7,19690
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec-imals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
Customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
s~bmit tenders except for their own account.
Tenders will be received
without deposit from incorporated banks and trust companies and from

K-48

- 2 responsible and recognized dealers in investment securities." Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public annotmc
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rej ec tion the reof. The Secre tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final.
Subj ect to these reservations, noncompetitive tenderl
for each issue for $200,000 or less without stated price from anyo~
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 10, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 10, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereundel
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and thi!"
notice prescribe the terms of the Treasury bills and govern th~
conditions of their issue. Copies of the circular may be obtalned
from any Federal Reserve Bank 060~raRCh.

TREASURY DEPARTMENT
WASHINGTON, D.C.

April 3, 1969
FOR IMMEDIATE RELEASE
JOHN S. NOLAN NAMED
DEPUTY ASSISTANT SECRETARY OF TREASURY FOR TAX POLICY

Secretary of the Treasury David M. Kennedy today
announced the appointment of John S. Nolan, a
Washington, D. C. tax attorney, as Deputy Assistant Secretary
of the Treasury for Tax Policy.
Mr. Nolan will serve as deputy to Assistant
Secretary Edwin S. Cohen. He replaces William F. Hellmuth, Jr.,
of Oberlin, Ohio, who has resigned.
Mr. Nolan, 43, a law partner in the firm of Miller &
Chevalier, attended Harvard Law School, receiving his
degree magna cum laude in 1951. He was graduated from the
University of North Carolina in 1947 where he was elected
to Phi Beta Kappa. He has specialized in Federal tax practice.
In addition, he has served as a member of the Advisory Group
to the Commissioner of Internal Revenue; formerly was the
vice chairman, Section
Taxation, American Bar Association,
and served as an Adjunct Professor of Law, Georgetown Law
School. He has authored articles in the Harvard Law Review,
American Bar Association Journal, and the George Washington
University Law Review.

A U. S. Naval Reserve Officer, he is a member of the
American Bar Association, Bar Association of District of
Columbia, and the Federal Bar Association. His original
home was Miami, Florida. He is married to the former
Adeline Jean Mosher of Holyoke, Massachusetts. They have
five children and reside in Potomac, Maryland.
000

K- 49

TREASURY DEPARTMENT
2
WASHINGTON, D.C.

April 3, 1969

FOR IMMEDIATE RELEASE

MEMORANDUM FOR THE PRESS:
Attached is a copy of the second semi-annual
report on U.S. purchases and sales of gold and
the state of the U.S. gold stock forwarded by
Treasury Secretary David M. Kennedy to the
President of the Senate, Speaker of the House
and appropriate committee chairmen.
covers the second half of 1968.

The report

The first

semi-annual report -- covering the first six
months of 1968 -- was released on September 10,
1968.

000

K-50

Semiannual Report on Purchases and Sales of Gold
and the State of the United States Gold Stock,
July 1 - December 31, 1968

u. S. transactions in gold in the second half of 1968
were in marked contrast to those in the first half. During
the first six months of 1968 there was a loss of $1,384
million in the U. S. gold stock. In the second half of the
year there was a gain of $210 million.
This gain in the six-month period brought the total
gold stock of the United States to $10,892 million on
December 31, 1968.
The gold transactions for both the past six months and
the first six months of 1968 are shown by country and quarters
on the attached table 1.
In the first quarter of 1968 there were no significant
sales of gold to the United States and sales by the United
States amounted to $1,362 million, of which $900 million was
its share of participation in the gold pool operations. In
the second quarter, after cessation of gold pool operations
in March, the gross sales of gold by the United States still
amounted to $322 million. These sales were largely offset,
however, by purchases, primarily from France; which totaled
$300 million.
The picture for the second half of 1968 showed a large
reversal as the crisis atmosphere of March was dissipated.
Gross sales fell to $176 million in the third quarter and
to $31 million in the fourth quarter. On a net basis, gains
were shown for each quarter as purchases continued to be
made, primarily from France, for a total plus of $210 million.
(From the low point at the end of May 1968, the U. S. gold
stock rose by $424 million by year end.)
The only sizable transactions with individual countries
during the six-month period were the purchase of $380 million
from France and the sale of $50 million to Algeria.
As noted in the initial report by the Treasury on
September 6, 1968, a very large number of gold transactions
involved sales of gold to countries that were required to
make gold payments to the International Monetary Fund as
distinguished from those that wished to add gold to their
reserves. All of the sales transactions listed in the
attached Table 1 of $2 million or less during the third and
fourth quarters fell in this category. Similarly, the sale

- 2 -

to Greece represented the repurchase by Greece of gold in
anticipation of required gold repayments on a loan under
the European Monetary Arrangement. The gold which Greece
had obtained under the loan had been previously sold to
the United States.
There was only one transaction during the period
involving sales of gold for IMF purposes for which there
are corresponding gold deposits by the IMF with the United
States. This transaction is shown on Table 2.

Attachments:

Tables 1 and 2

UNITED STATES N):'''l' MONETARY GOLD TlcANSACTIONS WITH
FOREIGN COUNTRIES AND INTERNATIONAL INSTITUTIONS
January I-December 31, 1968

Area and Country
yte§:lie£n E~g!i
Belgium
France
Greece
Iceland
Ireland
Italy
Malta
Netherlands
Norway
Portugal
: iRi tzerland

Total
~2500

-32.5
+220.0
-0 06

+240.0

-12.4
-18/•• 0

-32.0
-25.0

-11.0

+3.0

-9.7
-48.5

+):).0

-5.0

+140.0
~10.6
It

-899.6
~

-1,195. 5

..:.L.Q

--=L.Q

+213.4

+150.5

--=.J&.a

-25.0
-7.5
+50.0
~

+176.4

+10.0
+15.0

-009
-25.0

-57.6
+600.0
-11.2
-52.4
-209.0
-14.7
-18.5
-0.9
-5.0
-50.0
+2.5
-834.6

-5.0

l";~key

Uni ted Kingdom
Yugoslavia
Total

TABLE 1

+50.0

-655.2
+50.0

;[&jj~n

AImlr;i,gl
Argentina
Bollvi:J.
Brazil
Chile
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Nicaragua
Panama
Trinidad and Tobago
Total

Afghanistan

-5.0
-0.1

-5.0

~0.4

-1.1
-0.1
-0.1
-20.0

-0.8
-0.2
-0.1

-0.9
-0.1
-0.1

-2.0
-0.1
-0.1

-0.1
-0.1
-0.1

-0.1
-1.3
-0.1

-0.1
-0.1
-0.1

-0.1

*
*

-11.6

::I7.8

-7.6

-2.3

-0.1

-0.1
-2.5
-0.2
-0.3

-0.4
-0.1

-0.1

-2.8
-0.1

-0.1
-0.1

-21.7

Burma

Ceylon
Cyprus
Indonesia
Iran
Iraq
Jordan
Korea
Kuwait
Lebanon
Malaysia
Muscat and Oman
Nepal
Pakistan
Philippines
Saudi Arabia
Singapore
Syria
Total

-15.0

....=iL&

-0.3

-0.2
-13.4
-0.3

~1401

-28.1

-6 00
-6.5

-7o~

-73.5
-S.7

-21.0
-23.5

*
-0.3

-24.9
-1.2
-6.0
+0.2
-0.1

-0.2
-25.0
-2,3.0

+9.S
-25.0
-2S.0

-0.3
-0.2

--=:Q...1
-141.6

-=:2.J.

*
-0.4

-30.0

N&.w_~

-157.,3
-1.8

-71.5

-5.5

-25.0
-0.1
-0.4
-4.9
-0.6
-0.6
-20,0
-0.3
-1.6
-0.3

-0.1

-58.6

-2.7
-2.6
-0.7
-13.4
-1.3
.0.1
-42.2
-16.4
-6.6
-24.9
-94.5
-320,3
-1.2
-6.0

+9.4
-50.0
-81.0
~

-375.9
-1.8

Algeria
Burundi
Ghana
Liberia
Mauritius

-0.1
-0.2

-0.1
-0.,3

-0.1
-0.3

-49.9
-0.1
-0.4
-0 04
-0.3
-;).,3
-9.3
-fl. 1
..{).3
-1.1

.:.Qa2

-=9....&

...;Q,.1

-0.9

-62,S
-17.0

Total
-21.7
-1,309.,3
+73.3
Domestic Transactions
+D.2
-0.2
-52.5
Total Gold Outflow
+7,3.5
-21.9
-It 361.S
F' .~.'::'~:; iDa:, not add to 1loi;a}..s because of rounding.
"tInder :f50,0Cl0.

+136.5

-1 2121.2
-52.3
-ll173.;

-49.9
-0,1

-0,1
-0 03

-0.1
-0.1

-0.2
-9.3

MOI'I..KC.O

Nigeria
Rwanda
Somalia
Sudan
Tunisia
Total

-0 01

-0.6

-10.5
-17.0

-50.8

+D.,3

+136.S

Wl.I2

lIIITID SfATIS MClfETARY GOLD TJWISlC1'I<IIS
WI'ftI PCJlEI CJi C01IITRIES
IIITIOlTID TDOUCII SPECUL DIPOOITS BY TIll DIF

(Millions of U.S.,)
Jmuary 1 - December 31, 1968

Area aDd Country

I ~rl =:rl ~rl

LI~~Q &_~gl

CJdl.e

DammeD aepubliO

Total

......

--6.6
-2.0

Jordan

~.2

llala~ia

-1.3

Total

--1.4

UnAI
J,lceria
C.-roan
Cea\ral African aep. -

CbM

Caaco(Brazsari 118)
Gabon

Ivory Coast

-0.2

nuc.ey

Uauritmda

IUF Deposit

-2.4
-0.8
-0.2
-0.1
-0.1
-0.1
-0.1
-<>.1

Total

-6.3
-0.4

--6.6

-2.0
-0.6
-1.3

--3.8

-0.8
-0.2
-0.1
-0.1
~.l
~.l

-0.1
~.2

-0.2

-3.3

"'().l

-0.1
-0.9
-0.1
-0.6
-0.1
-3.6

-8.2

-5.7

"'().l

-14.0

+8.2

-ll.~

..0.1

-3.0

buda
Upper Volta

Total

~.4

-0.1
-0.9

lIoroooo
N1pr

Total

QuatWI"

-6.3
-0.4

-0.1

-0.6
-0.1

-Reflects IMF deposit of $5.7 million and withdrawal of ,17.0 million.

TREASURY DEPARTMENT
(

WASHINGTON. D.C.

April 3, 1969
FOR RELEASE A.M. NEWSPAPERS
FRIDAY, APRIL 4, 1969
SECRETARY KENNEDY NAMES CALVIN E. BRUMLEY
AS DEPUTY SPECIAL ASSISTANT (PUBLIC AFFAIRS)
Treasury Secretary David M. Kennedy today announced the
appointment of Calvin E. Brumley as Deputy Special Assistant
to the Secretary (Public Affairs).
Mr. Brumley, who has been news editor of the Associated
Press-Dow Jones International Economic Report, will join the
Treasury on April 14.
The new appointee has bt'en employed by Dow Jones and
Company, Inc., which publishes the Wall Street Journal, for
nearly 15 years as reporter, bureau-;aTIager and news editor.
He was assigned to a New York planning group, which conceived
and formulated the International Economic Report in the fall
of 1966. It began publication in the spring of 1967 and now
has private and newspaper subscribers in most European and
many Asian countries.
Prior to his assignment in New York, Mr. Brumley, whose
by-line reads Cal Brumley, was Northeastern News Bureau Chief
for the Wall Street Journal in Boston o Earlier he was
Southeastern News Bureau Chief with headquarters in
Jacksonville, Florida. He reported in Cuba for the Wall Street
Journal during and after the Castro revolution.
Mr. Brumley's first newspaper job was as a reporter for
the Amarillo (Texas) G1obe-Ne~vs. Subsequently he worked for
the Associated Press in Dallas, was editor and co-publisher of
weekly newspapers in Tulia and Happy, Texas, reported for the
Lubbock (Texas) Avalanche-Journal and edited livestock
publications in Fort Worth and Denver.
The new Deputy Special Assistant has been active in
professional journalism organizati~ns. At the time of his
transfer to New York in 1966 he was Vice President of the
New England Chapter of Sigma Delta Chi, the professional
journalism fraternity.
K-51

- 2 -

Mr. Brumley, 45, is a graduate of Texas A & M University
with a degree in agricultural economics. While there he was
editor of the school newspaper.
He was born in Hereford, Texas, reared on a livestock farm
and attended Texas public schools. He is a veteran of World
War II.
He and his wife, Jayne, currently live in New York,
where she is employed as a reporter by Newsweek magazine.
They also maintain residence on Martha's Vineyard, Massachusetts.
A son, Bryan, 16, attends Milton Academy, Milton, Massachusetts.

000

TREASURY DEPARTMENT
(

FOR A.M. RELEASE
SATURDAY, APRIL 5,1969

WASHINGTON. D.C.
April 4, 1969
QUERIES:
WO 4-2041

TREASURY SECRETARY KENNEDY TO HEAD U.S. DELEGATION
TO MEETING OF ASIAN DEVELOPMENT BANK IN
SYDNEY, AUSTRALIA, APRIL 10-12, 1969
Secretary of the Treasury David M. Kennedy will head the
U.S. Delegation to the Second Annual Meeting of the Board of
Governors of the Asian Development Bank in Sydney, Australia,
April 10-12. Secretary Kennedy is U.S. Governor of the Bank.
Three members of the House Banking and Currency Committee
will be members of the delegation: Congresswoman Margaret
Heckler and Congressmen Seymour Halpern and Albert W. Johnson.
Members of the delegation from the Executive Branch will
include, from the Treasury Department: John R. Petty,
Assistant Secretary for International Affairs, Dixon Donnelley,
Special Assistant to the Secretary (Public Affairs),
Ralph Hirschtritt, Deputy to the Assistant Secretary,
Sam Y. Cross, Director, Office of Developing Nations; from
the Department of State: Thomas O. Enders, Deputy Assistant
Secretary for International Monetary Affairs; and from the
Agency for International Development (AID): Robert H. Nooter,
Deputy Assistant Administrator for Far East Bureau.
The Asian Development Bank -- established in 1966
is a
regional institution for financing economic development projects
and programs in the developing countries of Asia. The Bank has
33 members -- 20 regional countries, three of which are
classified as developed (Japan, Australia and New Zealand), and
13 non-regional countries, including the United States. The
Annual Meeting of the Bank Governors of the Asian
Development Bank brings together top financial and economic
officials of the member nations. The Bank's headquarters are
located in Manila, Philippines, which was the site of the First
Annual meeting last year.
The delegation is departing today and scheduled to return to
Washington April 14.
000
[NOTE:
Attachment

K-S2

tT~~t~E8: Sp£~XS~R~0~~N~~X~~0~~P~~t~~~ESt1~~~ENT

TREASURY DEPARTMENT
Washington
RELEASE FOR A.M. 's
SATURDAY, APRIL .s, 1969
STATEMENT OF SECRETARY OF THE TREASURY DAVID M. KENNEDY
UPON DEPARTURE FROM WASHINGTON, APRIL 5, 1969,
AS HEAD OF THE U.S. DELEGATION TO THE SECOND ANNUAL MEETING
OF THE ASIAN DEVELOPMENT BANK, SYDNEY, AUSTRALIA
(SCHEDULED FROM ANDREWS AFB, 9:00 A.M.)
I look forward to my participation in the deliberations
of the governing body of the Asian Development Bank in
Sydney, Australia.
My stay there will provide a welcome opportunity for
me to meet with my colleagues from other member governments
of the Bank, in what I am sure will be fruitful and
constructive discussions.
The United States vigorously supported the founding of
the Bank in 1966 as a broad-base financial institution
designed to serve a vast region's development needs. My
associates and I of the United States delegation will
continue our efforts to help advance the substantial progress
the Bank is already achieving.
Our country gave its ready support to the Bank in the
knowledge that self-help is the key to development. The
fact that the real impetus for the Bank came from the people
of the region is self-help of a very significant kind.
President Nixon enthusiastically subscribes to the
Bank's purposes and has instructed me to give meaningful
support to the Bank's aims during our meeting in Sydneyo
The President and all other members of his Administration
believe that encouragement and assistance to developing
countries, through the Asian Bank and other bilateral and
multilateral organizations, remain high on the list of American
priorities in carrying out our responsibilities to the Free
World. There is no more promising road to world peace.
000

TREASURY DEPARTMENT
Washington
STATEMENT OF SECRETARY OF THE TREASURY DAVID M. KENNEDY
UPON ARRIVAL AT THE HONOLULU INTERNATIONAL AIRPORT
HAWAII, ON APRIL 5, 1969
I am delighted to be in your lovely land and my colleagues
and I and my family look forward to seeing some of its
beauties even though our stay will be all too brief.
We are en route to the Second Annual meeting of the Board
of Governors of the Asian Development Bank in Sydney,
Australia, from April 10 to 12th. I will head the U.S.
Delegation.
My stay
to meet with
of the Bank,
constructive

there will provide a welcome opportunity for me
my colleagues from other member governments
in what I am sure will be fruitful and
discussions.

The United States vigorously supported the founding of
the Bank in 1966 as a broad-base financial institution
designed to serve a vast region's development needs. My
associates and I of the United States delegation will
continue our efforts to help advance the substantial progress
the Bank is already achieving.
Our country gave its ready support to the Bank in the
knowledge that self-help is the key to development. The
fact that the real impetus for the Bank came from the people
of the region is self-help of a very significant kind.
President Nixon enthusiastically subscribes to the
Bank's purposes and has instructed me to give meaningful
support to the Bank's aims during our meeting in Sydney.
The President and all other members of his Administration
believe that encouragement and assistance to developing
countries, through the Asian Bank and other bilateral and
multilateral organizations, remain high on the list of American
priorities in carrying out our responsibilities to the Free
World. There is no more'promising road to world peace.
000

TREASURY DEPARTMENT
Washington

FOR RELEASE IN A.M. 's
TUESDAY, APRIL 8, 1969
STATEMENT OF SECRETARY OF THE TREASURY DAVID M. KENNEDY
ON ARRIVAL AT SYDNEY, AUSTRALIA, APRIL 8, 1969
(11:40 P.M., EDT, APRIL 7) AS HEAD OF THE
U.S. DELEGATION TO THE SECOND ANNUAL MEETING
OF THE ASIAN DEVELOPMENT BANK, APRIL 10-12, 1969
I am glad to be in this great country and in the
particularly breathtaking city of Sydney. I have, for the
leaders and the people of Australia, warm greetings from
president Richard Nixon and the American people.
I am pleased to be on the mission which brings me and
the rest of the United States delegation half-way around the
world. For the business of the Asian Development Bank is
nothing less than giving impetus to the economic growth of
a region so vast as almost to defy comprehension.
I think it is not too much to say that future peace in
the area -- and, by extension, in the world -- hinges in no
small degree on the operations of the Asian Development Bank
and of other institutions, both national and international,
whose efforts parallel the Bank's.
The United States strongly supported the establishment
of the Asian Development Bank in 1966 to assist in the
development needs of your region. The progress that the Bank
has already achieved -- progress that must be credited
primarily to self-help -- has justified the confidence of all
of its member nations.
The United States is proud to participate in the Bank,
and I want to say on behalf of my government and the American
people that our dedication to the high purposes of the Bank
is firm and will continue long into the future.
I welcome the opportunity to meet with my colleagues
from other member governments of the Bank, and to take part
in their forthcoming deliberations.
My family and I also are eager to see as much as we
can of this lovely land during the period of our all-too-short
stay here o
000

K-53

86
TREASURY DEPARTMENT
Washington

STATEMENT OF SECRETARY OF THE TREASURY DAVID M. KENNEDY
UPON ARRIVAL AT THE LOS ANGELES INTERNATIONAL AIRPORT ,
LOS ANGELES, CALIFORNIA, ON APRIL 5, 1969
.

The members of my delegation and I are enroute to the
Second Annual meeting of the Board of Governors of the
Asian Development Bank in Sydney, Australia, from
April 10 to 12th. I will head the U.S. Delegation.
~

My stay
to meet with
of the Bank,
constructive

there will provide a welcome opportunity for me
my colleagues from other member governments
in what I am sure will be fruitful and
discussions.

The United States vigorously supported the founding of
the Bank in 1966 as a broad-base financial institution
designed to serve a vast region's development needs. My
associates and I of the United States delegation will
continue our efforts to help advance the substantial progress
the Bank is already achieving.
Our country gave its ready support to the Bank in the
knowledge that self-help is the key to development. The
fact that the real impetus for the Bank came from the people
of the region is self-help of a very significant kind.
President Nixon enthusiastically subscribes to the
Bank's purposes and has instructed me to give meaningful
support to the Bank's aims during our meeting in Sydney.
The President and all other members of his Administration
believe that encouragement and assistance to developing
countries, through the Asian Bank and other bilateral and .
multilateral organizations, remain high on the list of Amerl.can
priorities in carrying out our responsibilities to the Free
World. There is no more promising road to world peace.
000

TREASURY DEPARTMENT
WASHINGTON. D.C.
18 RELEASE 6: 30 P.M.,
'.7, April 1, 1969.

RESULTS OF mEASURI' S WEEKLY BILL OFfERIIG
!be Treasury Departlllmt announced that the tenders tor two series of Treasury
one series to 'be an additional issue ot the bills dated January 9, 1969, and the
iher series to be dated April 10, 1969, which were offered on April 2, 1969, were
~ned at the Federal Reserve Banks today.
'!'enders were iD'fited tor $1,60~,000,
~ thereabouts, ot 91-48y bills and tor $1,100,000,000, or thereabouts, ot 182-48y
Llls. !'be detail1 ot the two series are as tol1ows:
~lls,

~QE

OF ACCEPfED
91-day 'l'reasury bills
JlPETITIVE DIM: _..::;:JII&;;;.;.;tur~i=ngiL,..,;:Ju:.=::llyif--=l:.:;0L'..:1:.:96::.::.9-:-_
Approx. Equiv •
Price
Annual Rate
High
6.U:8~
98.4:4:6
Low
98.438
6.17~
Average
98.4:41
6.167~

182-4&y Treasury bills
_turing October 9, 1969
Apprax. EquiT.
Price
Annual Rate
96.880
8.171~
96.866
6.19~
96.873
6.185~

!I Excepting
5~

45~
)TAL

2 tenders totaling $305,000

ot the amount ot 91-day bills bid tar at the low price waa accepted
ot the amount ot 182-day bills bid tor at the low price
accepted

TElOlERS APPLIED FOR AND ACCEPmD BY rElERAL RESERVE DIS'mIC1'8:

District
Boston

lew York

AEElied For

Philadelphia
ClevelaDd
RicbJloDel
Atlanta
Chicago
St. Louis
MinneapOlis
(ansas City
Dallal
San lI'ranc1lco

2,051,'75,000
34:,170,000
39,822,000
22,838,000
62,801,000
192,612,000
68,078,000
21,576,000
38,80',000
33,098,000
172,055,000

'l'O'.rALS

$2,772,193,000

hi Includes

Applied Por

Accefted

28,86',000 '7,939,000

6, 781,000

Acc!Eted

1,391,000

1,792,26',000
17,958,000
36,600,000
11,4.65,000
'0,637,000
188,910,000
",US9,000
16,1",000
2',7'7,000
2',018,000
16',225,000

855,216,000
7,956,000
30,399,000
7,965,000
1',"1,000
37,999,000
24:,759,000
3,644,000
18,387,000
13,118,000
82,298,000

$l,600,109,OOO~

$Z,367,908,ooo

$l,l00,553,OOOs/

1,146,627,000
18,670,000
3',"3,000
18,738,000
'3,'78,000
92,102,000
57,4:78,000
12,076,000
32,115,000
22,348,000
104,095,000

$381 1.57 000 nonca.petitift te_rs accepted at tbe avena- price of98."1
el Includes $17':802;000 nODcOlll)8titive teDder. accepted at the a'"rae- price ot96.17S
rate. are on a 1Mmk discount basiS. !be equiftlent coupon i l l . 1 ie14• are
6.35~ tor the 91-dq }tille, aDd 6.'7~ tar tM 182-Clq 'b1111.

1Lb••

UNITED STATES SAVINGS BONDS lSSUEO

M~n REDEEMED

THROUGH

March

31, 1969

(Doll or amounts in millions - rounded ond will not nccoaorilv odd to totol,)
DESCRIPTION

ED
us A-I D35 thru D-1!H 1
us F lInd G-1941 thru 1052
U!S J and K-1952 thru 1956
URED
!S E1i:
1941
1942
l!H3
1944
19-15
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

5,003
29,$21
3,660
1,880
8,298
13,354
15,577
12,239
5,550
5,265
5,444
5,313
4,697
4,063
4,258
4,862'
4,955
5,162
4,985
4,692
4,511
4,285
4,289
4,335
4,177
4,656
4,539
4,4.38
4,775
4,727
4,383
87
615

Unclassified
Total Series E
~ies H (1952 thru May. 1959) 11

H (June. 1959 thru 1969)
Total Series H
Total Series E and H
ries J and K 1957

{Total matured
I Series Total unmatured
Grand Total

lea /ucrucd d'uounl.
",1 redemplion value.
~IOII o{ owner bond&

" .'w,d

AMOUNT ISSUEo.u1

AMOUNT

REDEEMED

4,996
29,480
3,622
1,659
7,337

11,~38

13,718
10,605
4,627
4,233
4,285
4,143
3,571
3,091
3,212
3,$79
3,574
3,661
3,487
3,213
2,991
2,725
2,617
2,474

2.~
2,40

2,3
2,248
2,221
2,016
1,241

!../

•

41
39

220
961
1,516
1,859
1,6.34
923
1,031
1,160
1,231
1,126
972

1l.70
11.58
11.35
11.93
13.35
16.63
19.58
21.31
22.91
23.97
'23.92
24.57
26.39
27.87
29.08
30.05
31.52
34.57

1,~6
1~283

1,381
'1,501
1,h98

~,479

1,580
1,559
1,671
1,861
1,853
2,251
2,183

36.38

44.36

48.35
48.09
49.35
53.49
57.33
71.69
100.00

2,190

. 873

160,530

116,325

44,205

27.54

5,485
6,983

3,294
1,572

2,190
5,411

39.93
77.49

12,468

4,867

7,601

60.96

112,998

121,192

51,806

29.95

15'

)8,184
173,091
211,275

38,098
121,270
159...L368

8p
51,821

51.900

,
held and will earn interest {or additional periods a/ler ori,if'I(Jl malurl'Y dill'S.
00"" w;':~:L .r,=~,: :';., ••• n p,.••• rtH~ lor ,ed~mptiun.

mar be

I
f

38.96
42.93

2,554
2,710
3,142
87
-258

.14
1.07

15.96
.23
29.94

~.51_

TREASURY DEPARTMENT
WASHINGTON, D,C.

April 9, 1969
FOR IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
or two series of Treasury bills to the aggregate amount of
2,700,000,000, or thereabouts, for cash and in exchange for
reasury bills maturing April 17,1969,
in the amount of
2,703,296,000,
as follows:
9Lday bills (to maturity date) to be issued April 17, 1969
n the amount of $1,600,000,000,
or thereabouts, representing an
dditional amount of bills dated January 16, 1969,
and to
lature July 17, 1969,
originally issued in the amount of
1,100,670,000,
the additional and original bills to be
ree1y interchangeable.
182-day bills, for $ 1,100,000,000,
ated April 17, 1969,
and to mature

or thereabouts, to be
October 16, 1969.

The bills of both series will be issued on a discount basis under
ompetitive and noncompetive bidding as hereinafter provided, and at
.aturity their face amount will be payable without interest. They
ill be issued in bearer form only, and in denominations of $1,000,
5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
maturity value).
Tenders will be received at Federal Reserve Banks and Branches
p to the closing hour, one-thirty p.m., Eastern Standard
ime, Monday, April 14, 1969.
Tenders will not be
eceived at the Treasury Department, Washington. Each tender must
e for an even multiple of $1,000, and in the case of competitive
enders the price offered must be expressed on the basis of 100,
ith not more than three dec"ima1s, e. g., 99.925. Fractions may not
e used. It is urged that tenders be made on the printed forms and
orwarded in the special envelopes which will be supplied by Federal
.eserve Banks or Branches on application the refor.
Banking institutions generally may submit tenders for account of
ustomers provided the names of the customers are set forth in such
enders. Others than banking institutions will not be permitted to
~bmit tenders except for their own account. Tenders will be received
lthout deposit from incorporated banks and trust companies and from
(=54

- 2 -

respons ible and recognized dealers in investment lecurities. Tender.
from others must be accompanied by payment of 2 percent of the flce
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by An incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public ann ounc I
ment will be made by the Treasury Department of the Amount and price
range of accepted bids. Those submitting tenders will be adviled
of the acceptance or rej ection thereof. The Secn! tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tender.
for each issue for $200,000 or less without stated price from any onl!
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective iSlues,
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on April 17, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 17, 1969.
Cash And exchange
tenders will receive equal treatment. Callh adjustments will be midI!
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bi118, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have Any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed ~
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority,
For purposes of taxation the amount of discount at which Trea.ury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b)-and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bill. issued
hereunder are sold is not considered to accrue until luch bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereund.r
need include in his income tax return only the difference between
the price paid for such bills, whether on original iSlue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current r8vilion) and thi'
notice prescribe the terms of the Trealury bills and govern the aA
conditions of their issue. Copies of the circular may be obt.in~
from any Federal Relerve Bank 000~ranch.

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

April 10, 1969
FOR IMMEDIATE RELEASE
STATEHENT OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY OF THE UNITED STATES AND
UNITED STATES GOVERNOR OF THE ASIAN DEVELOPMENT BANK
AT THE SECOND ANNUAL MEETING OF THE BOARD OF GOVERNORS
OF THE ASIAN DEVELOPMENT BANK
SYDNEY, AUSTRALIA, APRIL 11, 1969
I am honored to meet with you today as a new member of the
Board of the Asian Development Bank and as the representative of
the recently inaugurated President OI my country, Richard M.
Nixon.
President Nixon has asked me to extend his warmest greetings
to the members of this distinguished group -- to express once
again his deep friendship for the nations and the peoples of
Asia -- and to affirm his support for the Asian Development Bank
as an institution contributing to the economic development of
Asia.
I welcome the opportunity to attend this second annual meeting of the Board of Governors for two reasons:
First, the pleasure of visiting Australia, this magnificent
city, Sydney, and sharing with' all of you the warm and grac ious
hospitality of the government and the people of Australia.
Second, the opportunity to become acquainted with each of
the representatives gathered here, to learn more about the Bank
and its plans for the future, and to assist the officers of the
Bank and my fellow Governors in guiding its progress.
It remains true, today, as it has throughout history, that
all too often nations are bitterly divided by conflict. My own
country and others represented here are now engaged in such a .
conflict in Vietnam. That war exacts heavy claims on our energ~es
and our resources. It emphas izes all that divides men rather tt1an

K-55

- 2 the common human aspirations that link them together.
As a member of the new U.S. Administration, I want to aSSure
you that President Nixon has no higher goal than to bring an
early, last ing and just peace to Vietnam. I know all of you
share that hope and will contribute in every way that you can to
making it a reality.
Institutions such as the Asian Development Bank point the
way to even greater cooperation among nations in the future.
The creation of international economic institutions with nations
working together to promote a better life for all of their citizens
is a unique and inspiring step in the history of man. How different it is from the preceding centuries, when nations conceived of
their economic interests only in the most narrow and selfish terms.
Because of our experience in this Bank and others like it, I am
hopeful that one day we shall be able to work equally well together in settling our political differences.
Meanwhile, the bus iness of economic development must go on.
That is the task to which we address ourselves this week.
Growth and progress most certainly will ce advanced if our
international monetary system is strong and responsive to the
growing needs of the future. It was to provide this strength
that the Board of Governors of the International Monetary Fund
approved the amendment that establishes the Special Drawing
Rights facility. My government would like to see it activated
this year. I am gratified that so many of the regional members
of the As ian Deve lopment Bank have taken the necessary stepS to
ratify the amendment and to indicate their readiness to
participate in the Special Drawing Rights facility. More than
40 countries holding more than 60 percent of the votes in the
Fund have now ratified the amendment. It will not become
effective until 67 member countries with 80 percent of the total
voting power have completed the process of ratification. I
hope that those members who have not yet acted will soon comp~u
the necessary procedures that will enable them to join in thiS
mutual undertaking.
The new Special Drawing Rights facility -- which should be
activitated this year -- will serve the developing, as well as
the developed countries. It will directly add to monetary
reserves in proportion to IMF quotas. Moreover, it will have
an important additional advantage as a major factor in
facilitating a high level of world trade and investment.

- 3 My government is firrrlly devoted to the cause of Asian
economic development, which will help to fulfill the shared
aspirations of this region. It follows, then, that we are
also firmly devoted to strong support of the Asian Development
Bank. As you know, my country joined wholeheartedly in the planning and effort that made the Bank a reality. I am most encouraged by the accomplishments of the Bank in its first two
years.
I need hardly remind this audience of the Bank's impressive
beginnings:
A well developed organization
A staff distinguished both by professional
competence and broad regional experience,
whose accomplishments attest to the sound
and effective leadership of President
Watanabe
A solid record of 11 loans totalling $66
million
This admittedly condensed list of achievements barely covers
the Bank's successful efforts. The Bank should also be justly
proud of the priority attention it has devoted to such basic
fields as agriculture and its growing concern with increas ing
productivity and creating new jobs. The Bank has enlisted the
talent and initiative of private enterprise through its loans to
development banks in Pakista~
the Philippines and Thailand for
loans to private borrowers.
As these loans suggest, development in this vast region can
never be accomplished through intergovernmental action alone.
Truly, we are building an institution capable of assuming greatel:"
responsibilities for advancing Asian economic development. This
is in no small part due to the fact that the Bank has earned the
confidence of lenders and contributors as a sound and thoroughly
responsible financial institution. But it does not end there.
There is growing appreciation by the peoples of Asia that the
Bank offers an imaginative channel to bring human and economic
reSOtlr"'~l:l rn
nn h~ln;nO' t-hp-m achieve a better life.
hO!:l't"

- 4 The future of the multilateral approach to development
financing will be rewarding for Asia and for the entire world
It is increasingly recognized that all countries share the .
responsibility for overcomi~ the poverty, hunger and despair
that is the daily fare of too many of our fellow men.
Despite the recognized advantages of the multilateral
approach, my government be 1 ieves that, in Some cases, there is
no substitute for bilateral assistance. At the same time, we
place a high value on multilateral assistance and strongly
encourage efforts by the richer nations to help the developing
areas realize the aspirations of their peoples. I am confident,
therefore, that interest in multilateral aid will help to
stimulate strong expansion of the Asian Bank.
The creation of the Special Funds envisaged by the Bank's
founders and provided for in the charter is of keen interest to
all of us. Already, the governments of Canada, Denmark and
Japan have agreed on the use of their contributions.
As for my own country,President Nixon decided very early
in his Administration to reexamine all United States foreign
assistance, to review what has been done, and to determine our
future course. At the outset of that review, we had for
ratification and funding a complete multilateral agreement for
a $2 billion replenishment of the resources of the International
Development Association. The new Administration in Washington
has reaffirmed its intent ion to part ic ipate in this replenishment and we hope to obtain the necessary legislative authorization for the United States contribution.
The Bank's reques t that donor countries contribute to the
Special Funds is now an active part of our review. I welcome
the opportunity provided by this Second Annual Meeting to learn
more about these Special Funds so that this experience can be
reflected in my recommendations to the President.
Let me say on behalf of the United States that we fully
support the need for the Special Funds. We are convinced that,
multilateral institutions should be able to provide concessional
as well as ordinary financing. And that the Special Funds -given strong and shared support by the member nations -- can be
a vitally important supplement to the Bank's other lending

- 5 -

facilities. When we return to Washington, we intend to formulate
a proposal for our contribution to the Special Funds to be submitted this legislative year.
The preoccupation of this meeting is with development of
this region through multilateral assistance. Asia's economic
needs are great. The available financial resources are always
less than we would wish. However, through cooperative efforts
we can achieve a very great deal.
Moreover, the habits and the policies we are establishing
now will assure that we can move ahead with renewed purpose to
take constructive action as fresh opportunities to advance the
economic and social well-being of Asia. That will surely emerge
once the just peace in Vietnam for which we all so earnestly pray
is finally achieved.

000

TREASURY DEPARTMENT
,
WASHINGTON. D.C.

April 10, 1969

FOR IMMEDIATE RELEASE
TREASURY MARKET TRANSACTIONS IN MARCH

During March 1969, market transactions
in Federal Securities of Government accounts

resulted in net sales by the Treasury
Department of $1,174,500.00.
000

K-56

TREASURY DEPARTMENT
;
=

WASHINGTON. D.C.
t RELEASE 6:30 P.M.,
~l

April 14, 1969.
RESULTS OF TREASURY I S WEEKLY BILL OFFERIlfG

'!be Treasury Department announced that the tenders for two series ot Treasury
Lls, one series to be an additional issue of the bills dated January 16, 1969, and the
ter series to be dated April 17, 1969, which were offered on April 9, 1969, were
!l'Jed at the Federal Re serve Banks today. '!'enders were invited tor $1,600,000,000,
~reabouts, of 91-day bills and far $1,100,000,000, or thereabouts, of 182-day
Lls. 'Dle details oftbe two series are as follows:

91-day Treasury bills
maturing Juq 17, 1969
Approx. Equiv.
Price
Annual Rate
98.447 ;g
6.144J
98.430
6.211~
98.434
6.195~ Y

JOE OF ACCEPlED
RTITIVE BIDS:

High
Low
Average

182-day Treasury bills
1I8turing October 16, 1969
Approx. Equiv .
Price
Annual Rate
96.881 E.I
-S-.16~
96.862
6.20~
96.870
6.191~

!I Excepting

1 tender of $13,000;~ Excepting 2 teDders totaling $350,000
of the amount ot 91-day bills bid tor at the low price was accepted
5~ of the amount ot 182-day bills bid tor at the low price was accepted

64~

rAt ']EImERS APPLn:D FOR AIm ACCEP'lED BY lEDERAL RESERVE DISTRICTS:

District
Boston
lew York
Phllade lphia
Cleveland
Richmond
A.tlanta
Chicago
St. Louis
MinneapOlis
Kansas City
Dallas
San FranCisco
'roTALS

I
I
I

Applied For

1,885,514,000
35,280,000
71,515,000
17,338,000
51,681,000
208,721,000
63,109,000
24,862,000
44,540,000
34,990,000
138.317.000

AcceEted
$ 29,357,000
1,076,434,000
20,280,000
69,515,000
17,338,000
41,321,000
138,321,000
51,4:01,000
18,642,000
41,040,000
24,810,000
12.037.000

$2,605,224,000

$1,600,496,000

29,357,000

AEElied For

5,651:000

1,683,005;000
18,624,000
24,457,000
6,287,000
36,532,000
158,114,000
34,453,000
17,781,000
22,500,000
24,239,000
111,127,000

£I

$2,142,770,000

AcceEted
$
5,151,000
889,005,000
8,464,000
19, 13?, 000
6,286,000
20,094:,000
51,754,000
20,303,000
9,781,000
18,500,000
13,539,000
38,427,000
$1,100,441,000 ~

Includes $410 725 000 noncompetitive tenders accepted at the average price ot 98.434
Includes $176:409:000 noncompetitive tenders accepted at the average price ot 96.87C
ibese rates are on a bank discount basis. The equivalent coupon issue yields are
6.3~ for the 91-day bills, and 6.4~ tor the 182-day bills.

TO CORRESPONDENTS:
Thought you would like to have the
attached transcript of the Secretary's
Sydney Press Conference.

DIXON DONNELLEY

TREASURY DEPARTMENT
WASHINGTON, D.C.

April 14, 1969
'OR THE PRESS:

Following is the transcript) as received by cable; of a
lews conference held by Secretary of the Treasury David M. Kennedy
.n Sydney, Australia, at 3:00 p.m., Friday, April 11,1969
:Sydney time). He was in Sydney to attend the Second Annual
1eeting of the Board of Governors of the Asian Development Bank
)f which he is United States Governor:
MR. DONNELLEY: I am Dixon Donnelley, and I am
Special Assistant to the Secretary of the Treasury for
Public Affairs. The gentleman on my left of course, is
our distinguished Secretary of the Treasury, Mro David
Kennedy.
Before we begin, I would like to say that this
conference is on the record. The Secretary has
asked me to tell you that he hopes that this will
substitute for the many individual interviews so many
of you have asked of me. Mro Secretary.
MR. KENNEDY: Ladies and Gentlemen, it is a pleasure
for me to be in Australia and to enjoy some of the sights
and some of the pleasantries of Sydney, a great city. I
express here formally for myself and family and
delegation our appreciation for the courtesy of the
Government and the people of Australia.
I came here principally to demonstrate the Nixon
Administration's interest in Asia and to show that the new
Nixon Administration is firmly dedicated to the development
of this area of the world. It is my first trip out of
the UoS. since my appointment as Secretary of the Treasury.
My second trip will be to another developing area in the
world, Latin America, close to home.

K-57

- 2 -

You have my statement that I made this morning before
the Asian Development Bank, and you can use that. I will
now open the meeting to questions.
QUESTION: Mr. Kennedy, in your statement this morning
you indicated that you would be asking your government for
a contribution to the Special Funds of the Bank.
MR. KENNEDY:
QUESTION:

Precisely.

What amount will you ask for?

MR. KENNEDY: This has not been determined. We
will ask for an amount that will be substantial, an
amount that will be reasonable, and an amount that we
feel that we can get through the Congress of the
United States this legislative year. That is important.
QUESTION: Do you expect it will be more or less
than one hundred million dollars?
MR. KENNEDY:

I will not put a figure on the amount.

QUESTION: There has been some disappointment among
some of the Asian countries that you have not seen fit,
as the Dutch and Japanese have, to mention a figure which
you will be putting up to Congress. Have you been having
any talks with the Asian delegates to the conference, and
knowing of the urgency, have you perhaps disillusioned
them a little about this?
MR. KENNEDY: My statement was very clear and
forthright: When we go back, we will reappraise the
situation along with all other aspects of AID, and
that we will come up with a program and present it to
the Congress of the United States.
QUESTION: Have you seen anything to change your
mind about what the figure should be?
MR. KENNEDY: No, I have not. I am firmly convinced
that there is a need for the Special Fund. We are in
favor of it and we shall come up with a figure and with
a program that will be reasonable, I think, and
satisfactory for the foreseeable future.

- 3 -

QUESTION: Yesterday when you were going out, I
approached you and you said you were optimistic and
overjoyed at the qualify of the conference itself and
also the statement by Mr. Watanabe. Would you elaborate
on that?
MR. KENNEDY: Yes. I think this conference has been
a wonderful example of international co-operation at its
best. This is a new organization in its second year
and it has made progress o The Bank has a good staff,
firm,qualified leadership and I think the action they
have taken now to support the Special Fund is all to the
goodo I am very pleased that other nations have stepped
up and shown the way in this field. The United States
will be firmly behind it.
QUESTIOW: You also mentioned that the cooperation
shown at the conference itself was a good indication for
the future. Would you elaborate on that?
MR. KENNEDY: Yes. In our discussions at the meetings
and in the corridors and private meetings bilaterally
after and between meetings, there is every reason to be
encouraged
I think that the attitude of the developing
nations is one of hope and one that is showing careful
planning, careful thought
It is not a question of
just pumping moneyo It is a question of taking the
funds and the resources by qualified people, technical
aSsistants, and having the projects which are approved,
succeed o
0

QUESTION: May I take this opportunity to ask you
one question which concerns the Euro-dollar. We understand
that the figure of the Euro-dollar which is currently in
circulation amounts to thirty million.
MR. KENNEDY:

You are taking in billions o

QUESTION: I mean 30 billion, and I think it poses
a problem, and there is apprehension that it might turn
out to be a disruptive factor to the financial market
operations. What is your comment on that?

- 4 MR. KENNEDY: I am glad you asked that question,
really. The Euro-dollar market is one of the free
markets left in the world. It provides liquidity for
many uses, for helping various areas of the world. The
United States is using it in large volume at the present
time. The figure you gave, I think, is too high. But
I see no real problem with that market. The rates, of
course, are very high because the demand
had been high, 'and we in our country as you well know
have had a very strong inflation. Prices have been
going up, and we are trying to bring that inflation
that has been running for three or four years under
control. In that process we are following orthodox
and traditional methods of reducing government
expenditures, bring them below the present Johnson
budget, creating a surplus in our own domestic accounts.
At the same time, we are asking for an extension of
the surtax so that we will have a surplus assured.
Then we are taking action through our central banking
system to restrict credit and, as a result of that,
with the heavy demands that are seen for credit in the
maLkets, with interest rates at a very high level, that
has been reflected over in the Euro-do1lar market and
other markets.
QUESTION: Back to this conference, what do you
see as its biggest achievement so far?
MR. KENNEDY: I think the biggest achievement is that
the bank actually made some loans
They do have in the
pipeline other applications that have been or are being
processed and will be acted upon. They also have working
competence in their management and in their technical
affairs to carry out the programs that are financed, and
I think the next thing that they have done which is very
significant is this Special Fund which will be helpful
in taking care of those situations where they cannot have,
at least in the softer areas of the loan market, La
concession operated o (GARBLED IN TRANSMISSION)
0

QUESTION:
In your speech this morning, you stressed
the need for activation of the Special Drawing Rtghts
of the International Monetary Fund. If these cannot be
ratified by the 67 necessary countries fairly soon, is this
going to have any effect on the recommendations you made
of foreign aid?

- 5 -

MR. KENNEDY: No. It is related only in a very, very
distant way. Our recommendations on the AoI.D.
from time to time, and particularly this Special Fund, will be
forthcoming very quickly to Congress o
QUESTION:

Can you give us a time?

MR. KENNEDY: I have no time on it. Soon after
I get back I will be working on that, along with other
matters. The Special Drawing Rights I threw into this
deliberately, because I think it is important that we
do activate the S.D.R.'so They have been approved
by the I.M.F. Many nations have approved them and I think
it would be not only possible but likely and very desirable
that they be activated by the meeting of the I.M.F. this
fall o
QUESTION:

Why the urgency for this year?

MR. KENNEDY: There is no pam~c, no real urgency, but
that would give strength to the international monetary
mechanism, and I think that it would be bad to delayo
We are nearly there now. We are nearly home.
QUESTION: How much would you like created?
Would you like to create it lirumediately, and how much?
MR. KENNEDY:
I would like to see it activated as
soon after the I.M.F. (meeting) as it can be implemented,
and the amount. We have not spelled out any set amount.
It should be in large enough amounts to take care of
the needs for a few years time and I would, if I were
to e~r, I would put in on the heavy side o I would go a
little more than some people have been thihking, but I
have no figure in mind.
QUESTION:

Something in the oider of five billion?

MR. KENNEDY:

I have no figure in mind.

QUESTION: This Special Fund which you said you would
make a recommendation on, has President Nixon actually
made a decison on this or will your recommendation go
to him and he will then make a decision on it?

- 6. -

MR. KENNEDY: President Nixon has not made a decision
on it. He is studying the whole thing -- or at least
asking the Treasury to study it -- and we will come up with
some kind of discussion on ito We will discuss it with
both parties of Congress and we hope to come up with a
program which will be supported by the Congress of the
United States o
QUESTION: Is there any significance in your current
feeling on this conference and the factor of the American
withdrawl from Vietnam?
MR. KENNEDY:

No.

QUESTION: I am talking along the lines of economic
support rather than military support for the area of South
East Asia.
MR. KENNEDY: We are aware and you are aware of the
drain and burden and difficulties of Vietnam, and I
expressed in my statement this morning that the President
is making it a first priority and a very great effort to
find a lasting and effective peace that will be sustainable
by all.
QUESTION: Would any of your observations on this
conference have any bearing on this, his ultimate feeling
about Vietnam?
MR. KENNEDY: No. His feeling is broadly crystalized
on Vietnam. I think that the thing that Vietnam ending
would do would be to change from the military some aspects
of financial cost over to another area of assistance and so
ono But I must say here that his "Peace Fund" that is
talked about when Vietnam ends would take the figure of
what the budget is, and everybody is trying to get their
hands on that account. There are all kinds of programs
in our cities and the developing areas that are trying to
establish for themselves part of that moneyo It will not
be a complete reduction. The military effort just does not
stop like that, and we have a very heavy burdeh of a peace
umbrella over the world.

- 7. -

QUESTION: Since you have been here you have had several
private talks, some of which we know about and some of
which we undoubtedly do not know about. In any of these
have you come to any conclusions about which you could tell
us, or any recommendations you will be making to the
president? I am thinking particularly of the talks you
have had with the Australian Treasurer and the Prime Minister,
and any effects they may have on u.S. trade and investment
policy in Australia?
MR. KENNEDY: I am sorry that I cannot really answer
your question. We have had a number of bilateral talks,
taking the problems of the nations as they affect your
country and the United States. Your Prime Minister was
in the United States and had some discussions. He will
be back in the United States. Talks and consideration
by the staff is going along, and I must say that from the
standpoint of relationships with Australia, it is of the
closest with the United States.
QUESTION: Has the thinking changed at all on U.S.Australian financial relations as a result of the talks
you have had here?
MR. KENNEDY:
QUESTION:
payments?

There is better understanding.

In those talks did you cover balance of

MR. KENNEDY: Yes. We covered the watertront, so to
speak. We had many discussions o
QUESTION: Could you give a point from where to whereo
Say from balance of payments to defense?
MR. KENNEDY: I think that it would cover most of the
areas of interest to your government and our government,
and you hit some of them.
QUESTION: Would you care to comment on the deflationary
actions taken by the previous administration, which are now
tending to bite in terms of the U.S. economy and slow down
the pace of inflationary pressures a bit. How that is
going to affect trade in this particular area?

- 8,-

MR. KENNEDY: Any nation going too fast with
inflationary pressures has to be adjusted, and the further the
adjustment goes or the longer it is delayed, the greater
adjustment is needed. Actually what we are trying to do
is a very simple thing but a very difficult thing. We
are trying to disinflate without causing a recession or
too much downturn -- take the steam out of the boiler, so to
speak.
QUESTION: But this will have some effect on trade in
the area, particularly with Japan.
MR. KENNEDY: It will have some effect on the internal
economy and on outside trade, but not serious.
QUESTION:
affect it?

You do not consider it will seriously

MR. KENNEDY: No. I think the economy of the United
States is so basically strong at this time that even with
the move towards accommodating the hopes and aspirations
of our people and the needs of our cities, there is no
serious turndown in prospect, and that makes it very
difficult to disinflate, when you have that kind of outlook.
That is what we are trying to do.
QUESTION: Speaking about April 4th, President Nixon
proclaimed his desire to improve the International payments
condition. It comprised a set of measures on the part of
the United States, and there is a certain concern that
these might have an adverse affect on exports to the
United States by all those countries including Japan.
You have already mentioned it,but what is your specific
comment on that?
MR. KENNEDY: I think you were referring to the
message of the President where he talked about bringing our
economy under control, and at the same time working on trade
liberalization and getting away from controls o Is that the
one you are thinking about?
QUESTION:

Yes.

- 9. MR. KENNEDY: We are trying in our way to have an easing
and a dismantling of controls. I have worked most of my
life trying to develop free markets, trying to have freedom
of trade among peoples. I think that barriers are being
built up one after another when we get into problems. We
realize in this field that it is not easy to dismantle
controls. We have to do it very carefully, and that is the
reason why we are making it on the basis of strong pressures
on our own economy, to keep it in balance o I believe this
will aid in fostering international discussions and in
fostering freer international trade. The liberalization
is not in the present climate designed to seriously affect
our balance of payments. We have reduced the interest
equalization rates. We can do that in the present climate
because of the high interest charges in the United States.
It is not likely that there will be a great calIon this
market at these rates when you can get the money cheaper
in other places. We want to continue the stand-by
possibility. We are going to ask for an extension of the
talks so that the President can change it if necessary the
other way. Hopefully, he can reduce it.
QUESTION: In the context of your philosop~y with free
markets and free trades are you prepared to comment
on what appears to be, at any rate from this Side of the
world, a sort of creeping protectionism on the part of
Congress. If you can talk about specific things of
interest to Australia -- wools, metals.
MR. KENNEDY: There is a feeling that over the years
the United States has led the world in freedom of aid
and freedom of trade, and that is true. We have gone
to the conference table and been very easy on negotiationso
We have had very great barriers against us. We are
working bilaterally to overcome any of these that are
hurting our economyo On the other side, there has been a
feeling on the part of many of our businesses, many of our
people, that we should be more restrictive, that we should
put quotas on many things. The President has made hi.s
position very clear that he believes in free trade, that he
is trying to work in this kind of climate and economy where
free trade could be facilitated and not build barriers, and
I have already expressed my view very strongly on that. I
do feel strongly.

- 10 QUESTION: Specifically, do you see any prospect of
easing of restrictions of import in your market of
Australian wool and meat?

MR. KENNEDY: Specifically we shall discuss that with
your government officials.
QUESTION: Would you like to see greater Australian
economic participation within South East Asia?
MR. KENNEDY: I think Australia has shown leadership
and I commend the government of Australia for its
interest in this area o I think there is a bulwark of
strength here and looking to the future I would see that
Australia can really be a strong factor in helping build
this area of the world. I would compliment them rather
than criticize on what has been achieved. I think they
have shown leadership.
QUESTION: In previous conferences in Australia the
United States seemed to be playing a leading role, but
in this conference you seem to have kept yourself in the
background much of the time. Do you think this is
perhaps indicative of the way the Nixon Administration
intends to work?
MR. KENNEDY: I think the Nixon Administration is not
trying to set forth expectancy and have expectations'
outgrow the realities of life o I think what we want to do
is -- when we see the need -- demonstrate by action, and
not have high sounding phrases, not have large figures
bandied about, but have a program that not only is
sustainable but which will produce resultso I believe
you have asked a good question there.
QUESTION: You mentioned that Australian participation
at this time was pretty good, but in relation to the
Asian Development Bank would you like to see us, since
we live in the area and the area is part of this country,
do more than we are doing at this time. In other words,
does it apply to us now that we should have been a little
more generous than we have?

- 11 -

MR. KENNEDY: I would be the last one to cciticize
or to say what could have been done. I think each nation
has to take a look at its own responsibilities, its own
aspirations and desires, and if I were to give an answer
I would say that you have done very well.
QUESTION: Specifically in your speech today when
speaking about the .United States' attitude towards
Special Funds, you said you hoped other countries would
also come in on the Spec ial Funds. Does this inc lude
Australia;would you like to see Australia come in?
MR. KENNEDY: I would like to see all of the leading
nations join in the Fund and do as much as they can.
QUESTION:

Including Australi.a?

MR. KENNEDY:

All of the nations.

QUESTION: On these so-called soft loans would you
be prepared to comment in which areas you would like to
see this form of loan channeled? There has been some
criticism for instance of the Japanese attitudes, where
they want this money directed specifically to agriculture
so that they can develop complementary economies in the
area rather than competitive manufacturing.
MR. KENNEDY: I think in the case of a bank -- and I
know a little bit about a bank -- I would like as much
freedom of action as possible in the staff and the
management of the bank to follow their own desires. I
know the receiving countries would like as much freedom
in directing their projects in their own way. But a
nation that is putting up money has to have some say -if they want it -- as to where the money should be spent
and how. I know unrestricted gifts are being sought out
and are desirable, but I would not want to criticize a
nation for directing its funds into an area where they
believe the need is greatest or that it will be of most
help to a developing area. If they do get too many
restrictions, it will make a difficult problem for the
Bank itself to operate, and I think that is what is being
talked about. We are going to have to look in our own
situation as to whether we want to be just relied upon for

- 1'2 -

funds or whether we want to designate some areas that we
think need developing and where we want to direct funds,
I would not want to foreclose, through any statement I
made here, our own options in this matter. I hwve raised
a lot of money for universities. All the private
universities need money. There is a never-ending need
for money and they all want unrestricted gifts. But when
I go to a man and he says, ~'I will give the money but it
has to have my name on the building and it has to be a
library," I would not say "No, we do not want the money.
We do want want the library". I would take the money
and give him his wish and I think that is true in this
field.
QUESTION: You have been very cautious about not
criticizing anybody. Is there anything that has happened
in Australia since you have been here or anybody you
have talked to since you have been here that you are unhappy
about?
MR. KENNEDY: I might be unhappy about my wife if
I find she has spent a lot of money here. I am a Scotsman
and we have got a balance of payments problem, and so I
hope she is very, very careful in what she buys, because
I have seen some beautiful merchandise in the shops.
QUESTION: There has been growing apprehension in
South East Asia that the new President Nixon might be
inclined to over emphasize Europe, giving less emphasiS
to the South East Side, and it has been felt that this
tendency might grow more pronounced in the economic field.
What do you think about it?
MR. KENNEDY: I do not think it is true. I think that
coming into office, President Nixon had a very important
first order of business: to reappraise Vietnam and to
take a look at the Middle East and the various problems
of the world. I was a great advocate of his early trip
to Europe. I think it was necessary and important, and
did not show any lack of interest in Asia for him to go
in the other direction on his first trip. I think he went
to Europe to show that he was not being overly concerned
with other areas of the world. He asked me to corne here
and I think at some point he will be travelling through.
It is a big world despite the jet, and he has many
obligations. Right now he is spending most of his time
on the domestic scene trying to improve our own economy.

- 13 I am glad of that because as the chief financial officer of
the United States, I think that was a must. I began to
think that some international things were being given too much
thrust and there were things that he should have been doing
at home.
QUESTION: We have been relieved that you have been
able to discuss the close of Vietnam. What would be the
most conspicuous approach to be taken by the Nixon
Administration in the political and economic field towards
South East Asia?
MR. KENNEDY: I do not think at this press conference
I could really give you a worthwhile answer. I am sure
that it would be helpful to all of the nations in this
area to have peace in Vietnam. Surely it would have an
immediate economic effect on some countries. But
unfortunately the economic impact is a small part of the
total Gross National product of any of the world's nations.
It might be a marginal amount and it might present something
of a problem but I am sure that there would be need -large need -- for further development in this area.
Hopefully some funds may be channeled from the savings
for this purpose. I make no promises.
QUESTION: Has Mr. Nixon in your discussions made any
plans for a visit to Australia?
MR. KENNEDY:

No.

QUESTION: During your time as Secretary do you intend
to press for a review of the world money system over and
above the implementation of the S.D.R.?
MR. KENNEDY: When you say reform, that is in a way
Any movement or any mechanism or any
a bad word
market needs continual attention. We are having and
will continue to have discussions on ways and means of keeping
the international monetary system viable so that it will
meet the needs of the world. When you get into specifics
of how and what shall be done, you get into problems of
strong feelings one way or the other. Fortunately now the
experts in the universities, the leaders of finance and
banking, the ministers of finance, the heads of countri~s,
are taking a look at their own positions and the world's position.
I think we are in the kind of an atmosphere that the I.M.F. can meet
the needs of our economies. Each nation can do what it should
o

- 14 do. What we are trying to do in the United States is a
very,very simple thing, that is to make the U.S. dollar
strong at home, and a currency that can be used in
international trade -- not only as the world reserve
currency, but one with a stable value.
QUESTION: Can you give us an indication of some of
these specifics as you see them?
MR. KENNEDY: No, I do not think I could enlighten you
on this. You have heard all of the famous words, flexible
exchange rates, the creeping pegs, and all of these things,
I do not think any of these are the real answer. The real
answer is to handle the situation as we have it and find
a way to adjust in each of the major nations to the
movements of their own environment and obtain a parity
among the currencies that will sustain trade and improve
the growth of the world.
QUESTION: Could you give us some indication of when
you think you will have the U.S. economy under control?
These inflationary pressures will have abated to a point
where you feel the dollar is strong at home, a strong force?
MR. KENNEDY: I think the dollar is strong at home
and overseas now. It is standing up well on the
exchange marketso I do not want to give the impression
that it was not. What I was saying was that with the
inflation we have we could be in serious trouble if we
did not bring it under control. As to the time when it
will be -- I think the action we have already taken will
have a very important effect and I think it is having an
effect now. We are becoming a little impatient in these
matters and want it to happen overnight. It just does not
happen this way. But before the year is up I am sure the
necessary action will have been taken and the economy will
be in a better shape.
QUESTION: Do you think your ability to keep the
economy under control will have any direct relationship
to the implementation of the S.D.R. 's?

- 15 MR. KENNEDY: No. I think what we are doing now is
helping to get activation of the S.D.R., because the
banking and finance people say that we should put our
house in good order.
QUESTION: There is a suggestion of early activation
of S.D.R. Is it possible that we will have to keep
a watchful eye on S.D.R., otherwise the world global
trend will be towards inflation and there may be
some need of preventive measures towards an
inflationary trend. What is your comment on that?
MR. KENNEDY: I think there is no substitute for
discipline on each individual country's part. I do not
think we can discipline this area of the world or this
area of the world can discipline us. I think it is
the responsibility of each of us in our own way to
bring your own house into order. I do not see that the
activation of the S.D.R. will present an inflation problem.
I think it will merely be a liquidity and adjustment
process with the ability to take care of the needs
for the present time.
QUESTION:
You have said you are quite satisfied
with the measures you are taking to put your own house
in order, but at the same time there is also the
problem on the other side, if you like, of granting
services in Europe. Do you think countries such as
Germany are taking this situation seriously and are
doing as much as you would like?
MR. KENNEDY: I think they are taking it very seriously
and responsibly. They have their own problems in their
own country. They have had a very strong surplus for a
long period of time. They are in a position to show
leadership and I am sure they are aware of this. There
have been discussions with the German Government, the
German people, about their problem but again it would be
foolhardy for me to lecture Germany.
QUESTION: In this country the political opposition
particularly has been critical of the government's
policies on overseas investments in the past and the government's
refusal to insist on a high share of equity in any new
overseas project. Would you object in any way to an
inSistence on Australia's part of a large Australian share in
eqUity in any new American investment proj~cts?

- 16 MR. KENNEDY:
No, that is your business, not ours. You
do what you like there. It is up to each individual
corporation that might want to come in as to whether they
will come in as a small minority or with small participation
or whether they will stay out. I think your problem is one
of balanced growth, getting the capital investment that you
need for the building of your country and an economy that
can be sustained. I think nationalism to a point is all right,
but I would go very carefully on too many restrictions
because it could foreclose on your development. This is an
individual matter with the corporations. There are those who
might want to come into your market. When a country needs
capital and growth, one way of not getting it is to make it
so restrictive that outside corporations will
not come in.

QUESTION: Putting it another way, do you think in the
present financial climate in the United States if we did
insist on, say, 50 percent Australian with new projects, this
would lead to a great falling off in the amount of U.S.
investment we could expect?
MR. KENNEDY: That would be an individual situation with
the corporations and I would not know what companies or
corporations were considering coming in. It is not a matter
for the United States or the United States Government. I
know that many of our corporations ten years ago or so
would not go into any area unless they had full and complete
control, because they had no experience in joint ventures and
in participations which they did not controlo In recent
years many of them have had experience. Most of that
experience has been very good. Some of it, perhaps, had
discouraged them from expanding and going abroad, but I
think again it is an individual corporation's decision
as to whether they want to come in and on what basis.
Usually they want to come in when they can see chances
to make a profit -- we are still in the profit system -and also a contribution to their over-all development,
which would mean the development of the area.

- 17 QUESTION: When the Asian Development Bank was in
process of being organized the President of the United
States at that time suggested that the communist countries
of Asia, specifically North Vietnam, should be
participants as well as recipients. Has the Nixon
Administration or have you yourself formulated any policy in
this regard?
MR. KENNEDY:

No.

QUESTION: The United States and South Africa are at
odds over the use of newly mined gold. Do you think there
is any chance of the two countries reaching agreement over
this issue?
MR. KENNEDY:

Yes.

QUESTION: Could you explain on what grounds this
agreement will come about?
MR. KENNEDY: No. I have had no discussions with South
Africa. I am aware of the history of the problem. I am
aware that South Africa is a sovereign nation and they have
their own individual problems and I am sure that the problem
of their newly mined gold is not insurmountable and that
people with good will and a desire to accomplish a purpose
will do so. It is not a question between the United States
and South Africa. It is a world question.
QUESTION: Looking to the long term when America
finally gets to the stage where a solution is found to end
all the problems at home and keeping in mind the era of
defense that has now gone back to Britain and Australia
in various fields. Do you look to an ultimate solution of the
problems within South East Asia in relation to Australia's
position here as a joint American-Australian economic venture?
In other words, would an economic investment in South East
Asia from ~he American point of view do more than Vietnam is
dOing?
MR. KENNEDY: I have not given consideration to your
precise question. But I think we want to work very closely
with Australia. I think our common interests direct that kind
of an attitude. I think we have many common interests that
we can work on together. I think we can aid the area better througt
an international organization such as the Asiah Development Bank

- 18 rather than by joining two n~t~ons in a common enterprise. If
we can direct our common poll.cl.es so that you can grow and
remain strong, as you are -- Australia has great potential __
the resources, the people, the know-how, the stability of
government and all those things -- then you will be in a
position to show the leadership and have the financial
policy to assume increased participation and increased activity
in this area. It will be to your selfish benefit as well
as humanitarian. The same holds true of the United States and
Japan and with other nations in this area that are making
great progress. We are seeing the results of community
interest on a multilateral basis that are actually encouraging.
One could get terribly discouraged if you just say, "You cannot
do this." You cannot do it overnight, but we are not trying
to do things overnight. What we are trying to do is find
ways of financing and give management and direction so that over
a period of time we will have the kind of growth and
development that is sustainable. You cannot do that if you
have instability of governments or you have policies in
governments that are so restrictive that they hold back or
they go so fast that they cannot service their debt. When you
lend money you expect to be repaid with interest. This is a
loan -- otherwise it is a gift -- and so you build a balanced
economy. You have to have discipline, and we lecture
sometimes countries that get out of hand. I do not like
to lecture. I like to sit down with them and talk about
their problems and see if we cannot come to a reasonable
solution.
Thank you very much, gentlemen.

fNN!

......
~

STATEMENT OF THE HONORABLE

,.~

,-.

PAUL W. EGGERS,' GENERAL COUN8EL
DEPARTMENT OF THE TRFASURY
BEFORE THE SENATE COMoITTI'EE ON BANKING AND CURRENCY
ON 8.34 AND 8.296
APRIL 15, 1969
10 A.M. EST

Mr. Chairman and Members of the COmmittee:

I appreciate the opportunity to appear before the Committee this
morning to testify on 8.34 and 8.296.
These bills vould effect a number of significant changes in the
Investment Company Act and the Investment Advisors Act.

In addition,

they have several features vhich would affect bank trust department
activities.

Because it is in this latter respect that the proposed

legislation falls within the particular field of interest of the
Treasury Department, I vill devote the bulk of my comments this morning
to these portions of the bills.

Further, because the tvo bills have

the same effect in this regard, I vill for simplicity's sake, refer only
to 8.34.
8·34 would resolve several questions vhich have arisen concerning
the operation by banks of collective investment funds.

These questions

2
are tvofold:

First, the extent to vhich the securities lavs are

applicable to such funds; and second, the extent to vhich the operation
of such funds may violate the Banking Act of 1933.
These questions concern three distinct types of funds.

The first

is the traditional common trust fund for the collective investment of
moneys held by banks in the capacities of trustee, executor, administrate
or guardian.

These funds are tax-exempt if operated in conformity with

the rules and regulations of the Comptroller of the Currency.

They are

also specifically exempted from the Investment Company Act of 1940.

The

bill vould provide an exemption for these funds fram the provisions of
the Securities Act of 1933 and the Securities Exchange Act of 1934,
except for the antifraud sections of those statutes.

It would also

recognize that the Banking Act of 1933 does not preclude banks from
operating these fUnds.
The second type of collective fund is the group trust for the
collective investment of assets of tax-exempt stock bonus, pension or

3
profit sharing trusts.

Such pooled funds are also tax-exempt, under

Revenue Ruling 56-267.

Banks operate these funds both for the collective

investment of assets of corporate employee benefit trusts, and those
established by self-employed persons.

The bill would recognize that

all such group trusts are exempt from the Investment

Camp~

Act.

would provide that, except for the antifraud sections, the prOVisions
of the Securities Act and the Securities Exchange Act are not applicable
to such pooled funds for corporate employee benefit trusts.

As to group

trusts for the collective investment of assets of trusts of self-employed
individuals, S.34 provides that the bank regulatory agencies may exempt
interests therein if necessary or appropriate in the public interest and
consistent with the purposes of these Acts.

Thus, the Comptroller of the

Currency as to national banks, the Board of Governors of the Federal
Reserve System as to state member banks, and the FDIC as to state
nonmember insured banks, would supervise the application of the securities

4
laws, as such agencies deem necessary, as to these funds.

This would

enable the banking agencies to coordinate such rules and regulations
with their present supervisory activities concerning trust departments.
In so doing, the bill follows the precedent wisely established in the
Securities Acts Amendments of 1964 as to bank securities.

In addition,

S.34 would provide confirmation that the Banking Act of 1933 does not
prevent the operation of these funds by banks, as long as in conformity
with the Regulations of the Comptroller of the Currency.
The third type of collective fund is the commingled account for
the collective investment by banks of funds held as managing agent.
S.34 would confirm that such funds are governed by the Investment Company
Act of 1940, as administered by the Securities and Exchange Commission.
It would amend that Act to remove present minor impediments to bank
operation of such funds.

In addition, S.34 would provide that the operatj

of fund3 of this type by banks does not contravene the Banking Act of 193~

5
as long as in conf'ormity with the rules and regulations of the Comptroller
of the Currency.

It would thus reverse the decision of the District Court

for the District of Columbia in the case of Investment Company Institute
v. Camp and provide a desirable uniformity of banking regulation for these
funds, similar to that which now exists as to common trust funds.
This bill would not involve any novel activity for banks.
have been acting in fiduciary capacities for over a century.

Banks
They have

been operating formalized cammon trust funds for the collective investment of moneys held in these capacities since 1937.

Banks have been

a&rlnistering pension trusts in one form or another since they were first
established, and have been pooling such trusts for collective investment
since 1956.

They have been acting as trustee of retirement trusts for

the self-employed, and pooling such trusts, since 1962.
a~inistered

Banks have

managing agency accounts since the early 1930's.

The only

activities which they have not heretofore been able to carry on has been
the collective investment of moneys of these accounts.

6
We believe that it

~ould

be highly desirable for banks to be able

to make their investment expertise, as

~ell

as their experience in acting

in fiduciary capacities, available to the public in a form
permi t their accepting smaller accounts.

~h1ch

will

The pooling of retirement trust!

for the self-employed, and of managing agency accounts, as permitted by
this proposed legislation,

~ould

accomplish this end.

We further

believe that it would be most desirable to remove the technical impediments which have resulted from the uncertainty as to the applicability
of the securities
be to open the

~ay

la~s

to these funds.

A primary benefit fran this would

for banks more fUlly to effectuate the Self-Emplqyed

Individuals Tax Retirement Act of 1962.

To this date, the questions whid,

exist as to the applicability of the securities laws to pooled funds for
these trusts have greatly restricted bank acceptance of them.

Since such,

trusts are necessarily small in amount, it becomes necessary to invest
them collectively to be able profitably to offer this service.

7
enabling banks to pool these funds in a manner consistent with both the
objectives of the securities laws, and banking regulatory practice, the
bill accomplishes a most desirable objective.

Finally, these questions

which have arisen pertaining to the securities and banking laws have also
created uncertainty on the part of many bankers as to the status of
traditional cammon trust funds, and group trusts for the collective
investment of assets of corporate employee benefit trusts.

We believe

that the clarity which this bill would provide as to these points would
also be highly desirable.

Because the activities affected by 8.34 involve only a minor
departure from the present fiduciary operations of banks, which they have
carried on for years subject to the supervision of the banking agencies,
it is apparent to us that the additional responsibilities which the bill
would place in those agencies can be quite readily assumed.

The continued

utilization of the banking agencies for the supervision of these funds,
~d

the administration of such of the securities laws as is necessary,

8
vlould also provide economies which would not result if these responsibilities were instead conferred upon other agencies.

Accordingly, the

Treasury Department believes that the banking aspects of S.34 are most
desirable and strongly urges that the Committee act favorably thereon.
As indicated at the beginning of my testimony, S.34 and S.296
would also accomplish some revisions of the Investment Company Act and
the Investment Advisors Act.

Some of these provisions are labeled as

reforms in the investment company industry, while others are designed
to facilitate, update and improve the administration and enforcement of
these Acts.

Because the Treasury Department has no extensive background

of experience in dealing with conventional investment companies, and the
system of regulation and control which has been established as to this
type of operation, we believe that it would be inappropriate to comment
as to the desirability of enactment of these proposals in either the
form taken in S.34 or in S.296.

However, should Congress in its wisdom

9
determine that these measures shouL: "be passed, the Department is of
the opinion that there wiD. be no dif'ficu1ty occasioned in their application to bank operated cowu.:5.ngled agency accounts.
Finally, the bills

cv~.t..el.in provisiol!.'~

which would assure an equal

status for insurance company separate accounts a.s against bank canmingled
managing agency account.s.

We feel that this principle may be desirable,

and have no objection to its enactment.

STATEMENT OF THE HONORABLE DAVID M. I<ENNJEY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ON
REPLENISHMENT OF THE RESOURCES OF
TIE INTERNATIONAL JEVELOPMENT ASSOCIATION
10:00 A.M., Wednesday, April 16, 1969

Mr. Chairman and members of the Committee:

I appreciate

this opportunity to urge that the United States participate in
replenishing the funds of the International Development
Association.
The Bill before you today -- H.R. 33 -- which would authorize

a U. S. contribution of $480 million to IDA, is extremely important
to the welfare of the developing nations.
~ll

It is important as

to the more advanced countries which are contributing through

this institution to growth and progress in the developing areas.
~

have come to realize that economic progress alone does not

~sure

world peace.

But it does enable men everywhere to better

realize their personal hopes and aspirations.

Economic progress

th~ helps to blunt the despair and frustration which too often

lead to wasteful and sometimes dangerous conflicts among men
and nations.

The United States contribution would be made over

a t~ee-year period.

I urge you to act favorably on this measure,

and to recommend its prompt passage by the Senate.

K-59

- 2 -

As you know, the bill was favorably reported by the House
Banking and Currency Committee, and was passed by the House of
Representatives on March 12.

In both instances, it was

appr~

by a large bi-partisan majority.
This is not &urprising.

IDA stemned from an American idea

and has rece ived bi-partisan support of four Presidents, member
of Congress and many other leaders in American national life.
IDA was created primarily at Congressional initiative.

Senate

Resolution 264 of 1958 originally suggested establishment of
the Association as an affiliate of the World Bank.
President Eisenhower strongly recommended the formation

IDA -- pointing out that, "The well-being of the free world is
vitally affected by the progress of the nations in the less
developed areas."

Presidents Kennedy and Jotmson encouraged

and approved the subsequent expansion of IDA's operations.
President Nixon is firmly convinced that IDA helps meet
an essential need of the developing countries, and that cantin
support for it is in our own national interest.

As the Presid

has said: "America I s basic self-interest in world development
stems from the brutal fact that there can be no sanctuary for

- 3 The establishment of IDA in 1960, and the agreement to
provide it with additional and larger resources in 1964, were,
in effect, commitments by other nations to a more equitable
sharing of the burden.

Today, we ask a second replenishment

that would represent additional progress in that direction.
In the first five years of IDA, the economically advanced
nations contributed a total of some $150 million a year for
its operations.

In the following three years, they increased

the amount to $250 million a year and, 1.mder the proposal I
am supporting today, they would contribute $400 million a year.
I think it important to note that the United States -- which

provided more than 43 percent of the f1.mds from the developed
nations when IDA was established -- would contribute 40 percent
of the new replenishment.

In the eight years since IDA began operations, several of
t~ ~veloping
~t

countries have made truly impressive progress.

many other countries are advancing only slowly.

The lives

of their people are blighted by hunger, sickness and ignorance.

These nations -- the poorest of the developing world -- urgently
require the assistance that IDA provides.

If they are to progress,

they must have access to credit on terms they can meet
speCifically, to credits that can be repaid on easier terms over

- 4 a longer period of

Development financing on harder

ti~.

terms would be sel[-dcfeai.ing,
costs would drain

aW8

ttn

b€'<.;.iC.lse

funds

mounting debt-servicing

rrov~rled.

end required, for

economic growth.
IDA draws on the experience and skill

of the World Bank,

but lends on terms th.:: t would not be possible for the Bank
itself.

Thus, it plays a Wlique and vital role in the concerted

effort by industrialized nations to assist the developing
countries.
We want to encourage other economically-advanced nations
to increase their assistance to the "have-not" countries.
other donor nations grow financially stronger, we would

li~

them to assume a greater share of the burden of providing
development finance -- and, indeed, under this proposal, they
would do just that.

They are shouldering their burden in IDA -

and I believe that is another compelling argument for continuin
our participation in the agency.
Other cOtmtries put up three dollars for every two the Uni·
States provides to IDA.

This does not include money they give

in addition to their pledges, nor does it include funds which
the World Bank transfers to IDA out of its yearly net earnings ~!:
The Bank transferred $75 million out of fiscal 1968 net earningn

- 5 c~ared

with only $10 million the previous year.

I am very

pleased that the Bank has increased its contribution to IDA.
I do not foresee a decline in such transfers.

On the

contrary, should conditions permit, transfers from net earnings
over the 1968 level would be in order.
~esident
~fore

I am assured by the

of the Wocld Bank that he will support this objective

his governing board.

In addition to burden-sharing in amounts of financing,
IDA assures burden-sharing in terms of financing.

Because of

IDA's uniform repayment terms, all donor nations assist on
t~

same concessionary terms.
As a multilateral agency, IDA offers other important

advantages that are well-recognized by your committee:
-- the objectivity of an international institution
-- the broad and collective experience of its member nations
-- the opportunity to exercise leadership in the development
effort.

IDA is also strengthened by its direct affiliation with
the World Bank.

Because it is directed by the same President,

guided by the same Board of Directors and Governors, and utilizes
the same expert management and staff, we can be certain that its

nmds will be expended prudently.

Applications for IDA credits

- 6 -

must meet the same strict standards set for requests for World
Bank loans, and are given the same care ful appraisal.
IDA credits, like
currency.

t~le

Moreover

Bank's loans, must be amortized in hard

The only esser.tial difference is that IDA provides

funds in cases where

·~he

borrowers need more favorable foreign

currency repayment te .~ms than the Bank can provide.
I am fully satisfied that the terms of the proposed
replenishment will protect our balance of payments.
Under the agreement, if our current payments imbalance
persists, we will provide in cash until fi.scal 1972 only that
part of our contribution which is expended for IDA-financed
purchasing in the United States.

Furthermore, this arrangement

would continue after that until other contributors' shares in
this replenishment are exhausted.

In other words, the agreemen

provides that the United States' contribution -- to the extent
required for purchasing in other countries -- will be postponed
Instead, other countries will accelerate their contributions
during this period.

I should point out that this arrangement

would not affect IDA and the World Bank's traditional system
of international competitive bidding.

- 7 The budgetary cost of our contribution will be less than
t~

amount of our pledge over the first three years.

IDA calls

on contributors for cash only when it needs funds to meet
disbursements on its credits, and the calls are on a pro rata
basis.

Because of the lag between credit commitments and

disbursements, calls for cash would be only a fraction of the
p~dges

for some time.

And let me repeat that: we would be

called on for even less than our pro rata share should we
continue to have payments difficulties, thus reducing even
further the budgetary impact during the early years.
My final point is this: the l8-nation replenishment
agreement cannot become effective until the United States agrees
to make its contribution.

Thus, the future of IDA depends

squarely upon Unites States action.
The first step in the replenishment was completed last
~ar

when the replenishment resolution of the Board of Governors

received the required two-thirds vote of the 102 member' countries.
However, the U. S. Governor could not

vot~

bec9.use

not comple,te action on the proposal last year e

C:'r~grBss

dld

Our country is

the only contributing nation that has not approved the resolution.
The second step in the replenishment is approval of the
agreement by at least twelve countries whose contributions would

- 8 -

total $950 million of the proposed $1.2 billion total.

Eleven

countries whose combined contributions would be $472 million
have completed action to fulfil their part of the agreement.
Therefore, if the United States agrees to make its contributioo
of $480 million, the second replenishment will be effective.

On the other hand, if we withhold our contribution, the
replenishment cannot take effect.

Our approval can be expectec:

to bring prompt and favorable response from those countries
which have approved the resolution but have not acted on their
pledges: Belgium, France, Italy, Japan, Luxembourg, and South
Africa.
Because the delay in obtaining additional funds has
threatened to suspend IDA lending, several countries are
advancing funds against their pledges.

Because of their actw

IDA has been able to approve additional loans.
Other nations have shown their confidence in the work ani.
future of IDA by approving the replenishment agreement -- and l
in some instances, going a step farther and advancing funds.
I believe that failure to approve the United States pledge
would be a very serious setback -- not just to IDA, but to th
entire concept of multilateral assistance we have so vigoroUS
encouraged.

- 9 H.R. 33 would authorize the appropriation of $480 million
for the U. S. contribution -- without fiscal year limitation,
with the full amount remaining available until expended.

The

U. S. letter of credit this fiscal year and in each of the next
two fiscal years, would be $160 million.

We would request funds

for this year's contribution as a supple~nta1 item.

There

would be no budgetary expenditures until drawings are made.
The future of the International DevelOpment Association
and perhaps even of the whole concept of international cooperation
for development -- now depends upon the United States.

If we

want IDA to continue in the role we envisioned for it as a
strong and effective helper to the less-developed countries,
we must renew our support for it.

By so doing we will also

re-affirm our belief that nations have a common responsibility
to work together in solving the world's economic problems.
I hope the Committee will act favorably on H.R. 33, and
will report it promptly to the Senate.

Thank you.

'}'RE:ilSURY DEPARTMENT
Washington

EXCERPTS FROM REMARKS OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY, BEFORE THE EXECUTIVE
COMMITTEE OF THE AFL-CIO, GREENBRIER HOTEL
WHITE SULPHUR SPRINGS, WEST VIRGINIA
TUESDAY, APRIL 15, 1969, 6:30 P. M.

At the outset, let me recall Samuel Gompers' response
when he was asked, "Exactly what do you want for the American
working man?" His reply, as you well know, was: "More!
More! More!
Within the bounds of reason and fiscal prudence, so do I.
And so does the entire Nixon Administration. However, we
don't want it to stop with labor. We want more -- and more
and more"-- for every segment of our population.
This evening, I want to discuss the most serious obstacle
to achieving more and more and more for all Americans. You
know very well that I'm referring to inflation -- to that
insidious enemy of prosperity that riddles the economy and
threatens the pay envelopes and living standards of all of us,
including, labor.
President Nixon and the economic and financial policy
team I ):,ep"resent have assigned the defeat of inflation
the highest priority.
In all candor, an insidious inflation is close to having
our great economy by the throat. But I assure you of my
deep conviction, shared by the others who advise the President
in such matters, that for the task of breaking the grip there
is strength to spare' in both the economy and the people
who make it go. We should not panic. But neither should we
underestimate, as has happened in the past, the diverse and
persistent forces with which we are dealingo
I do not really believe that labor leaders like yourselves
need to be reminded of labor's stake in a successful outcome of
the fight against inflation o Nonetheless it is instructive to
contemplate for a moment what has happened to take-home pay
since 1965
There is broad agreement that 1965 was the year
in which inflation began to get away from us
0

K-60

- 2 Looking at data from the Bureau of Labor Statistics we
find that in terms of constant dollars -- meaning what the
money will buy -- the spendable average weekly earnings of
production and non-supervisory workers (in private non-agriculturE
employment and with three dependents) climbed steadily through
1964, when it stood at $76.38.
But between 1965 and 1968 as inflation began to d 0 its
work, the figures for these same earnings level off, holding
for the four years at an average of $76.42 in a range between
$78.13 in 1967 and $78.61 in 1968.
Now I fully realize that these data are but one measure
of the problem but they are representative of what has happened.
They are simply not consistent with the reasonable and feasible
goal of steadily improving fortunes of American workers in
a healthy, soundly expanding economy.
They are a measure of the trouble inflation has caused and
a signal of deterioration to come if we do not act with
prudence and firmness -- above all with firmness.
And I would remind you that the figures I have cited tell
nothing about what is happening in that sector of the labor
force where unemployment is highest because the potential
workers in it lack the skills that spell a steady job.
Familiar, too, are what inflation does to the kind of savings
that are most commonly made by low and middle income families.
Under present circumstances they are lucky if they get the
same value out that they put in, much less realize a
legitimate profit from letting others use - their- money.
._As I have so often said, this administration has made
up its mind to slow inflation down significantly and to
show progress on the problem this year. The fiscal tool
at hand for this purpose is increasing revenues and lowering
expenditures in order to exert some spending restraint
by the F:deral ~ver~ent on an over heated economy.
~he Pres1den~ sa1d:
The Government must be willing to
1mpos: ~pon 1tself the same new discipline that inflation
and r1s1ng taxes have imposed upon the American wage
earner and his family."

- 3 -

You gentlemen may have noticed that the Nixon
some quarters of
Administration has been accused in
too much talk about intentions to solve problems and too
little action to get on with the actual solutions. It
is not really a very perceptive criticism ,but in any case
I would argue that it certainly has no merit with regard
to fiscal or budgetary matters.
This administration intends to live within its
means.

The first order of business in our battle with
inflation is to assure a strong budget surplus
This
requires extension of the income tax surcharge, plus
carrying out the President's proposed budgetary reductions.
0

The budget proposals call for a total reduction in
expenditures of $4 billion in fiscal 1970 from the
revised budget inherited by the Nixon administrationo
Military cuts account for $1.1 billion of total savings
Other sample reductions include: $185 million in foreign
aid spending, $140 million in outlays by the Atomic Energy
Commission, and the space program, $345 million in
agricultural and natural resources outgo, $420 million in
postal and transportation budgets, and $150 million
from other programs
0

- 4 There are also readjustments in projected human resources
spending. By paring judiciously and reorganizing to gain
efficiency we have managed to budget $390 million less for these
programs than was projected. Bear in mind, however, that the
1970 budget provides for an increase of $6.5 billion over
196Y in domestic progra~s.

These proposals will be submitted to Congress and, of
course, are subject to disposition by your elected Senators
and Representatives.
While projecting revenues is an inexact science, we
expect a budget surplus of at least $5.8 billion, the largest
in eighteen years and the fourth largest in our history.
As the President said, we believe a surplus of
this size is a clear signal that we are getting our
house in order.

A second tool which will assist us in our efforts to
control inflation, will be a monetary policy pointed toward
restraint, which will work in harness with fiscal policy.
Toward this objective, the Federal Reserve Board recently
further limited expansion in the supply of money and credit
by again raising the discount rates, and as a new step raising
reserve requirements of member banks.
The efforts of a restrictive monetary policy already had
been reflected in slower growth in bank credit and the money
supply in the first quarter, as compared with a very strong
increase in the monetary aggregates during 1968.
There is no doubt in my mind that the economy can take
this strong medicine. Nor should you doubt that we are sincere
about moving to stop it -- to let the surcharge die -- as soon
as an end of the Vietnam War, or other changed factors, will
permit. Meantime, however, we would be derelict indeed if we
did not insist that the medicine be swallowed. The alternative
to curbing inflation, which is simply a further spiral ending
in a "bust" would be catastrophic.

- 5If that happened, efforts to solve the social problems
of poverty, urban blight, unequal opportunity and all the rest
would simply go glimmering. Indeed these problems are one
reason we are in such deadly earnest about curbing inflation.
It is only from the platform of a healthy economy that effective
social improvement programs can be launched with any real hope'
of success.
Now before I speak of what we propose to do on reforming
the tax structure, let me touch briefly on the prominent
question of whether we can throttle down inflation without
throwing people out of work. My answer here is that if we keep
our rierve in doing the things that mus t be done, and stressing
that weare talking about temporary measures, we think we can
bring it off without a significant or substantial rise in
ul!l.employment.
Of one thing I am convinced: Unless we do succeed
in bringing inflation under control this year the problems will
increase to the point where it can only be changed at a very heavy
cost in terms to unemployment.
I'would point out that labor is generally scarce these
days and that a fair amount of the time would pass before
~ployers, having acquired and trained a work force. would
lay workers off. Of course, my view is well known that the
,real e:lYlployment problem is not in numbers ,but their
distribution and' in the skills which the economically
disadvantaged need to be taught if we are truly to progress in
this field.
And now for a word about taxes, which may be singularly
appropriate since some of you may have less than four hours
in which to send a certain piece of mail, check enclosed, to one
of my employees.
There are'many, including some members of Congress, who
believe that for reasons of equity and justice,tax preferences
should be closed before, or coincident with, extending the
surcharge.

- 6 -

We agree, equity and justice demand that preferences be
closed. But this is a very tough thing to do.
To repeat a well known phrase, "One man's loophole is another
man's living." Permanent revision of the tax laws is a
long, tedious process, and it cannot and should not be considerec
an economic substitute for the extension of the surtax.
In terms of priority, our mission is simple: in putting
the needs of the nation first, we must have the surcharge now,
before it expires. At the same time we will begin the arduous
task of revising our tax structure.
Let there be no mistake in the minds of the American
people: As our tax laws stand today, unfair burdens are
imposed on some, whil~ special preferences granted to others
are just as inequitable. We know this, and we intend to do
something about it.
This administration. working with the Congress, is
determined to bring equity and fairness to its tax code. Our
goal is meaningful reform legislation in this session of Congresl
President NixQn will send a special Message to Congress
very shortly, o~tlining in general terms the scope of our
reform proposal~. Next wee~ the Treasury will present those
proposals, in detail, to the Congress.
While I cannot go into specific details of these proposals,
let me touch upon a few areas the Treasury staff has been
intensively studying since January.
There have been many reports about a Treasury plan to
assure that no wealthy person can escape paying his fair share
of taxes. These reports are true.
The proposal being looked at for a tax on persons with
large amounts of currently sheltered income, would place a 50
percent ceiling on that amount of an individuars total income
that could enjoy tax-preferred status.
The belief is that our proposal limits preferences while it
also takes a giant step toward simplicity and equity.

- 7 There are also other areas under study, including the
problems of allocation of personal deductions, the tax treatment
of conglomerate mergers, the abuse of the special tax
exemption for small corporation~, exempt organizations, including
private foundations, the rules affecting charitable deductions
and the tax treatment of mineral production payments.
Now, let me make it as clear as one can, this brief
recital of areas under careful scrutiny since January is not
necessarily an outline of what will be included in the President's
tax reform proposals announced later this week. It does
indicate the breadth of our studies, and it means that these
and many more areas will all be dealt with during the course of
the coming months.
I think it is appropriate here to point out that the
revenues derived from possible changes I have described would
probably make possible the extension of some benefits to
taxpayers in the lower and middle income brackets. We have under
intensive study several proposals to lighten the tax burden
of as many of these people as we can, and in the course of the
next few months our proposals in this area will be made public.
Our mission is to keep faith with the American people.
We will not promise what we cannot deliver. We are committed
to take every step necessary to protect the wage earner, the
farmer and businessman. We will take every step necessary to
protect real income from erosion.
Only a combined policy of a strong budget surplus, and a
coordinated monetary policy of restraint, can now be effective in
battling inflation. This is fundamental, and as President Nixon
has said on many occasions, we intend to deal with fundamentals.
I thank you.

000

STATEMENT BY THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE
THE HOUSE COMMITTEE ON BANKING AND CURRENCY
10:00 A.M., THURSDAY, APRIL 17, 1969

Mr. Chairman and Members of the Committee:

I want to thank you, Mr. Chairman, and the other members
of the Committee for giving Administration witnesses an early
opportunity in these hearings to express our full support for
legislation to regulate one bank holding companies and to
recommend enactment of H. R. 9385.

My brief remarks will be

followed by more comprehensive statements by Under Secretary
of the Treasury Walker and Assistant Attorney General McLaren.
H.R. 9385 is preventive legislation.

It would reasonably,

but effectively, stop a trend toward the merging of banking

and corrrrnerce.

This trend, just now developing, threatens to

change the nature of the American private enterprise.

Our

economy could shift from one where commercial and financial
power is now separated and dispersed into a structure dominated
by huge centers of economic and financ ial power.

Each would

conSist of a corporate conglomerate controlling a large bank,
or a multi-billion dollar bank controlling a large nonfinancial
conglomerate.

,;. 2 -

H.R. 9385 has the strong endorsement of the President,
as well as the support of the Treasury Department, the Bureau
of the Budget, the Justice Department, the Council of Economic
Advisers, and the three Federal banking agenc ies .
President Nixon, in his statement of March 24, said:
"Left unchecked, the trend toward the combining
of banking and business could lead to the formation
of a relatively small number of power centers
dominating the American economy.

This must not

be permitted to happen; it would be bad for banking, bad for business, and bad for borrowers and
consumers.
"The strength of our economic system is
rooted in diversity and free competition; the
strength of our banking system depends largeLy
on its independence.

Banking must not dominate

commerce or be dominated by it."
Bank holding company legislation dates to the 1930s.
The Banking Act of 1933 defined a bank holding company as a

company that owned or con tro lIed 50 percent of one bank.
Inadequacies of the early legis lation resulted in the Bank
Holding Company Act of 1956, which provided the first

- 3 comprehensive Federal regulation of all corporations holding 25
percent or more of the stock of two or more commercial banks.
For a decade, the 1956 Act worked satisfactorily.

The

117 one-bank holding companies in existence when the Act was
passed were increased by an average of 40 per year, and in
most cases these were small banks.
By

the end of 1968, however, the rate of tormations had

tripled -- bringing the number of one-bank holding companies
existing and proposed to about 800.
the size of the banks involved:

Even more significant is

these 800 controlled nearly

a fourth of all commercial bank depos its in the nation
whereas the small one-bank holding companies

existing in

mid-1965 accounted for only one-twentieth of the total.
In 1965, more than 80 percent of the banks owned by
existing one-bank holding companies had total deposits of less
than $30,000,000.

In 1968, however, nine of the nation's

twelve largest banks -- with deposits ranging from $6 billion
to over $20 billion -- announced their intention to create
one-bank holding companies.
Clearly the situation has changed markedly in just the
past year.
Many bankers feel that they are threatened with being
taken over by conglomerates.

Businessmen and industrialists

;.. 4 -

are equally concerned.

Their fear is that in the current

merger climate, domination of their assets by huge bank holding
companies could become a reality.
unfortunately, the fact is that whoever wins this battle,
our free enterprise system will be the loser.
The proposed Bank Holding Company Act of 1969 would
rebuild the wall separating diverse economic interests.
the legislation:

The Bank Holding Company Act of 1956 would be
amended to extend Federal regulation of bank
holding companies to those companies which
control one bank.
All corporations which have affiliated with
banks since June 30, 1968 would be required to
confine their activities to the financial,
fiduciary or insurance functions specified in
the 1956 Act.
Activities which are bank-related would be
decided by a unanimous agreement of the three
appropriate bank regulatory agencies, the Federal
Reserve Board, the Federal Deposit Insurance
Corporation and the Comptroller of the Currency.

Under

-5 The proposed legislation is in the best inerests of an
independent banking system and a free, competitive economy.
This Administration believes the approach contained in
this bill is fair and workable.
it full support.

000

I urge the Congress to give

SfATIMENI' BY THE OONORABLE CHARLS E. WALKER
UNDER SECRETARY OF THE TREASURY
BEFORE THE OOUSE Ct»1IITEE ON
BANKING AND CURRENCY
10:00 A.M., Thursday, April 17, 1969

Mr. Chainnan and Members of the Conuni ttee, I want to thank
you for the opportunity to participate with Secretary Kennedy and
Assistant Attorney General Mclaren in presenting the Administration's
position on Federal regulation of one-bank holding companies.
As the Secretary emphasized, our bill has one simple purpose:

to draw a fair but finn line between banking and corronerce.
Conceptually, this may be relatively easy; in practice there are
many complexities.

Let me describe some of those complexities in order to clarify
the logic of the provisions of H.R. 9385.
Inasmuch as no one proposes to prohibit the formation of onebank holding companies, but only to regulate their acquisitions,

the first problem lies in defining the appropriate types of activities
or ftmctions for such corporations.
Our view is that the essence of banking today is the purveying
of financial and related services.

Clearly, banking in 1969 involves

much more than the acceptance of deposits and the granting of loans.

Beyond fundamental definitions is the question of how far
Congress should go in spelling out the scope of these financial and

K-62

- 2 related functions in legislation, as opposed to delegation of
authority to the banking agencies.

We believe that the Congressional

mandate should be flexible and relatively broad, as it was in the
1956 Act.

On. the other hand, the powers granted to the banking

agencies would be significant and therefore should be rather clearly
circumscribed.
Closely related to the problem of definition is the problem
of administration - - which agency or agencies should be authorized
to carry out the wishes of Congress ? Should the authority be
centralized in one agency, as in the original Act? Or should the
authori ty be dispersed in the usual manner among the three Federal
banking agencies?
The advantage of the first approach would be absolute uniformity
of standards and no danger that anyone Federal agency could ''play
off" the others with extreme interpretations of the intent of Congress.
On the other hand, the granting of full administrative authority over

all bank holding canpanies -- one-bank as well as multi-bank -- to
one agency would in effect result in a significant shift of jurisdictional authority among the three Federal banking agencies.

Perhaps

some such shifts are desirable; if so, they can be considered later.
We believe that this bill should be confined to the simple purpose
stated earlier.

- 3 -

The approach we recommend would result in uniformity of
standards while still retaining the traditional dispersed approach
to Federal bank supervision.
Still another problem relates to competitive and public interest
factors in administering the legislation.

Certainly no affiliations

should be permitted which would tend to create a monopoly or
substantially lessen competition.

Nor should the affiliates of

bank holding companies be permitted to engage in "tie-in" sales
or in any line of activity which would be harmful to the public
interest.
Our legislation contains explicit provisions dealing with
competition and the public interest.

These were worked out with the

close cooperation of the Department of Justice.

Mr. Mclaren will

discuss these provisions in his testimony.
Finally, we have the question of forcing complete divestiture
of non-financial activities or enacting some sort of "grandfather
clause," a cut-off date for di vesti ture

requirements.

Inasmuch

as this is basically forward-looking legislation, designed primarily

to prevent future concentrations of economic and financial power,
we believe the case for a "grandfather clause" to be very strong.

Up to this time, the mixing of banking and conunerce has not occurred

to any significant extent.
Let me now turn to the specific provisions of H.R. 9385.

- 4 -

Defini tion of a Bank Holding Company
H.R. 9385 would tighten the definition of bank holding companies
by including --

any company owning 25 percent or more of the shares of

any

ccmnercial bank.

Present law applies only if

two banks are awned.

-- any

~any,

regardless of the percentage of stock owned,

which has the power directly or indirectly to direct or

cause the direction of the management or policies of any
bank.

There is no similar provision in present law; sane

confusion has arisen because \D1.der present law the Federal
Reserve Board has authority to detennine whether a
company controls 25 percent of the stock of a bank.
- - partnerships, by amending the Act's definition of "company"
to include partnerships; partnerships wereexcl~d \D1.der
the 1956 Act.
companies whose stock is held in trust except for personal
trusts and those tenninating within relatively short periods
of time; stock held in trust was excluded \D1.der the 1956
!\ct, and even when the rules were tighened in 1966, they
did not go as far as our bill.

- 5 -

This tightening of definition speaks for itself.

Obviously,

the definition had to be extended to include one-bank holding
companies if the basic loophole in the 1956 Act is to be closed.
In addition, it is clear that substantially less than 25percent stock ownership represents control in many larger banks.
To be fully effective, therefore, the legislation must pennit the
banking agencies to define something less than 25 percent as
effective control in particular cases.
The new provisions relating to partnerships and stock held
in trust will help further to assure that the Act serves its

fundamental purpose of drawing a line between banking and commerce.
Activities of Bank Holding Companies
Section 4(c)8 of the 1956 Act pennits registered bank holding
companies to acquire "shares of any company, all the activities of
which are of a financial, fiduciary, or insurance nature and which
the [Federal Reserve]

Board. . . . . . . . . .. has detennined to be so

closely related to the business of banking - - as to be proper
incident thereto ..... "
We propose to amend Section 4(c)8 to pennit registered bank
holding companies -- both one-bank and multi-bank -- to acquire
shares in any company engaged exclusively in activities which have
been detennined "(1) to be financial or related to finance in
nature or of a fiduciary or insurance nature, and (2) to be in the

- 6 public interest when offered by a bank holding company or its
subsidiaries."
Is this definition broader or narrower than the one it
replaces?

The key words - - "financial," "fiduciary," and

"insurance" - - are included in both the existing and proposed
statutes.

The addition of the phrase

"or related to finance in

nature"'; could be interpreted as implying a broadening of functions.
But the new language including the public interest as

specific

factor to be considered by the acbninistering authority is in the
direction of tightening the definition of appropriate related
activi ties.
Whether dropping the clause, " . . . so closely related to
the business of banking . . . as to be proper incident thereto
. . .," represents a tightening or broadening of the definition
is impossible to say - - simply because the ''business of banking"

has not been clearly defined in law.

If, as indicated earlier

as our view, the business of banking relates to purveying a
relatively wide range of financial services, then the range of
activities permissible under Section 4(c)8 would not be broadened
significantly by enactment of H.R. 9385.

But if the business of

banking is interpreted narrowly, significant broadening might well
occur.

- 7 As a matter of practice, banks in recent years have been

providing new types of financial services, and, if free to do so,
are likely to continue.

Thus the question before the Conmittee

is not that of judging one definition to be broader than the other,
but of deciding whether the public interest will be served by
authorizing banks, either directly or through affiliates and
subsidiaries, to offer a wide variety of financial and related
services to the public.
We think that such authority, properly circumscribed, would
result in competition that would be good for the economy and good
for the user of financial services.

We also believe - - as Mr.

Mclaren makes clear in his statement -- that H.R. 9385 contains
fully adequate safeguards to assure that competition, not

concentration, will be the result of the legislation.
Amrinistration of the Act
In contrast to other postwar bank regulatory measures,
~stration

of the Bank Holding Company Act of 1956 was not

dispersed among the three Federal banking agencies, but was centered
in the Board of Governors of the Federal Reserve System.

Although

our proposed bill would leave the approval of bank acquisition by
bank holding companies in the Board, the authority over financial
and related acquisitions (in Section 4(c)8) would be administered
by the three agencies under guidelines unanimously agreed upon by

the agencies, each with one vote.

- 8 How would this procedure work?

In effect, Congress would direct the representatives of the
three agencies to devise a set of guidelines to be followed by
each of the agencies in approving or disapproving applications by
bank holding companies for acquisition or de novo creation of new

affiliates.

In addition to the guidelines relating to competitive

and public interest factors, the agencies, through an interagency
ccmnittee, would be expected to draw up a list of what it agrees·
are appropriate financial and related activities -- consistent, of
course, with the mandate of the Act.
Once the guidelines were agreed upon, the Comptroller of the
Currency would have full authority to administer Section 4(c)8 -within the guidelines -- for holding companies tmder the jurisdiction

of his office. The Federal Reserve Board and the Federal Deposit
Insurance Corporation would have similar authority with respect to
holding companies under their respective jurisdictions.
In effect, our approach to administering Section 4(c)8 would
place the regulation in the three agencies together, with supervision
in each one, depending on the class of bank owning the predominance

of assets in the holding company.
This approach seems to us to have special advantages in meeting
the problems involved in limiting the activities of affiliates of bank
holding companies.

- 9 -

In the first place, it is recognized that the mandate in
both the 1956 and the proposed 1969 Acts is broad, thus granting
significant powers to the banking agencies.

The requirement of

unanimous agreement on the types of activities permitted under
the legislation should help prevent extreme interpretations of the
mandate that would permit banks, in effect, to cross the line
between banking and commerce.

Surely no one can argue logically

that a procedure which requires the unanimous agreement of three
agencies is more permissive than one which requires the approval
of only one agency.
Furthermore, each agency would be required to report to
Congress each year with respect to its administration of this
provision.
~

Your Committee could therefore maintain surveillance

to the administration of the Act and take corrective steps if

the interpretations of the agencies seemed to be inconsistent with
Congressional intent.
Some final words about the rationale supporting the
Administration's proposal for administering the legislation:
In the years since World War II, Congress in enacting bank
regulatory legislation has almost without exception provided for
dispersal of the regulatory authority among the three Federal banking
agencies, depending upon the type of bank.

The Bank Holding Company

Act of 1956 was the single exception to that approach.

- 10 Advocates of dispersed supervisory authority over b~2 argue that
it prevents the concentration of a huge amount of power (over $500
billion in financial assets) in one Government agency.
~tain

They also

that concentration of all regulation in one agency can,

~ending

on the attitude of the agency heads, result in regulation

that is at times arbitrary, burdened with red tape, and in the long
run stultifying to what should be a dynamic industry.
Proponents of a single-agency approach to Federal bank regulation
point to waste, overlapping and duplication of effort.
misses the point.

This argument

Some overlapping and duplication of effort - - and

there is not much - - are a small price to pay if better regulation is
the result.
We agree that the Federal bank supervisory arrangements need
review. We shall study the arrangements and, if changes seem necessary,
take appropriate steps.

But we submit that any desire to change the

basic regulatory structure should not be allowed to shape the form of

this legislation which has but one simple purpose.
p~osal

The Administration

keeps this basic form intact.

But even though the basic form of the structure is maintained, the
requirement for approval by three agencies assures uniformity of
standards and therefore avoids the danger that one agency will get out

of step with the others.

- 11 The "Grandfather Clause"
The figures which Secretary Kennedy presented in his introductory
statement demonstrate that the mixing of banking and commerce which
H.R. 9385 is designed to stop had not proceeded very far by 1965.
At that time, the great majority of one-bank holding companies in
existence involved small banks.
No ins tances of abuse in cormection wi th these "traditional"
one-bank holding companies have been brought to the attention of the
regulatory agencies.

On the contrary, the banking agencies are

convinced that the quality and quantity of financial services available
in many small conmnmities have been enhanced as a result of the existence
of these companies.
We therefore recommend enactment of a "grandfather clause, It and
we suggest June 30, 1968, as the appropriate cut-off date.

This date

is not so far back in time that forced divestitures would disrupt the
operations or threaten the viability of most of the smaller, "traditional"
one-bank holding companies.

On the other hand, the date is early

enough to include the great majority of new companies whose organization
h~

pushed the total assets involved to such a high level.
Future activities on the part of the conglomerates which acquired

banks before July 1, 1968 - - and therefore could retain them Wlder the
lI

grandfather clause" - - would be restricted to the lines of business or

activities in which they were engaged on JWle 30, 1968.

This is a

- 12 -

stringent restriction; in effect it means that any conglomerate which
wishes to continue to diversify -- and many of them do -- would be
forced to dispose of its bank.
Other Provisions
There is no intention of using H.R. 9385 as a vehicle to permit
bruUs or their affiliates to engage in activities hitherto prohibited
by law.

The bill in no way expands the authority of banks or banking

affiliates to enter the securities business, operate mutual fmds or
underwri te revenue bonds.
The other major provisions of the legislation pertain to competitive
fac.tors to be considered by the banking agencies in administering the
Act and implications for enforcement of the anti-trust provisions of
the Shennan and Clayton Acts.
I turn now to Assistant Attorney General McLaren for a discussion
of those proviSions.

TREASURY DEPARTMENT
;
WASHINGTON, D.C.
April 16, 1969
FOR IMMEDIATE RELEASE

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
~2,700,000,000,
or thereabouts, for cash and in exchange for
Treasury bills maturing April 24, 1969,
in the amount of
$ 2,703,500,000,
as follows:
91-day bills (to maturity date) to be issued April 24, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated January 23,1969,
and to
mature July 24,1969,
originally issued in the amount of
$1,097,452,000,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
or thereabouts, to be
dated April 24,1969,
and to mature October 23,1969.
The bills of both series will be issued on a discount basis under
competitive and noncornpetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturi ty value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Monday, April 21, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec"imals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application the refor.
Banking institutions generally may submit tenders for account of
CUstomers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
S~bmit tenders except for their own account. Tenders will be received
Wlthout deposit from incorporated banks and trust companies and from

K-63

- '1. -

responsible and recognized dealers in investment securities. Tender
from others must be accompanied by payment of 2 percent of the f~e
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated ban
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public anno~
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Sec~tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tende
for each issue for $200,000 or less without stated price from any 011
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
wade or completed at the Federal Reserve Bank on April 24, 1969, ir
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 24, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be mad
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are exclude
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereund
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which th
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and th
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 050~rancb

TREASURY DEPARTMENT

WASHINGTON. D.C.
Ap r i 1 15, 1969
TREASURY STATEMENT IN RESPONSE TO QUERIES
CONCERNING SOUTH AFRICAN DRAWING ON THE IMF

As announced today by the International Monetary Fund,
South Africa is drawing its gold tranche of $66 million
from the IMF.
The United States supports the policy of the IMF that
drawings by countries under their gold tranche positions
in the Fund should be virtually automatic, and full legal
automaticity for such drawings is expected to enter into
force shortly by amendment to the Artic les of Agreement
In the light of these circumstances and policies, the U.S.
raised no objection to this drawing by South Africa, and
the U S • Executive Direc tor agreed to the Fund proposal that
$46 million in dollars be included in this drawing, in line
willi the Fund's current practice for currency useo
0

At the same time, this particular use of the Fund's
resources by a country that has been in a basically strong
payments position with rising reserves may raise certain
questions as to the consistency of the drawing with the
general understandings heretofore associated with use of
the gold tranche and with the broader objectives of the
I~. Naturally, we will be observing further developments
~th respect to the use and repayment of this drawing with
these considerations in mind.

000

K-64

TREASURY DEPARTMENT
;
==

WASHINGTON. D.C.
April 17, 1969

- IMMEDIATE RELEASE
TREASURY'S MONTHLY BILL OFFERING
FOR

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
~1,500,OOO,000,
or thereabouts, for cash and in exchange for
Treasury bills maturing
April 30, 1969,
in the amount of
~1,701,60l,000,
as follows:
276-day bills (to maturity date) to be issued April 30, 1969,
in the amount of $500,000,000,
or thereabouts, representing an
additional amount of bills dated January 31,1969,
and to
mature January 31, 1970,
originally issued in the amount of
$1,000,177,000,
the additional and original bills to be
freely interchangeable.
365-day bills, for $ 1,000,000,000,
dated April 30, 1969,
and to mature

or thereabouts, to be
April 30, 1970.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
~5,OOO, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Standard
time, Thursday, April 24, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three dec'imals, e. g., 99.925. Fractions may not
be used.
(Notwithstanding the fact that the one-year bills will run
for 365 days, the discount rate will be computed on a bank discount
baSis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms
and forwarded in the special envelopes which will be supplied by
Federal Reserve Banks or Branches on application therefor.

Banking institutions generally may submit tenders for account of
CUstomers provided the names of the customers are set forth in such

tenders.
K-65

Others than banking institutions will not be permitted to

- 2 submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announc
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rej ec tion the reof. The Sec~ tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
,uade Ot" completed at the Federal Reserve Bank on April 30,1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing April 30, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0oO~ranch.

TREASURY DEPARTMENT
t

~NASHING·rON.

D.C.

April 18, 1969

FOR A. M. RELEASE
FRIDAY, APRIL 18, 1969

TREASURY SECRETARY KENNEDY TO HEAu TieS, DELEGATION
T
\t'~·~·'·'T'I"/·:
Bu'''t'R
""'OtiEi"TORS
TO TENTH ,'~"~~l..,Tr·'..."'
, " I . .. L
(.c,.L
l~'-',
nL ' '.";~
U
V .t',.l~
INTEl' "FJJ.ir;:C :':..:-: I: ;~;Tr:u~~'_\:'I:r~T bANK
GUATEMALA CITY, G0ATEI'1,,\LA, APRIL 21-25
1.

Secretary of the Tceasury David M. l~nneJj ~ill head the
United States Delegation to the Tenth Annual Meeting of the
Board of Governors of the Inter-Anerican Development Bank (IDB)
in Guatemala City, April 21-25. As the Bank's U.S. Governor,
Secretary Kennedy will address the mec:cL."lg.·)n April 22.
The Secretary and
today from Andrews Air
Mexico, the party will
April 20 at 4:30 p.m.,

his party will leave Washington at 12 noon
Force Base. After a short stopover in
arrive in Guatemala City on Sunday,
EST.

Other members of the delegation as Temporary Alternate
Governors are:
Charles A. Meyer, Assistant Secretary of State
for Inter-American Affairs and U.S. Coordinator,
Alliance for Progress; Edward Clark, U.S. Executive
Director, IDB; Ralph Hirschstritt, Deputy to the
Assistant Secretary of the Treasury for International
Affairs.
Advisors on the delegation are:
Nathaniel Davis, U.S. Ambassador to Guatemala;
Reuben Sternfeld, Alternate U.S. Executive Director,
IDB; Dixon Donnelley, Special Assistant to the
Secretary (Public Affairs), Treasury Department;
J. Richard Breen, Director, Office of Central
American Affairs, Department of State; E. Jay Finkel,
Director, Office of Latin America, Treasury
Department; Ernest F. Chase, Office of Latin America,
Treasury Department.
K-66

- 2 -

The Inter-American Development Bank was founded in 1959,
with strong support from the United States and the
administration of President Eisenhower, to finance economic
and social development programs in Latin Anier-icH. Its
22 members include the United States and most independent
countries of Central and South America. In addition, a number
of other industrialized nations have made funds available for
lending by the IDB. As of September 30, 1968, the IDB
had approved, from all available sources, '+79 loans equal to
more than $2.6 billion.
Assistant Secretary of State Meyer will assume leadership
of the delegation upon Secretary Kennedy's return to Washington,
April 22.

000

TREASURY DEPARTMENT
;

WASHINGTON. D.C.

April 18, 1969
FOR RELEASE 11:00 A.M.,EST
FRIDAY, APRIL 18, 1969
NOTICE TO THE PRESS:
The Treasury Department and the British Embassy
jointly announced that the Chancellor of the
Exchequer, Roy Jenkins,

~ill

visit Washington at

the end of April to meet Secretary of the U. S.
Treasury David M. Kennedy for a general discussion
on financial and economic issues.

He will be

accompanied by Sir Douglas Allen, Permanent
Secretary of the Treasury.

000

TREASURY DEPARTMENT
Washington
FOR RELEASE 12: 00 0' CLOCK NOON
TUESDAY , APRIL 22 , 1969

STATEMENT OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY OF THE UNITED STATES AND
UNITED STATES GOVERNOR OF THE INTER-AMERICAN DEVELOPMENT
BANK, AT THE TENTH ANNUAL MEETING OF THE BOARD OF GOVERNORS
OF THE INTER-AMERICAN DEVELOPMENT BANK
GUATEMALA-CITY, GUATEMALA
TUESDAY, APRIL 22, 1969

I am delighted to meet with you today as new United
States Governor of the Inter-American Development Bank, and as
the representative of our recently inaugurated President,
Richard M. Nixon.
I am saddened -- as are all of you -- by the untimely
passing of Guatemala's Foreign Minister, the Pre sident of
the United Nations General Assembly, Dr. Emilio Arenales
Catalano
Dr. Arenales was' a dis tinguished leader of Guatemala, of
His death
deprives everyone, everywhere, of a devoted and tireless worke
in the cause of world peace.
our hemisphere, and of the entire world community.

Just prior to leaving Washington, I received a letter from
President Nixon, who has a deep, personal interest in the
work of the Inter-American Bank.
With your permission, I would like to read it to you.
"The forthcoming Guatemala City meeting of
the Board of Governors of the Inter-American
Development Bank will be the first such meeting
you will attend as United States Governor. It
is also the first such meeting since I have
become President of the United States. I would,
accordingly, appreciate it if you would convey
the following personal message to the Governors
from me:

- 2 -

"It is a pleasure for me to send my greetings
to this annual gathering of the Governors of the
Inter-American Development Bank. In its 10 years
the Bank has come to playa highly constructive
role in Latin American development.
"The positive effects of the Bank's lending
activities can be seen throughout Latin America.
As the resources available to the Bank grow, I am
confident that the Bank will make an increasingly
vigorous and effectiv~ contribution to the economic
and social development of the hemisphere.
"The Inter-American Development Bank stc;mds
as an outstanding example of multilateral
financial cooperation among the nations of the
Americas. I want to convey to you my best wishes
for continued success."
I join wholeheartedly in the president's expression of
confidence and support for the Bank. I am familiar with
its important contributions to hemispheric development and
its great potential for the future. I look forward to
assisting the officers of the Bank and my fellow governors
in guiding its progress.
I would like to organize my remarks today around a
relatively few points that seem important to me as one who
assumes his duties as a member of this board after an
extended period as a commerial banker. In summary, these
points are:
First, the multilateral banking approach to
development, as exemplified by the InterAmerican Bank, is sound and deserves further
emphasis. T underscore banking here, with the
emphasis on high standards and economic
performance by borrowing countries that that
term irr,plies.
Second, the economic development that the Bank
seeks to foster cannot be achieved in Latin
America unless inflation is contained -- nor
can the United States attain its economic
objectives if inflation is unchecked.

- 3 l'-

Third, a climate that permits private enterprise to
flourish, that encourages both domestic and foreign
private investment, is essential for balanced
economic growth.
And finally, development can succeed only within the
framework of a smoothly functioning world trade and
payments system. Prompt action to put into effect
the new Special Drawing Rights facility of the
International Monetary Fund is essential in this
regard.
Let me now expand on each of these points in turn.
The decade since the agreement establishing the Bank was
offered for signature has been marked by ever-closer
cooperation among nations to help developing areas achieve
their legitimate aspirations. The Inter-American Bank
exemplifies this willingness of nations to work together
to promote a better life for all of their citizens. The Bank
not only has served well the mutual interests of the
Mericas -- it has also been a model for institutions serving
the needs of other developing regions.
I returned only a few days ago from Sydney, Australia,
~ere I was privileged to participate in the second
annual meeting of the Asian Development Bank, which has made
significant progress since its founding in 1966. As you
know, the progress of the Asian Bank has been aided by
expertise and experience contributed by officials and staff
of the Inter-American Bank.
The multilateral approach to development financing -both world-wide and through regional banks -- offers great
hope for the future. Through this approach, nations large
and small, rich and poor, can work together effectively to
overcome the poverty, hunger, and despair that afflic ts
too many of our fellow men.
It follows, then, that my government places a high value
on multilateral assistance and encourages its increased use
by the economically-advanced nations.
At the same time, however, 'i,ve recognize that in some
cases there can be no substitute for .bilateral assistance,
which provides an important direct link between nations -lliereby promoting a greater understanding of one another's
problems and a helpful exchange of mutually useful knowledge.

- 4 In reviewing the progress of the Inter-American Bank -including the accomplishments discussed in the annual report
for last year -- I have been particularly impressed by two
points:
First, the growing ability of the Bank to tap
varied sources of capital
Second, the success of the Bank's efforts to
attract funds from advanced nations other than
the United States •.
Such diversification of the Bank's sources of funds is
important in mobilizing the maximum possible resources for
development.
In addition -- and I say this with complete candor -the Bank's capacity to tap funds from a variety of sources has
reduced international demands on the hard-pressed United
States capital markets at a time when my country is making a
determined effort to solve its balance of payments problem.
I can assure you that this development is welcome
indeed.
The steady progress of the Bank since 1959 is a tribute
to its leadership. Dr. Felipe Herrera has served with
distinction as president of the Bank since its inception. He
has given generously of his wisdom, energy and talents, and
the Bank, its member countries, and our entire hemisphere, are
indebted to him for his outstanding service.
We all recognize that the popular concept of a financial
institution is frequently distorted. Are we a cold,
impersonal entity?
Not all!
I think the wisdom of the Bank's leadership is reflected
1n its deep-rooted concern for the most important element in
the development of a nation:
its people. Through carefully
selected investments in the economic and social fields,
the Bank strengthens the ability of the peoples of the
Americas to contribute more productively to the growth and
prosperity of the hemisphere. Thus, it helps to build the
essential human base on which economic progress depends.

- 5 The continuing efforts by the Bank to strengthen its
administrative procedures also demonstrate the foresight of
its leadership. These timely moves -- among which I include
the procedure established last year for systematic review and
appraisal of all aspects of operations -- will increase both
the effectiveness and effeciency of operations.
I would like at this point to suggest that the Bank would
benefit by giving greater weight to the economic performance
of borrowing countries. Borrowers would find it in their
own best interest to seek the Bank's objective appraisal of
their economic plans and progress.
Similar, I don't think it gratuitous to suggest that
the Bank should regard such rigorous appraisals as one of
its essential functions
0

I am certain that no one in this room today doubts that
a very crucial question for the Bank is simply this: are
our member nations taking adequate steps to avoid or to curb
inflation?
The countries of our hemisphere have learned the hard
way that inflation, if left unchecked, is a vicious enemy of
development and wildly dissipates its benefits.
The other side of the coin is, of course, the fact
that the achievement and maintenance of price stability
promotes economic justice and sound and sustainable growth.
In establishing goals for our national economies, each
of us must be concerned with the same essential elements -no matter what the size of our country or its stage of
economic development. These key elements are, of course:
a satisfactory rate of economic growth.
reasonable price stability.
reasonably full employment.
equilibrium in the balance of payments.

- 6 And, Gentlemen, lest you think that I'm seeking to lecture,.
without regard for my own country's problems, let me say
that although the United States continues to enjoy rapid
economic growth, we still face the critical problems of
inflation and balance of payments deficits.
I would be less than honest if I did not say that unless
we in the United States overcome these problems, all of our
other economic objectives will be endangered.
However, let me assure you, my fellow Governors, that
the United States is determined to solve the problem of
inflation. And, i~we solve that vexing problem, we will also
be well on the way to a solution of our international payments
imbalance.
President Nixon and his entire Administration are firmly
committed to taking effective action to check inflation and
to return our economy to the path of reasonable price
stability. We intend to achieve this goal through general
economic restraints that are fully compatible with the
maintenance of a high level of employment and our sy.stem of
free, competitive private enterprise. Here, I want to
add- perhaps gratuitously -- that private enterprise is the
dynamic element in our economy. Any actions that would
weaken it would be as dangerous to our future as would be
continued inflation.
Historically, Latin American governments have wisely
recognized that a flourishing private sector is vital to
over-all national development. Happily, foreign private
investors are actively seeking to harmonize their objectives
with the national goals and basic concepts of their host
countries -- particularly with respect t6 the fields they
se~k to enter, to active recruitment of local managerial
skllls, to association with local capital, and to good
corporate citizenship in general.
Latin America's industrial sector has been growing
faster than Latin America's gross national product as a
whole. This reflects many factors:
Changed investor attitudes.
New opportunities presented by economic
integration arran~emenrs_

- 7 The relaxation of financial controls made possible
by more stable conditions in a number of countries.
The increased ability of private enterprise to
draw on domestic sources of capital.
And the provision by foreign investors of financial
resources, advanced technology, and established
organizations.
Private enterprise, beth domestic and foreign, has
demonstrated its ability to stimulate increased economic
activity in Latin America.
I believe that those Latin American officials who
establish domestic policy should continually seek to
improve the climate for private enterprise, so that it can
add to its already significant accomplishments.
May I add that this search for a better climate applies
also to those officials who are concerned with the
international flow of private capital.
One very important way in which Latin
can help to facilitate international flows
trade and investment is by acting pr'omptly
agreement on Special Dr'awing Rights of the
Monetary Fund.

American governments
of capital for
to ratify the
International

The new Special Dr'awing Rights facility -- which should
be activated this year' -- will ser've the developing, as well
as the developed countr'ies. It will dir'ectly add to monetary
reserves in proportion to IMF quotas, and will provide the
liquidity needed for growing tr'ade and investment.
We should all be gr'atified that 11 of the members
of the Inter-American Bank have taken the necessary steps to
ratify the amendment. Some 45 countr'ies, holding more than
60 percent of the votes in the Fund, have completed
ratification. However, the amendment requir'es approval by
67 member countr'ies, holding 80 percent of the total voting
POwer. Since the SDR facility cannot be activated until
countries repr'esenting at least 75 p<.>rcent of the Fund 1 s
quotas indicate their readiness to partic ipate, I hope that
those Latin American nations which :l<lVC not yet completed
both steps will do so pr'omptly.

- 8 In closing, let me assure my associates on the Board of
Governors that the United States will continue to give its
strong support to the objectives of the Inter-American
Development Bank.
May I also say that we are prepared to listen -- to
look
and to learn?
We want to hear your views as to what you want to do
for yourselves -- and your beliefs about what we can do
together.
We earnestly seek your advice and solicit· your assistance
in finding solutions for our mutual problems.
As president Nixon has said, we seek "a new era of
cooperation, of consultation -- but, most important -- of
progress, for all the members of our great American family."
Thank you.

TREASURY DEPARTMENT
,.. ;;;,.---

;

=
WASHINGTON. D.C.

lOR RELEASE 6: 30 P.M.,
londly, April 21, 1969.

RESULTS OF TREASURY t S WEEKLY BILL OFFERING

'!be Treasury Depart~nt announced that the tenders for two series of Treasury
Inls, one series to be an additional issue of the bills dated January 23, 1969, and the
)ther series to be dated April 24, 1969, which were offered on April 16, 1969, were
t!pened at the Federal Reserve Banks today. Tenders were invited for $1,600,000,000,
',r thereabouts, of 9l-day bills and for $1,100,000,000, or thereabouts, of 182-day
lills, '!be details of the two series are as follows:

lANGE OF ACCEPlED
:()lPETITIVE BIDS:

High
Low
Average

91-dey Treasury bills
_...;.ma~t..;..;ur;:;..;i;:;..;ng....:.l-.;;;,.Ju.;;;.;1~y:---;;;2.;;;.4L.l....:1;;.;:9~6.;;;.9_ _

Price
98.445
98.436
98.439

Approx. Equiv .
Annual Rate
6. U52J
6.187~

6.175~

182-day Treasury bills
maturing October 23, 1969
Approx. Equiv ..
Annual Rate
Price
6.14s,;
!=J6.892 a 7
96.881
6.169~
96.884
6.164~

~ Excepting 2 tenders totaling $152,000.
78~ of the amount of 9l-day bills bid for at the low price was accellted
54~ of the amount of l82-day bills bid for at the low price was accepted

lVJTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

)1strict

!os ton
lew York
?hilade lphia
~leveland

Ucbmond
~tlanta

:h1cago
St. Louis
MinneapOlis
Kansas City

rallas
San Francisco

ronu.s

~lied

AcceEted
For
$ 15,285,000 $ 15,159,000
1,103,476,000
1,947,941,000
25,149,000
40,549,000
42,275,000
44,095,000
16,314,000
16,314,000
39,664,000
54,338,000
140,774,000
202,623,000
48,220,000
59,220,000
22,551,000
29,516,000
34,760,000
46,221,000
17,478,000
17,478,000
95 z161 z 000
154t.826z000

$2,62 (\,406,000

AIl;Elied For
$
6,834,000
2,035,137,000
17,879,000
35,017,000
6,308,000
34,924,000
141,462,000
34,155,000
21,619,000
21,790,000
11,679,000
135,386,000

$1,600,981,000 ~I $2,502,190,000

AcceEted

6,834,000

903.:;34,000
7.879,000
29,017,000
5.708,000
16,098,000
55,612,000
16,535,000
8,119,.000
17,290,000
11,679,000
24,466 ,')00

$1,102,571,000 ~I

Includes $387,372,1)0f) noncompetitive tenders acce-pted at the aver~ price :::>f 98.439
Includes $168,729,1)1)(\ n 0 ncompetit1ve tenders accepted at the average Ilrice of ~f).884
'nlese rates are on n bank discount basis. The equivalent coupon issue yield:; Are
6,36~ tor the 91-d8y bills, and 6.45~ for the 182-day bills.

TREASURY DEPARTMENT
£

WASHINGTON. D.C.
April 21, 1969
FOR RELEASE AFTER 10:00 A.M.

Tuesday, April 22, 1969

SUMMARY OF TAX REFORM PROPOSALS
The President has recommended repeal of the 7% investment
credit effective April 21, 1969. This means the credit will not
be allowable for orders placed on April 21, 1969. This repeal
permits his further recommendation of extension of the surcharge
at a reduced rate of 5% for the period January 1, 1970, to
June 30, 1970, instead of the 10% rate that is being recommended
for the balance of the current year. The repeal will provide
addi tional federal revenues for other imp')rtant tax measures in
the planning stage.
The following material is a brief summary of the tax
reform proposals presented by the Treasury Department to the
House Ways and Means Committee on April 22, 1969.
The net revenue change of the entire package will be
small -- the revenue increases of reform measures will be
largely offset by the revenue losses from the relief measures.
A table showing the overall revenue effects of the entire
package for the first full year and in the long run (1970 and
1975) is included.
THE PROPOSALS

The Treasury recommends a general restriction on the
net value of certain tax preferences in two respects:

Limit on Tax Preferences CLTP). A 50 percent ceiling would
be imposed on the amount of an individual's total income
Which could "nj 0'1 tax preferred status.
Total income for
this purpos(' '.I()ldd be determined --

- 2 (1)
(2)
(3)
(4)

By including appreciation in value of property
given to charity;
Before deducting intangible drilling expenses and
percentage depletion in excess of cost depletion;
Before deducting certain excessive farm losses;
Before deducting the excess of accelerated over
straight line depreciation on real estate.

The four preferences could not exceed half of total income.
There would be a $10,000 minimum amount of allowable preferences.
Thus, an individual with $100,000 of net business income, which
reflects a deduction of $200,000 of accelerated depreciation on
real estate in excess of straight line depreciation, would
have adjusted gross income of $150,000 (in effect, $50,000 of
the excess depreciation would become taxable).

A five-year carryover of disallowed tax preferences (an
averaging device) would restrict the effect of this limit to
persons who consistently have an excessive amount of these
preferences. A three-year transition period, establishing
the ceiling at 70 percent, 60 percent, and 50 percent, respectively, would phase in the limit gradually. When fully phased
~, the revenue increase will be
$80 million.
Allocation of Deductions. An individual with more than $10,000
of tax preferences would also be required to allocate his
itemized (non-business) deductions between taxable income and
the non-taxed or "allowable" portion of tax preference amounts.
For this purpose, tax preferences would also include interest
in state and municipal bonds and the excluded portion of longterm capital gains (50%). Thus, all itemized deductions could
no longer be applied entirely against taxable income where
there is also substantial non-taxable income.
The allocation will be phased in generally over a two
year period. Thus, in the first year, only one-half total
itemized deductions would be required to be allocated. When
fully phased in, the revenue increase will be $500 million.

3 -

To provide essential relief to persons In poverty, we
recommend a:

•

Low Income Allowance. An additional allowance would be granted
to generally insure that families at the poverty level would not
be required to pay any Federal income tax. This allowance, which
would be automatically built into the tax tables, would completely
exempt more than 2 million families from tax payments, effective
at the following income levels:
No. of Exemptions

Income

No. of Exemptions

Income

family of 1

$1,700
2,300
2,900
3,500

Family of 5
6

$4,100
4,700
5,300
5,900

2
3
4

7
8

The allowance would be phased out as income exceeded the above
poverty levels at the rate of $.50 for each dollar of income
over the levels. Thus, for a single person the allowance would
not exempt income over $3,300; for a family of eight, it would
phase out at $6,100. The allowance would be effective for 1970
and thereafter. The revenue loss from this change would be
$700 million.
III
The Treasury also recommends the following reforms:
Mineral Production Payments. The tax treatment of mineral
production payments would be changed. These "production
payments," sold by oil companies and other mineral producers,
represent in effect advance payment for future extraction of
the minerals, and they are sold to accelerate income to avoid
the statutory limitations on credits and deductions, such as
the depletion allowance. Henceforth, these production payments
will be treated as loans, which is their true substance.
Similarly, the duplication of tax benefits by such persons in
retaining and selling production payments in so-called ABC
transactions will be dealt with in the same way. Bona fide
production payments pledged for exploration or development will
not be affected. The revenue increase after the first year will
be $200 million.

- 4 -

Private Foundations and Exempt Organizations. Certain specific
~uses by private foundations would be prohibited:
self-dealing between the foundation and related parties
failure to distribute real income annually to charity
thp control of operating business corporation (with
a 5-year transition period for existing holdings)
engaging in certain political activities, such as
voter registration drives.
Penalties for these abuses would be imposed, and power
would be given the United States District Courts, acting at
ilie instance of the Justice Department in the absence of state
action, to impose appropriate sanctions.
Foundations would also be required to make available for
public inspection information as to grants to individuals, the
activities of these individuals, and their work product.
Certain specific administrative changes would be made to
provide much closer scrutiny and audit of fuundation activities.
Present law taxing income from the direct operation of a
business by certain tax-exempt organizations would be extended
to churches and other tax-exempt organizations not currently
covered. The investment income of social clubs and certain
similar organizations, now untaxed, would be taxed. All taxexempt organizations would be taxed on the income of any
investment assets acquired with borrowed funds and not related
to their tax-exempt functions (so-called Clay Brown bootstrap
cases). The revenue increase from these various provisions cannot
be estimated.
~aritable

Contribution deduction:

The 30 percent limitation on charitable contribution
deductions would be increased to 50%, to apply to all taxpayers
beginning in 1969.
The unlimite~ charitable deduction available to certain
persons who qualify in at least S out of any 10 years would be
cut down. Thus, chari table contributions taken together with
tll other itemized non-business deductions could not exceed
80% of adjusted gross income.
In addition, a number of situation which allow different
t~ benefits for contributions depending on features of the
property given or the method of gift require attention. Under
present law, deduct ions for contribut ions to charity may [)(' i I)
the form of cash or property, taken a t i t 0 fair market value.

- 5 Except with respect to donations of installment obligations,
gain is rot recognized to the donor on the making of the
charitable gift. Treasury recommends that the deduction for
charitable gifts of property, the sale of which would result
in reducing income, be restricted to the cost or other basis
of the property in the donor's hands. The effect is similar to
taxing the appreciation of ordinary income assets in a charitable
gift.
Treasury also recommends that no deduction be allowed for
the rental value of property leased rent-free to a charity; and
that no charitable deduction be allowed for gifts of stock
rights unless the shareholder allocates the basis of his old
stock in part to the rights which are given to charity.
Treasury also recommends that the special two-year
charitable trust rule be repealed. The repeal will mean
that in all cases a grantor will be taxed on trust income where
a reversionary interest will or may be expected to take effect
within ten years. Similarly, in the case of gifts of short term
Income interests to charity, the donor should not get a deduction
unless he is taxable on the income.
Corporate Securities. In recent years there has been a rapid
increase in the number and the size of mergers or other
consolidations among corporations, particularly in the area of
so-called "conglomerate" combinations. While the reasons for
this development are principally non-tax, there are tax aspects
~ich require change.
Treasury recommends legislative action on a number of
issues, including the installment sales reporting treatment of
capital gain recognized on the receipt of bonds, the treatment
of original issue discount on bonds, and the interest deduction
on the repurchase by a corporation of its own convertible bonds
at a premium. In addition, Treasury is seeking to develop a
~egulation to distin~uish debt from equity for purposes of the
Interest deduction.We consider this distinction is at the heart
of the problem of the increased use of debt securities in these
transactions.
While the measures recommended by the Treasury at this time
not specifically directed at acquisitions, whether of a
conglomerate nature of otherwise, we believe that they will
attack some of the basic tax problems involved in combinations
~nd decrease the impetus toward creation of unusual security
Interests that are difficult for investors to evaluate. The
Treasury is also undertaking a basic study of the general
treatment of tax free corporate reorganizations.
~e

- 6 -

Multiple Corporations. The advantage taken by a number of large
corporations of certain tax relief provisions for small business,
whereby a reduced corporate tax rate of 22 percent is applied to
the first $25,000 of taxable income, would be ended. Corporate
groups ranging up to hundreds of corporations would be consolidated
into one for this purpose. The change would be phased in gradually
over five years. The revenue increase from this change, when fully
effective, will be $235 million.
Farm Income. Various provisions whereby farm deductions, frequently
representing the cost of assets acquired, are offset against
ordinary income, but the sale of farm assets is taxed only as
capital gain, will be amended. The dapital gain will be taxed
as ordinary income to an appropriate extent. The hobby (gentleman
farmer) loss rules preventing the consistent deduction of very
large losses by individuals from certain enterprises would be
strengthened. The revenue increase from these proposals has not
been determined.
Accelerated Depreciation: Public Utilities and Others. Tax-free
dividends presently being paid out of accelerated depreciation
reserves, principally by public utilities but also by some other
corporations, would be made taxable after a three-year adjustment
period.
Federal and state regulatory commissions would be prevented
from requiring a public utility to compute net income after tax
for rate making purposes as if accelerated depreciation had been
taken unless the utility voluntarily elects accelerated depreciation. Utilities are forced by the position of some commissions
to claim accelerated depreciation to reduce their taxes, and the
benefits are flowed through to the consumers at the expense of
the Federal revenues generally. This rule will preserve the
status quo and prevent further adoption by regulatory commissions
of the 11 flow-through" concept except where the utility itself
elects accelerated depreciation. This change will prevent an
annaul revenue loss which could reach $1.5 billion if this
limitation were not imposed.
Stock Dividends. The practice of a number of corporations
issuing dividends in stock which increase the stockholder's
interest in such a way that they are a substitute for cash
dividends, rather than simply being a larger number of shares
for the same interest, would be discouraged by making such
dividends taxable. The Treasury proposal substantially follows
the recommendation of the Advisory Group on Subchapter C,
established by the House Ways and Means Committee in 1956. This
provision will prevent a sUbstantial future loss of revenue.

- 7 Capital Losses. Net long-term capital gains are In general
taxed by including only one-half of the gain in ordinary income.
A net long-term capital loss, however, may he deducted up to an
annual limit of $1,000 in full against ordinary income. This is
not only inconsistent but leads tc) tax planning of asset sales
to separate gains and losses into alternate years. We recommend
that each dollar of net long-term capital loss be permitted to
offset only 50 cents of ordinary income. The limit of the annual
deduction should be kept at $1,000 with the present unlimited
carryover. In addition, married persons filing separate returns
should be subjected to an annual limit of $500 each. In the long
run this change will increase revenues by S10 0 T11illion.
~stricted

Stock Plans. During the past few years, there has
been a rapid grmvth in the number of restricted stock plans.
Under these plans, an employee receives stock or other property
subject to restrictions on sale or other limitations. Because
of these restrictions, tax is not imposed under existing rules
until the employee sells the stock, and the amount then subject
to tax is limited to the value of the stock when the employee
received it. In effect, any increase in value during the period
the restrictions are in effect is taxed only if the stock is
sold, and then as a capital gain.
Treasury proposes that, as a general maTter, where an
employee receives stock or other property as compensation, he
should be subject to tax when his rights in that property
become nonforfeitable. When an employee receives nonforfeitable
rights in property SUbject to restrictions on sale, these
restrictions would be ignored, and the amount taxed would be
the unrestricted full current fair market value of the property,
unless the restrictions are bona fide limitations which continue
for the life of the property.
Multiple or Accumulation Trusts. Under present law, income may
be accumulated in trust and distribu"ted to the beneficiary without
tax to the beneficiary, with certain exceptions, even though that
beneficiary pays higher tax than the trust itself. This enables
creation of multiple trusts for the same beneficiaries to avoid
the progressive rate structure.
Treasury proposes that all income accumulated in trust vJill
be taxed at the beneficiary's regular rates when the income from
the trust is received by the beneficiary. In addition, income
accumUlated in trust for the benefit of the grantor's spouse
will be taxed to the grantor as earned, as it is under present
law when it is accumulated for the grantor's own benefit. This
provision will increase revenues by $70 million.

8 -

Moving Expenses. The deduction for moving expenses would be
substantailly liberalized to include certain indirect costs,
(house hunting trips, temporary living expenses at the new
location and the cost of selling or buying a house) up to a
maximum of $2,500, of which no more than $1,000 could be for
ilie indirect costs. The higher limit would be available for
ilie direct costs (the costs of buying or selling a house and
lease breaking costs.) The revenue loss from this change would
be $100 million.
~a11 Business Subchapter S Corporations.
The existing rules
permitting small business corporations to be taxed similar to
partnerships to avoid the double tax on corporate earnings would
be substantially liberalized by expanding existing size and
~pes of income limitations, eliminating technical requirements,
and simplifying their operation.

Extension of Special Treatment of Banks Holding Foreign Deposits.
Interest earned on U.S. bank deposits owned by foreigners
oot resident in the United States and not connected with a
trade or business conducted here is exempt from income tax, and
the bank deposits themselves are exempt from estate tax. However,
existing law provided that these exemptions shall not continue
beyond 1972. The expiration date was enacted in 1966 as part of
the Foreign Investors Tax Act. At the time, the Congress was
coocerned that termination of the exemption would have an adverse
~pact on foreign balances in the United States and therefore
deferred the effective date for terminating the exemption for
five years.
The balance of payments continues to be a matter of concern.
While we cannot forecast what the situation will be by 1973,
it is clear that the scheduled termination will make a solution
to the problem much more difficult to achieve. Accordingly,
Treasury recommends that the Congress take action in accordance
with the President's recommendation of April 4 that the scheduled
termination of the exemption be repealed.

- 9-

lable 1. -- Tax Reform Proposals
Estimated Increase or Reduction (-) ~ Calendar Year Tax Liab!lities ~

millions)

Long-run
effect

1969

1970

A. Lllrltation on tax preferences .........................................

.B. Allocation of deductions •..•••.••••..••••.•...•.•..
2. Ww" income allmra.n.ces ....................................................... .
3. Mineral production payments •.•....•...••..•.•.••.••
4. Foundations and exempt organizations .•..•..........
5. Charitable deduction changes ••..••....•.•.....•...•
6. Corporate securities ............................................................ ..
7• Multiple surtax exemptions •••...•••..•.............

275
0

40
500
-665
140

235

8. Farm. income rlll.e s .................................................................. ..
9. Tax-free dividends from accelerated depreciation .••

50
80

.0. Stock distributions .............................................................. ..
1. Capital loss limitation •.•.•.....•....• : ........•.•
l2. Restricted stock plans .•..•••.•.•.•..••...........•
l3. ~til?le trusts ..................................................................... ..
l4. ~ving expenses ...................................................................... .
l5. Subchapter S changes •••.•••...••••......•........••
Net increase (+) or reduction (-) •••......•••••••

-10

80
500

-665

200

-10

100

55
-110

70
-100

+400

+90

+540

Based on current incorc.e levels with no provision made in long-run estimates
for effect of income growth. Estimates include a 10 percent "3urcharge. for 19~9
and a 2 1/2 percent surcharge for 1970.

* No basl' S

for

I'
I,lnl~
'
e::~IIrI:'

t
revenue e ff ec.

1-1'.'1 prevent sukJ,.nU nl future revenue

SOffi('

('ases , however, thes'

1·1:1·~lJ

res

STATEMENT OF THE HONORABlE CHARLS E. WALKER
UNDER SECRETARY OF THE TREASURY
BEFORE
THE HOUSE WAYS AND MEANS COMMITTEE
ON THE PRESIDENT'S TAX PROGRAM
APRIL 22, 1969, 10 A. M.

As president Nixon stated in his message to the Congress
yesterday:
Reform of our Federal income tax system is
long overdue. Special preferences in the
law permit far too many Americans to pay
less than their fair share of taxes. Too
many other Americans bear too much of the
tax burden.
The program which Assistant Secretary Cohen and his deputy,

Mr. Nolan, join with me in presenting today is a highly
important first step in reshaping the Federal tax system to
make it fair and efficient.
As important as this step is, however, it should be
recognized only as the first stage of our program.

Many of

our proposals are aimed directly at correcting abuses which
permit wealthy people and prosperous businesses to avoid

fair share of the tax burden; these proposals have been carefully
prepared and evaluated.

But time has not permitted the

careful study and analysis necessary before all existing
preferences can be evaluated and, if appropriate, adjusted
or eliminated.

The proposal for a "limitation on tax preferences, II

- 2 which Secretary Cohen will describe to you, is a fair and
effective approach to preventing abuse by the beneficiaries
of such preferences.

We recognize that this proposal is not

the final answer -- but we maintain that it is quite

appropriate as an interim measure.
As our study of the income tax system got under way -and it has been assigned the highest priority -- it became clear

that the existing income tax structure results in a paradox
for social policy.

the one hand, public policy is pledged

to relieving the lot of all those American citizens who live
in poverty.

On the other hand, the existing system forces

many of these people to pay Federal income taxes.

The "low income allowance," which we propose for adoption
will assure that persons or families in poverty will not pay

any Federal income taxes

in effect, more than 2,000,000

families will be removed from the tax rolls.

The allowance

is structured in such manner, however, that the revenue impact
is relatively small.
President Nixon's recommendation for repeal of the
7·percent investment credit is also a tax reform measure.

- 3 It recognizes the fact that a subsidy to business investment,

however desirable in the early 1960's, no longer outranks
other important national needs.

The revenue released by

repeal of the credit will permit earlier tax relief to all
individual taxpayers, including those in the middle- and
upper-income brackets, by reducing the lO-percent surcharge
to 5 percent on January 1, 1970.

This represents a reappraisal

of the president's earlier decision to request extension of
the full lO-percent surcharge until June 31, 1970.
In addition, within a few weeks we shall request consideratiol
of two high priority progratl$ -- wh:ic h also can be funded with
part of the revenues released by repeal of the investment
credit -- to inaugurate Federal revenue sharing with state
and local governments and to provide tax credits to encourage
investment in poverty areas and hiring and training of the
hard-core unemployed.
The

tax reform proposals which we shall discuss with you

today are independent of the Administration1s firm program
to cool our overheated economy-

It is true that repeal of

the investment credit will tend to dampen demand in a sector
of the economy that is moving much too fast -- the market

- 4 for business equipment, but it should be emphasized that in
the entire set of proposals outlined by the President yesterday
revenue gains and losses are essentially balanced.

The

approximately $4 billion in revenues gained by repeal of the
credit, enactment of the limit on tax preferences, and
correction of abuses, will be approximately offset by the
January 1 phase-down of the surcharge, the enactment of the
low income allowance, and the funding of the revenue-sharing
and new tax credit proposals.
The lights have been burning late at the Treasury
Department and the program of continued tax study and reform
ordered by the President will result in much more midnight
oil being consumed in the weeks and months ahead.
h~

The Pres ident

directed secretary Kennedy to thoroughly review the entire

Federal tax system and present recommendations for basic
changes no later than November 30, 1969.
As the president said, that is a large order .- but we
are determined to do our bes t, not only in studying and
evaluating the many preferences that we have not been able to
attack directly now because of shortage of time, but also to
~ve

toward basic structural changes that go beyond reform.

- 5 To sum up, in the words

f the Pres ident:

Fairness calls for tax reform now; beyond that,
the American people need and deserve a simplified
Federal tax system, and one that is attuned to
the 1970's.
We must reform our tax structure to make it more
equitable and efficient; we must redirect our
tax policy to make it more conducive to stable
economic growth and responsive to urgent social
needs .
Mr. Chairman and Members of the Committee, we are dedicated
to those goals.

I now turn to Mr. Cohen and Mr. Nolan for their summaries
of our proposals.

00000

STATEMENT OF THE HONORABLE EDWIN S. COHEN
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY

BEFORE
THE HOUSE WAYS AND MEANS COMMITTEE
ON THE PRESIDENT'S TAX PROGRAM
APRIL 22, 1969, 10 A.M.

Mr. Chairman and Members of the Committee:
I join in Dr. Walker's statement, and it is my pleasure to
present to you our interim program of tax reform and tax relief.
The most critical problems, which we believe should be dealt
with promptly, are, first, maintaining confidence in the tax structure by curbing the excessive use of tax preferences by some wealthy
taxpayers and, second, removing the burden of the income tax from
those who are below the poverty level.
To deal with these two problems we recommend:
(1)

A general restriction on the use of certain tax preferenees through adoption of:
(a)

A Limit on Tax Preferences which would in general
limit preferred income to 50 percent of total income, and

(b)

A requirement for allocating itemized deductions
between taxable and preferred income.

- 2 -

(2)

Adoption of a special "low income allowance" to exempt from
Federal income tax persons whose incomes are below the poverty
level.

Our ability to pay for this provision depends in sub-

stantial part upon enacting the restrictions on tax preferences.
Our interim program also deals with a sUbstantial nwnber of
other situations that involve a pressing need for tax reform or tax
relief.
(3)

These include:

The use of mineral production payments to avoid statutory
limitations on credits and deductions.

(4)

The control of the tax exemption privilege of foundations
and the taxation of certain unrelated income of charitable
organizations.

(5)

An increase in the limit on the charitable contribution deduction
from 30 percent to 50 percent; a restriction on the use of the

- 3 -

unlimited charitable contribution deduction; and structural
changes to prevent undue advantage being taken of charitable deductions.

(6) The tax problems of certain corporate securities frequently
associated with corporate acquisitions.

(7)

The use of the special exemption provided for small corporations by large corporate groups using chains or families of
corporations to enjoy multiple surtax exemptions.

(8)

Various provisions dealing with the reporting of farm
income which permit losses to offset ordinary income
while related gains are capital gains.

(9)

The payment of tax-free dividends by various companies
from accelerated depreciation reserves.

Related to this

is the treatment of the accelerated depreciation election
in the public utility regulatory process.
(10)

Application of the stock dividend rules to make taxfree, corporate distributions which are substitutes for
cash dividends.

(11)

The deduction of long-term capital losses in full against
ordinary income.

_4_
(12)

The use of restricted stock plans to defer and limit
income tax treatment of compensation arrangements.

(13)

The achievement of income splitting through accumulation
trusts, especially multiple trusts.

(14)

An increase in deductible moving expenses.

(15)

Relaxation and simplification of the rules affecting
Subchapter S "small business ll corporations.

We also recommend:

(16)

Elimination of the scheduled termination of certain exemptions now accorded bank deposits owned by foreigners.

The revenue impact of our proposals are shown in Tables 1 and
2.

These tables reflect our judgment that several of the tax

increase provisions should be put into effect gradually because
taxpayers have made important business or investment decisions in
reliance on present law.

The program will produce approximately

balanced revenue impacts in the first two years.
items will produce a larger net gain.

Eventually these

How these longer run revenue

gains will be related to the total revenue picture can be decided
at a later stage in our reform work.

The important thing is that

in view of tile past reliance on these long-standing provisions,
the changes have to be phased in, and unless these changes are
started now the revenue will not be available in 1972 and later
years to finance other tax reliefs.

- 5~ble

l. -- Tax Reform Proposals

Estimated Increase or Reduction (-) in Calendar Year Tax Liabilities ~

($ millions)

·•

......................

A. Limitation en tax preferences
B. Allocation of deductions •••.••..•••..••••••.•.•.•••
2. Low income allartlan.ces .................................. .
3. Mineral production payments ••..••••.•.•••.•••.•..,".
4. Foundations and exempt organizations •••••.••••••..•
5. Charitable deduction Changes ••..•••.•.•.••.••.•.•.•
6. Corporate securities ......................
1. Multiple surtax exe:::rrptions •••..••.•....•.•..•.....•
110

...........

8. Farm. .in come rue s •• ~ • • • .. • • • • • • • • • • • ~ • • • • • .. • • • • .. • •••
9. Tax-free dividends from accelerated depreciation .••
.0. Stock distributions ................................. .
1. Capital loss limitation •.•.••.....•.•••.........•.•
2. Restricted stock plans ................................. .
~3. Mtiple tr1.lSts .......................................... ..

1969

1970

·• Long-run
effect

1975

40-

275
0
95

500

-665
140

-665
200

*
*
10

-10

*
*
55

*
*
25

~35

10
0

-10

100

-110

-100

Subc.i1a,Pter S c..b..a.Ilges .......................................... .

Net increase (+) or reduction (-) ••...•.••.•.••••

+400

+90

+540

I" '~Vi,.,
0" eXT'en
- Q
.'+.
1·~..-.L.!Q
.:: _:;,
...... ;;,

l5.

·
·

··
·

.............................................. .

Based on current income levels with no provision made in long-run esti!!lB.tes
tor effect of incoEe growth. Estfu.ates ine-lude 5 10 percent ,ur_charge, for 19?9
and a 2 1/2 percent surcharge for 1970.

* No basis

for estimating revenue effect. In some cases, hov.rever, these measures
wiJ.l prevent substantial future revenue loss.

_ 6 _

Table 2. -- Tax Reform Proposals
Est~ted Increase or Reduction (-) in Revenues -- Budget Basis -- Fiscal Years

millions)
: ____~F~i_s_ca~l~Y~e~a~r_s_______

1970

1971

50
500

LA. Limitation on tax preferences •......••.••••.•..•..•.•
lB. Allocation of deductions •...•.......•••....•...•...••
2. IDw income allowa.nces ............................... .
3. Mineral production payments •.••.•.•.••.•.••.....
5. Charitable deduction changes ••....••...•..•..•••...

325
-285
110
-10

7. Multiple surtax exemptions •
8. Farm in come rule s ..........•....................... .•

10
0

•••

•

•••••••••••••••••••••••••

ilo Capital loss limitation ••.••.•
13. Mul.tiple trusts ..................................... .
0

14.

••••••

••••••••

-665

1~5

-10
30
10

Moving expenses •••.•••••••••.••••••••.••••........•••

55
-110

70
-100

..................

+185

+110

Net increase (+) or reduction (-)

- 7 We believe the proposals presented today make inroads on the
major tax preferences.
recommendations for
eliminate any abuse.

In several of these areas we are making

pe~anent

changes that will substantially

In the Limit on Tax Preferences (LTP) and

allocation of deductions proposals, we are not taking away the
preference

as such.

individual taxpayer.

We are curbing their excessive use by any
The outright elimination or reduction of any of

these provisions would require careful economic judgments based on
extensive data and studies.

They support in some degree important

segments of our business community, the financing of state and local
government activities, and charitable-educational institutions.
Before deciding whether any incentive should be retained in the
tax law or modified, we need to compare its cost to the revenue with
the benefit the public derives from its existence.
on which the Treasury staff is deeply involved.

These are questions

We have instituted

a series of meetings with representatives of the industries and other
entities affected by the incentives; we are collecting data; and we will
,report to the Committee as soon as practicable.
These provisions have been deliberately kept in the tax law
over many years, and they constitute standing invitations for taxpayers
to erect new buildings, drill for oil, or embark on programs of charitable
contributions.

Even if we should conclude that it would be unwise to

- 13 -

continue some of these benefits or if we should alter some of them,
it would not be appropriate to remove the preference precipitously
after taxpayers have embarked on programs which they might not have
adopted except for these provisions.

For this reason we would not be able

to raise significant revenue for the next fiscal year from basic revision
of these provisions to meet any appreciable part of the revenue need which
can be met by the surcharge.

I now offer more detail on each of these current or interim proposals.
(1)

The Problem of Low Taxes on Persons with High Incomes.

It offends the sense of equity of most taxpayers that some individuals
with high income pay little or no tax.

In large part this is due to a

series of provisions in the tax law which are clearly tax preferences.
These include:
(a)

Percentage depletion on minerals and intangible drilling and
exploration expenses to the extent they exceed what would be
normal deductions under

(b)

re~ular

accounting rules.

Deduction of the excess of accelerated depreCiation over
straight-line depreciation on buildings.

(c)

Deduction against non-farm income of farm losses arising
from unrealistic accounting methods.

(d)

Deduction of the excess of market value over basis of property
contributed to charity.

- 9Under present law taxpayers not only offset a large portion of their
gross income by combinations of these preferential provisions but the
advantage is accentuated because the itemized personal deductions can be
offset completely against the remaining taxable income.

Furthermore,

this latter advantage also exists in cases where taxpayers have tax-exempt
interest on state and municipal bonds and long-term capital gains (onebalf of which are excluded from taxable income).

Itemized personal deduc-

tions allocable to these income sources are also fully offset against
taxable income under existing law.
We recommend the adoption for individual taxpayers of a Limit
on Tax Preferences (LTP) which would place an over-all limitation
on tbe amount of specified tax preferences j.n anyone year.

We also

recommend requiring the allocation of itemized deductions between
income subject to tax and the tax preferences including also tax-exempt
interest and the excluded portion of long-term capital gains.

LTP is

an important and needed measure of tax reform which will insure that
the tax preferences which the law provides may not be used to excess
by any taxpayer.

They could no longer be used

to relieve those who

can afford it from contributing in part to the maintenance of the
Federal Government.

The allocation of deductions proposal is an

equally important, basic reform which will assure that certain taxpayers do not derive a double benefit from tax preferences by
offsetting the entire amount of their personal deductions against
taxable income only.

Together, these two provisions will take us a long

way toward tax fairness and equity.
A.

Limit on Tax Preferences.--Under our LTP proposal a

50 percent ceiling would be imposed on that amount of an individual's
total income which could enjoy tax-preferred status.

For this

- 10 purpose, total LTP income would be computed by including appreciation
on gifts to charity but without deducting for intangible drilling
expenses, the excess of percentage over cost depletion, certain farm
losses, and the excess of accelerated over straight-line depreciation
on buildings.

Farm losses would be included only to the extent that

such losses on the cash basis of accounting exceed the amount of
such losses on an accrual basis of accounting after capitalizing
all capital expenditures.
In other words, an individual would be able to claim these
exclusions and deductions only to the extent that his aggregate
amount does not exceed one-half of his total income.

Stated

another way, tax preference amounts will become taxable only to
the extent that they exceed income subject to tax from all other
sources.
The proposal would, however, in no case reduce an individual's
allowable total of tax preferences below $10,000.

As a practical

matter, the limitation of LTP to amounts exceeding income from
taxable sources, plus this $10,000 floor, will mean that taxpayers
who do not have excessive amounts of tax preference income will not
be affected.
For example, assume a taxpayer had $100,000 of salary and
$200,000 of tax preferences.

Under existing law, he could exclude

all the tax preferences, and he would be taxed on only $100,000.
Under LTP, his total LTP income would be $300,000.

His allowable

preferences would be half of $300,000, or $150,000, this being the
maximum amount he c'lUld exclude from his tax base.

Since the amount

.. 11 -

of allowable tax preferences exceeds $10,000, the floor would not
apply.

He would thus be taxable on $150,000, so that $ 50,000 of

his tax preferences would have become taxable--i.e., would have
been disallowed.
Note that if his tax preference amounts had not exceeded $100,000,
the amount of his taxable salary, LTP would not have any effect.

If the taxpayer's income from taxable sources were $8,000 and
his tax preference amounts were $10,000, LTP would have no effect
because he is entitled to a minimum of allowable tax preferences
of $10,000.
Furthemore, our proposal provides, in effect, for a five-year
averaging provision through the mechanism of a carryover of disallowed
preferences.

A taxpayer who exceeds the 50 percent limitation in

one year, and thus has some of his tax preferences disallowed and
included in taxable income, will be able to take advantage of
this carryover provision if, in the next five years, the amount
of tax preferences claimed falls below the 50 percent level.

This

averaging feature of our proposal is an important one since it
assures that the limit on tax preferences affects primarily those
who, year after year, take undue advantage of these preferences.
A three-year transition period is provided whereby the maxi-

mum limit on tax preferences will become effective gradually so
that investment decisions and planning can be made on the basis

- 12 of these new provisions.

In 1969, a taxpayer would be able to claim

preferences equal to 70 percent of his total income; and this percentage
would be reduced to 60 percent in 1970 and finally to 50 percent in
1971.

Thus, in 1971 and thereafter no individual could claim more

than one-half of his total income as

~ax-preferred

items.

Tax-exempt interest has not been included in the list of tax
preferences for LTP purposes because we have been advised by the
Department of Justice that there is doubt whether such inclusion
would be constitutional.
Capital gain income has not been included as an item of tax
preference for LTP.

Those taxpewers who do not use the alternative

tax of 25 percent on capital gain pay tax on one-half of their income
from capital gains at their regular rate.
intent of the LTP proposal.

This is in accord with the

In order to preclude capital gains from

further sheltering income, long-term capital gains would not be counted
in computing the amount of total income in calculating the 50 percent
limit on tax preferences.

Thus, if a taxpayer has net business income

of $100,000, which reflects an excess of accelerated over straight-line
depreciation on real estate of $200,000, and long-term capital gains of
$80,000, his limit on tax preferences would be $150,000 (one-half of
$300,000) and his adjusted gross income would be $190,000.
On the other

hand, those taxpayers who use the alternative rate

in effect exclude more than one-half of

~heir

capital gains.

We are

not prepared at present to recommend that the exclusion of such gains
be subject to the 50 percent over-all limit or. tax preferences.
effect would be to raise the alternative tax in some cases above

rl':I"

- 13 -

25 percent to as much as half of the taxpayer's top rate.

This could

have a serious economic impact, the ramifications of which would have
to be thoroughly considered as a part of a review of capital gains
taxation generally.
This proposal has some similarity t;; the "minimum income tax. 11
The l1minimum income tax" as proposed in the Treasury Studies was

- 14broadly designed to have the effect of limiting certain exclusions
to 50 percent of a revised adjusted gross income

(AGI).

It did

so, however, in a way that required a special alternative tax base.
This separate tax base would itself be a source of complexity.
More importantly, the separate base made it so difficult to deal
with matters of timing that items such as accelerated depreciation
and intangible drilling expenses were left out of the minimum tax
proposal.

These as well as certain farm losses are covered by LTP.

Further, we believe LTP is preferable to the minimum tax in that
it achieves an averaging effect, as previously explained, so that
it operates only against those taxpayers who consistently achieve
an imbalance of tax preferences in relation to taxable income.

Allocation of Deductions Proposal.--We also recommend

that an allocation of deductions be required whereby an individual
with more than $10,000 of tax preference income would be required
to allocate his itemized deductions (other than business expenses)
proportionately between his taxable income and his excluded income.
The latter portion would not be allowed as a deduction.
The items of tax preference to which itemized deductions would
be allocated and thus disallowed would be the same four items of
tax preference which are included in LTP, but with the addition
of the excluded one-half of capital gains and tax-exempt interest.
Tax-exempt interest is included as an item of tax preference
in the allocation proposal because it is reasonable to assume that
such non-taxable income is used along with taxable income to finance

non-business deductions.

15 -

There is no constitutional problem

because the proposal is in no sense a tax on such interest; it
is merely a disallowance of a portion of itemized deductions.
Precedent for such allocation with respect to tax-exempt interest
exists in present provisions of the Internal Revenue Code.
It is also appropriate to allocate deductions to the one-half
of capital gains that is excluded from the tax base

sinc~

it can

fairly be assumed that expenses which are incurred in a particular
year in which capital gain is also realized are

- 16 financed

in part from such excluded income.

The effect of this

allocation of deductions proposal on 'capi tal gains is the same as
would be achieved by subtracting from long-term capital gains the
allocable amount of the non-business deductions before calculating
the 50 percent of long-term capital gains that is included in ordinary
income.
Itemized deductions will be allocated to items of tax preference
only to the extent that, under the Limit on Tax Preferences proposal,
such preference amounts are not reQuired to be added back to income under
that proposal.

The amounts so added back to income will be treated the

same as other taxable amounts in the allocation fraction, and deductions
allocable to this total taxable amount will be allowable.

An exemption of $10,000 would be granted so that individuals
with $10,000 or less of tax-preferred income (includipg the excluded
half of long-term capital gains) would not have to allocate their
deductions.

This threshold will relieve the vast majority of taxpayers

from having to make the allocation calculation and will assure that only
cases of Significant tax reduction are affected.

However, for those

taxpayers with substantial amounts of tax preferences who are reQuired
to allocate their non-business deductions, the calculation will be a
relatively simple one that lends itself to the existing tax return

for~s

quite easily.
The LTP proposal in the first year, 1969 (fiscal year 1970
receipts), will increase revenues by $20 million.
year the increase will be

In the second

$40 million, and in the third year with

LTP in full effect at the 50 percent rate the increase will be $80 million.

- J·7 The allocation proposal when fully in effect in 1970 will raise
revenue of ~million.

In the first year, 1969, allocation would

be required for only one-half of itemized deductions, with a revenue
effect of $275 million, after allowing for the 10 percent surcharge.
We are not now recommending that LTP and allocation be applied
to corporations.

A major difference is that in the corporate area

the characteristic problem is not an unintended combination of tax
preferences but simply intensive use usually of a particular preference
which the Congress deliberately legislated as an incentive measure for
certain kinds of business.

Whether this should be changed necessarily

involves a basic reconsideration of the specific preference and the
economic effects of its removal or limitation in that industry.

This is

a project that we are engaged in as part of our present tax reform
studies.

At the present time, for example, LTP and allocation would have

quixotic effect on corporations incurring intangible drilling costs. It might
have more serious effects on companies with a single business than on
conglomerate-type companies.

LTP and allocation serve their purpose well

in the case of individuals using preferences in combination to excess, but
their application to corporations requires further careful consideration.
This is a proper point to comment on the publicity concerning
the 155 returns filed in 1967 with adjusted gross incomes over
$200,000 on which no Federal income taxes were paid.

Our LTP and

allocation of deductions proposals, along with our restriction on
Use of the unlimited charitable contribution, will result in payment

of tax in a great many of these cases.

\~e

are taking administrative steps

to identify clearly the causes of nqn-payment in these cases generally.
As a first step, Treasury cooperated with the staff of the Joint
committee on Internal Revenue Taxation in preparing brief statistical
analyses of each of the

154

non-taxable individuals reporting adjusted

gross income of $200,000 or more in 1966, indicating sources of income
and losses and major itemized deductions.
available to this Committee.

This study

being made

1 am including at the end of this

testimony some summary data on these cases.
Of the $112.1 million of adjusted gross income reported on the

154 returns, $78.6 mi Ilion (or '70 percent) ,vas given to charity and
deducted, indicating (since the normal limit on charitable contributions
is 30 percent) that a SUbstantial number of these persons qualified for
the unlimited chari table contribution permitted by law.

Interest paid

deductions amounted to $27.8 million (or 25 percent of AGI).

The deduction

for state and local taxes pa~d totaled $8.7 million (or 7.8 percent of
AGI) .

There are limitations, however, to this type of analysis.

For example,

data wailable on individual tax returns do not generally include tax-exempt
interest on state or local bonds.

Nor is full information available as to

the nature of income or losses derived from partnerships, Subchapter S
r.orporations, etc.

Thus, the tax return is not now a complete indicator

of taxpaying capacity.

Moreover, more startling cases are frequently

found among taxpayers vrho do pay a relatively small amount of tax than
among those who pay none.

To develop meaningful data not only as to

- 19 taxpayers with high

~justed

gross income and no tax but also on taxpayers

with high real income not reflected in ITadjusted gross income, IT we are
taking a number of administrative steps.
1.

Thus,

A substantial nwmber of 1968 returns recently filed showing
large income but low tax are being duplicated and

~rought

to the Natiopal Office promptly for analysis.
2.

We are designing an additional schedule for the 1969 return
to show a revised gross income amount which will include
various tax preferences as a basis for analysis and statistical work.

3. A research study is being conducted to bring together
data for a representative sample of taxpayers for three
consecutive years to determine the degree of recurrence
in returns of particular taxpayers of certain items of
income and

arotl~ioD.,

such as capital gains, investment

losses, farm losses, and other items.
We will make available to this Committee and to the Congress
additional data developed and the results of our studies as quickly
as they become available.

These actions will provide information

which will be a sound base for further legislation and administrative
action.

- 20As I have noted, the problem is not solelytlealthy persons who pay
no tax, but also the wealthy who pay comparatively little in relation to
their income.

Among taxpayers with adjusted gross income of $1 million

or more, aboQt 650 of the more than 1,000 with that income--about

65 percent--pay a tax of less than 30 percent of their income (including the full amount of capital gains).

Among taxpayers with income

between $500,000 to $1,000,000, there are aboQt 1,300--aboQt 55 percent-who pay tax less than 30 percent of their income.

And among taxpayers-

in the $100,000 to $500,000 range 30 percent, or about 25,000 persons,
pay less than 30 percent of their income in tax.

Our LTP and alloca-

tion proposals WOQld serve to reduce these disparities in tax burdens.
(2)

Low-Income Relief.

First priority for reducing the present burdens of Federal income
tax should be given to removing the tax on people
should be done in such a way as to

i~volve

poverty.

This

minimum tax reduction

for people at above poverty incomes.
We recommend that an additional deduction for a low-income allowance
be extended to certain low-income taxpayers who use the minimum standard
deduction.

This deduction would be designed so that persons whose

income is below the poverty level would be free of Federal income
tax.

The combination of the low-income allowance and the minimum

standard deduction would total $1,100, to which would be added the
personal exemption of $600 per person.
Table 3 provides more detail on the operation of this provision.
It will be seen that for a single taxpayer the proposal would make
income tax free up to $1,700, which is substantially equal to the

- 2l -

Ta.ble 3
Low-Income Relief Proposal
Col. 1

Col. 2

No. in:
family:

Poverty
level

$1,735

New level
at which
tax starts

Col. 5
Level at
which
benefit
disaEEears

Col. 6
Present
tax on
income .in
col. 4

$ 900

$1,700

$3,300

$117

2,240

1,600

2,300

3,700

100

2,755

2,300

2,900

4,100

3,535

3,000

3,500

4,500

4,165

3,700

4,100

4,900

4,675

4,400

4,700

5,300

5,180

5,100

5,300

5,700

5,785

5,800

5,900

6,100

·
Y ·

Y The 1969 poverty

Col. 3
•
present level·
at which
tax starts

Col. 4

levels are assumed to be 6 percent above the HEW nonfarm level for 1966.

CHART

PROPOSED LOW-INCOME TAX RELIEF:

MAXIMUM TAX-FREE INCOMES
$7,000 - - - - - - - - - - - - - - - - - - - - - - - - @?::::] PROPOSED LOW-INCOME ALLOWANCE

Wj MINIMUM STANDARD DEDUCTION

c;;- $6,000 ~

ISm PERSONAL

EXEMPTIONS
DOTS REPRESENT 1969
POVERTY LEVEL

•

«J

PRESENT LAW MAXIMUM
TAX-FREE INCOMES
.. ~

~ $5,000 - - - - - - - - - - - - - - - - - w
~

o
~

$4,000 - - - - - - - - - - - - - -

en
en
~ $3,000

PROPOSED MAXIMUM
TAX-FREE INCOMES \

~
$2,000 - - - ::=;)

--,

5
6
FAM Il Y SIZE

CHART 2

PROPOSED LOW-INCOME TAX RELIEF:

INCOME RANGE OF PHASE-OUT OF BENEFITS
$7,000 - - - - - - - - - - - - - - - - - - - - - - - - - 1\\\\\I@\\il TAX REDUCTION IN PHASE·OUT OF PROPOSED
::::::::::::::::
LOW-INCOME ALLOWANCE

_
(I)

~
co

$6,000 -

~
LoU

~ ADDITIONAL TAX-FREE INCOME
F22ZI (proposed low-income allowance)

....:.;.»:.:-::;:;:: '';

~ TAX-FREE INCOME UNDER

$5,000 -

PRESENT LAW
(exemptions and minimum - - - - 1.['11................. 1'
standard deduction)

$4,000

o
a:

C!)

fa $3,000ten
:::;:)

ci $2,000<C

5
FAM ILY SIZE

- 22 -

imated poverty l~el income of $1,735.

A family of four would

no tax on income up to $3,500.
The low-income allowance would be decreased by $1 for each $2
which the taxpayer's adjusted gross income exceeded,the maximum
taxable amount (including the personal exemption).

Thus the

-income allowance will phase out as income increases above the
Lmum mn-taxable amount.

For the single person the added relief

Ld decline at income levels above $1,700 and disappear at $3,300
lncome.

For the family of four it would phase out between $3,50C

$4,500.
All of this would be built into the optional tax table, which
:he only way that low-income taxpayers can use the standard or
mum standard deduction.

Thus the provision would not require

additional computation on the taxpayer's part.

He simply would

his tax from the table, as he does now.
The extra provision would provide maximum tax relief of $117
a single ~erson, the tax now payable on a $1,700 income.

egate it would affect about 13 million taxpayers, providing an
~ge
t,

tax saving of about $51.

It would relieve of all tax

5 million families who now pay tax on below poverty level

nes.

It is recommended that the optional tax tables be extended
the present ceiling of $5,000 to an income of $6,100, so that
provision would operate entirely on the optional tax tables.

- 23-

(3) Mineral Production Payments.
The sale of production payments in the extractive industries
Ilts in acceleration of depletable income, a failure to match
~ating

expenses with operating income, and a distortion of the

lral income tax results intended by Congress.

This distortion

lits the avoidance of limitations Congress has placed on the
.etion allowance, the foreign tax credit, the investment credit,
the net operating loss deduction.

Among other effects, it may

result in creation of artificial net operating losses in subent years which may be carried back to earlier years for purposef
btaining income tax refUnds.

The net result may be that over

riod of years, a corporation may pay no income taxes on its
~al

operations, even though it has reported a profit to share-

~rs

each year.

The production payment has also been used in so-called ABC
:actions to distort the

norm~l

operation of the Federal income

Irovisions by creating an unwarranted exclusion of income of
wner of the property, or as others see it, a distortion of
eduction of "lifting" or operating costs of the mineral property.
)riginally confined largely to oil and gas transactions, the
)f mineral production payments has spread in recent years to
extractive industries and is resulting in significant reducin tax liabilities.
'he Treasury recommends that these production payments be
~

as loan

transa~~innA

hn+~

~~+~

____ L

- 24:tion payments and ABC transactions.

This treatment would not

to production payments pledged for exploration or development.
~he

tax reform proposals of the previous Administration recom-

. that this change be made with
.fter the date of enactment.

re~ect

to transactions entered

We believe that the distortions

ome tax liability involved in these transactions, and increasilization in various extractive industries, indicate that
distortions should be terminated promptly.

Otherwise there

e an acceleration of such transactions prior to the enactment
legislation.
~ted

We recommend, therefore, that this provision

as promptly as possible and be effective with respect

lsactions consummated, or covered by a binding contract entered il
tfter April 22, 1969.
~tice

The industries involved have had ade-

that the tax treatment of production payments was under

.deration (see, for example, IRS Technical Information
~

999, October 28, 1968).

lis provision will produce an annual revenue gain of $200 milthe long run, and $95 million in the first year of operation.

)

Private Foundations and Exempt Organizations.

major area requiring immediate Congressional attention is
atment of private foundations.

We are convinced that these

ents for receiving and investing wealth are a useful source
ibility in achieving new levels of thought and action and in
Lng the most effective existing operating charities.

They

- 25 'ich the pluralism of our social order.

The very fact, however,

.t a. major direct responsibility of private foundations is wealth

its management imposes a special responsibility on the tax
tem, which was partly responsible for the existence of the
nda.tion.

This responsibility is to see to it that the wealth

managed with scrupulous regard for its charitable charge.
In many ways, however, the clear intent of present law to
Qire devotion of the property of foundations to charitable
poses is not achievable under existing statutory standards.
)ffer the following proposals to help achieve this purpose
to improve the system of taxing exempt organizations in general.
1.

Eliminate "self-dealing" through a general prohibition
against financial transactions between a foundation and
its founders, contributors, officers, directors or
trustees.

Require that all of the net income of a foundation be
distributed to charity on a relatively current basis.
Moreover, the foundation would be required to distribute
amounts equal to 5 percent of the value of its investment
assets if this amount is larger than realized income.
This rule will insure current charitable benefits commensurate with the tax advantages granted to foundations
and their donors.

- f'b -

3. Require that foundations sell or contribute to a publicly
supported charity enough of their interests in particular
businesses controlled by the foundation or the donor to
bring the remaining interest below the control limits
that would be set out in law.

Foundations would have

five years from the present time with respect to existing
holdings, and five years from the time of receipt of such
a controlling interest as a result of a gift or bequest
in the future, to make this disposition.

The

f~ve-year

period would be subject to extension for good cause shown.
A controlling interest would be defined as 35 percent of
the combined voting power of a corporation (or interest
in an unincorporated business), except that holdings between
20 percent and 35 percent could be considered controlling,
if control is in fact found to exist.

4. Prohibit private foundations from engaging in activities
which directly affect political

campaign~

such as voter

registration drives.

5. Require private foundations which make direct grants to
individuals for educational and other programs

to make

public the terms of the grants and resultant work product
of recipients of these grants.

Provide effective sanctions with respect to private foundations.

Disallowance of the exempt status of an organization

upon audit of its return after disqualifying transactions

- 27have occurred is frequently an inadequate penalty.

often penalizes charity while imposing no detriment upon
the private individuals responsible for its disqualifying
acts.

Also it is an inflexible provision, imposing light

or heavy penalties regardless of the seriousness of the
prohibited activity.
In order

impose appropriate sanctions for violations

of the new requirements of private foundations, we propose a specific set of civil penalties against foundation
management, against private persons who improperly deal
with foundations and, in some cases, against the foundation itself.

In addition, we propose that the Federal

District Courts be given jurisdiction to enforce the
obligation of a Federally tax-exempt organization to
devote funds properly to charitable purposes.

Thus, the

Internal Revenue Service will be authorized to forward to
the Department of Justice a recommendation for such action
if other remedies are inadequate.

Action in the Federal

courts seeking equity relief would be deferred during the
time the State Attorney General seeks appropriate relief
under state law to correct the abuse.

This system should

serve to bolster the efforts of State Attorneys General
to protect the public interest, efforts which now vary
widely from state to state.

- 287. Extend the provisions for taxation of "unrelated business
income" to churches and other exempt organizations not
now subject to those provisions.

Taxation of the churches

to the extent that they enter into the commercial transactions of the market place in direct competition with
taxpaying businesses is consistent with the protection of
the tax exemption of churches with respect to their passive
investment income and the income related to their primary
activities.

8. Enact pending legislation to overcome the effect of the
Supreme Court decision in the

Cl~y

Brown case to prevent

a charitable organization from borrowing to purchase
investment assets.

The effect of such transactions is

often to pass the benefit of the tax exemption on to the
seller, a non-exempt party, in the form of an artificially
high price.

There is no warrant in any event for a tax-

exempt organization borrowing money to purchase income
producing assets unrelated to its charitable function.

9. Tax as unrelated business income the investment income of
social clubs and beneficiary societies.

When this income

is used to pay for services to members, it should be
regarded as taxable to the same extent as if it were
earned by the members directly and used to pay for their
social recreations.

The unrelated income provision should

not, however, apply to the investment income associated
with fraternal insurance.

- 29In addition, I would like to indicate that we consider that
the provisions of the tax law with regard to exempt organizations
need to be given thorough study.

We :plan to" reexamine both the

criteria by which exemption is granted and the requirements for
continued tax-exempt status.

In addition to the difficulties in-

herent in vague statutory standards, such as

chari table" or "educa-

tional,1\ the present justification for exemption of business- oriented
organizations will be explored.

Further attention needs to be

given to the problem of the consequences of loss of exemption.
In many situations, it can be to the advantage of an exempt organization to surrender exempt status.

After a taxpayer has obtained

a benefit for a contribution to a charitable organization, there
is frequently no effecti ve penalty imposed on anyone from the
subsequent denial of exemption and no effective control at the
Federal level once exemption has been lost.
We have reviewed with Commissioner Thrower the creation of
~

advisory group on exempt organizations, made up of persons of

stature and diverse baCkgrounds.

The group would advise with the

Commissioner regarding major policy issues concerning the appropriate
activities and methods of operation of exempt organizations.

Such

a group, we understand, will soon be appointed.
We would like to assure this Committee that the Internal
Revenue Service will bend every effort to supervise the exempt
organization area as effectively and efficiently as possible within

- 30the confines of the statute.

Over the past several years the

Service has brought the benefits of automatic data processing to
the exempt organization field.

An Exempt Organization Master File

has been assembled containing at the present time 450,000 organizations.

The master file provides invaluable aid in auditing and

developing meaningful statistics reflecting the nature of the
exempt organization world.

Furthermore, exempt organization infor-

mation returns are now all filed in one Service Center.
Several years ago the Service made a policy decision to achieve
the same level of audit coverage for exempt organizations that it
achieves in connection with other returns.

Since 1964 the Service

has completed 65,000 examinations of exempt organizations.
of these audits represents

Each

returns actually screened.

During this period 1,180 revocations were recommended and total
tax change aggregated $134.3 million.
Further, the structure of the Exempt Organization Branch, a
specialized unit within the national office, has been significantly
improved, and published ruling activity was increased substantially.
Thus 168 rulings in this area were published in 1968 as compared
to 18 in the years 1961 through 1963.

Other improvements in the

handling of these cases were made.
Notwithstanding the significant improvements in the administration of exempt organizations, a major further step will soon be
undertaken.

A centralized unit in the National Office will select

3L
the large tax-exempt organizations to be audited and will assist
in planning and executing the audits themselves.

The unit will

also provide a quality check on the audit of smaller exempt organizations in the field by review of completed reports.

This program

should produce greater uniformity of treatment, and make the experience
gained thereby readily available for changes in legislation, regulations and rulings policy.

(5)

Charitable Contribution Deductions.

The vital role that charitable organizations fulfill in our
society is recognized by the charitable contributions deduction-a very strong incentive for charitable giving.

We are recommending

certain structural improvements in the deduction, but we feel it
is appropriate to couple these reforms with an increase in the
limitation on the charitable contribution deduction from 30 percent
to 50 percent.

This will increase the incentive effect of the

deduction without permitting any taxpayer to avoid tax on a fair
share of his income.

The increased limitation for charitable gifts

is justified, however, only if these other reforms are enacted.
With respect to the unlimited charitable contribution deduction,
which is available only to persons who make very large contributions
over a series of years, we believe that some limitation is in order.
We recognize that persons who make a significant long-run commitment
of a very large part of their income to a charity make a contribution to the charitable activities that would be difficult to replace.
At the same time, every taxpayer should be required to make some

- 32 significant payment to the maintenance of the Federal Government
as opposed to distributing all his income to charity.

To balance

these considerations,we propose that a taxpayer meeting the present
requirements as to the unlimited deduction be permitted to deduct
contributions only to the extent that his contributions, plus his
other itemized personal deductions, do not exceed 80 percent of
his adjusted gross income.

This provision applies to taxable years

beginning in 1969.
Under the present law deductions for contributions to charity
may be in the form of cash or property, taken at its fair market

value.

Except with respect to donations of installment obligations,

gain is not recognized to the donor on the making of a charitable
gift in property.

The charitable contribution deduction is reduced

in the case of gifts of certain depreciable and mineral properties
which would, if sold, result in ordinary income.

However, there

are still a number of major areas in which gifts of property to
charity produce unwarranted tax benefits to the donor beyond the
intended incentive effect of the deduction.

It is important that

the benefit of the deduction operate uniformly between taxpayers
who substantively have the same income and make the same contribution to charity.

The following changes are designed to accomplish

this purpose.
In 1958 the Advisory Group on Subchapter C recommended to
this Committee that

any deduction for charitable contribution of

Section 306 stock be reduced by the amount of ordinary income that
would have been realized on its sale to a third party.

We believe

that this recommendation should be adopted by the Congress and that

33the principle should be extended to charitable donations of all property
which, if sold, would produce ordinary income to the seller.

The benefits

to the charitable organization from the present rule are not commensurate
with the loss to the Treasury from the elimination of ordinary income tax
on the profit.
We recommend that the statute be amended to insure that no
deduction be allowed for the rental value of property leased rentfree to a charity.

The donor in such a case has no income from the

rental value and should not get a double benefit in the form of a
charitable contribution

deductio~any

more than a person donating

his services to charity.
We recommend that the special two-year charitable trust rule
be repealed.

This rule permits a taxpayer to avoid the percentage

limitations on the charitable contribution deduction.

The repeal

will mean that in all cases a grantor will be taxed on trust income
where a reversionary interest will or may be expected to take effect
within ten years.

He will, of course, get a charitable contribution

deduction for the value of the income interest going to charity.
Under existing law in cases where the income interest goes to
charity and the remainder goes to non-charitable beneficiaries, such

as the donor's family, the donor is not taxed on the income if he has
no reversionary interest (or if any reversion is postponed for more
than 10 years).

He also is entitled to a charitable contribution de-

duction for the value of the income interest going to charity.

recommend that this double benefit be ended by allowing the deduction
only if the grantor includes the income in his gross income.

- 34 -

Further, we recommend that no deduction be allowed for a gift to
charity of stock rights unless the shareholder allocates the basis of
his stock in part to the distributed rights.

Under existing law, a

taxpayer can purchase stock carrying stock rights, contribute the
rights to charity and deduct their value, allocate none of his cost
\
\

to the rights, and then take a loss on sile of the stock which, of
course, will have less value without the rights.

Our proposal would

end this double deduction.
With respect to donations of property which, if sold by the
donor, would produce long-term capital gain to the donor, we are
not now prepared to recommend that the deduction be reduced by
the amount of the untaxed gain.

We do recommend, however, that

the gain on capital assets so transferred be included with other
items that in the aggregate are subject to the limit on tax preferences (LTP).

(6)

Corporate Securities.

In recent years there has been a rapid increase in the number
and the size of mergers or other consolidations among corporations,
particularly in the area of so-called IIconglomeratell combinations.

The Congress must regard this development with great concern for
it constitutes a threat to the competitive climate for U.So business and to growth opportunities for new firms.

The total Congres-

siol. 1 concern should be reflected in a number of areas, including

Possible extension of the antitrust laws, revision of security
regulation and accounting rules, and regulation of bank loans to

- 35the extent that present loan limitations facilitate new consolidations.

It is also appropriate to investigate the question whether

the present tax laws offer special inducements to combinations.
From the evidence presented to this Committee, and from data
acquired by the Treasury, it is apparent that the basic tax provision encouraging the merger movement is that which accords taxfree treatment to reorganizations.

Over 90 percent of the mergers

in recent years have employed some form of tax-free reorganization.

The Treasury is beginning an immediate study of the application
of the reorganization provisions to see if the rules developed
some years ago are still appropriate to current conditions and
practices.
Present concern is also expressed about transactions in which
debt is a significant element of the acquisition price.

Tax policy

should focus on the appropriateness of the interest deduction with
respect to the issued debt.

It appears, however, that the greatly

increased use of debt in recent acquisitions is motivated primarily
by factors other than the desire to obtain an interest deduction for
tax purposes.

Thus, testimony before this Committee and information

obtained by the Treasury indicates that the greatly expanded use of
debt is occasioned by the desire to hedge against inflation, to
obtain "leverage" to obtain a more favorable earnings per share
ratio, to enable sellers of stock to acquire a prior claim on earnings and assets, and to obtain price stability in the package offer
that is made for the stock of the target corporation.

- 39 In our tax structure, an interest deduction is properly disallowed only if the underlying obligation constitutes equity rather
than debt.

We consider that the first section of H.R. 7489 does

not address itself to this basic question.

The Treasury is presently

seeking to develop rules or a regulation that will aid in distinguishing debt
from equity and disallow the interest deduction where the interest
payments represent in substance a return on equity.

These rules

would apply whether the instrument comes into existence in an acquisition, in a recapitalization, or in any other manner, and whether
the company is closely held or publicly held.

Special attention

will be given to . securities such as subordinated debentures
and convertible debentures.

Accounting for acquisitions as a "pooling

of interest ll rather than as a purchase may suggest equity treatment.
Convertible debentures that are non-callable for long periods ml:W" truly evidence
an equity position rather than a creditor status.

Other factors

which may be significant in the conglomerate area will also be considered.

Any new regulations promulgated iritli1s area would, however,

have prospective application only.
In addition, we propose that the following immediate steps be
taken by legislative action.

These steps will impede mergers and

acquisitions in which debt securities are used to gain tax advantages, and they are based on sound tax policy.
(1)

The Treasury supports adoption of a rule which would
deny installment sale treatment under Section 453 for
indebtedness issued in registered form or with interest

- .37coupons attached.
evident:

The reason for this change is self-

such instruments, freely traded on the market,

do not justify tax deferral.

(2)

achieve consistency of treatment between bondholders
\

and the issuing company where bonds are issued at a discount, we recommend that Section 1232 be amended to require
that original issue discount be treated as additional
interest income to the bondholders to be reported ratably
over the life of the bonds.

This rule would not apply

to bonds issued by any government or political subdivision.
This rule will decrease what we regard as a serious potential area for revenue loss on the issuance of debentures
with warrants attached. The bonds aTe treated as issued
at a discount if the warrants have value; the issuer claims
a deduction annually for amortization of the discount
element; and the holders obtain deferral of substantial
amounts of ordinary income.

There may be doubt whether

this discount income is ultimately being reported as ordinary
income on redemption or sale of the bonds.

Thus, under

the present structure of Section 1232, the income is not
characterized as interest income, cannot be made subject to
information reporting to the bondholders and the Internal
Revenue Service, and is not subject to tax for what may be
a long period of time until the bond is sold or redeemed.

(3)

The Treasury recommends that Section 163 of the Internal
Revenue Code be amended to exclude from the deduction
allowable to a corporation on repurchase

of its convert-

ible bonds at a premium the amount attributable to the
conversion feature of the bonds.

Present regulations

- 38 reach this result, but court cases have been filed to
test them.

Any doubt in this area should be eliminated

by legislation.
Other measures are being taken in regulations or rulings to
insure proper, consistent tax treatment with respect to debt securit}es.

While the legislative measures recommended by the Treasury

at this time and these other actions are not specifically directed
at acquisitions, whether of a conglomerate nature or otherwise, we
believe that they will attack some of the basic tax problems involved
in combinations and decrease the impetus toward areation of unusual
security interests that are difficult for investors to evaluate.

(7)

Multiple Surtax Exemptions.

Presently our corporate tax law provides a relief to small
business in the form of a rate of 22 percent, in lieu of the regular

48 percent, on the first $25,000 of corporate income.

It is a clear

miscarriage of the intent of this provision for one corporate chain
to

take advantage of the fact that its operations are carried on

through the legal form of separate corporations to permit many
times $25,000 to be taxed at a low rate.

Some corporate groups

have hundreds of separate corporations.

The present law imposes

a small penalty rate of 6 percent on the first $25,000 of income
of the separate corporations.
a penalty.

This has been grossly inadequate as

The large chain which can pay tax at a rate of only

28 percent on a large portion of its income has an unintended advantage over the local independent organized as one corporation that
pays tax on 48 percent of any income in excess of $25,000.

- 39-

The sequence of corporate income tax statistics from 1964
through 1966 shows a dramatic increase in the number of corporate
entities which are paying the 6 percent penalty rate (imposed by
the Congress in 1964 on the multiple surtax privilege).

Between

1964 and 1966, the number of corporations in total increased by
only 3 percent but the number in controlled groups electing to
use the multiple surtax exemptions and pay the additicnal 6 percent
rate rose by 20 percent.

A full

solution of this unintended exten-

sion of the small business privilege is imperative.
The transition to this rule would be accomplished by limiting
the permissible number of exemptions in a corporate group in 1969
to 100.

This number would be reduced to 50 in 1970, 25 in 1971,

10 in 1972, 5 in 1973, and 1 in 1974. The revenue gain when the
revision is fully operative would be $235 million.
(8)

Farm Income Rules.

In addition to the inclusion of certain excessive amounts of
farm loss in the Limit on Tax Preferences (LTP) provision, further
explicit changes in the tax law relating to farm income are essential to deal with the capital gain problem in this area, whether
or not the total farm losses are excessive in relation to income.
We recommend that livestock which is subject to depreciation
also be subject to recapture of excess depreciation at the time
of sale under Section 1245, just as other depreciable personal
property.

- 40We also recommend that the holding period for livestock, other
than race horses, be extended to two years

or two-thirds of the

expected useful life of the animal, whichever is shorter, before
sales can qualify for capital gains.
Further, we recommend that race horses in the hands of a
breeder qualify for capital gain only if:
i~

(1) they are breed-

animals, which would be demonstrated by the taxpayerrs having

bred them; or (2) they are used in the racing business for two or more
years.
We recommend that a taxpayer with farm operations be required hereafter
to keep an 1Texcess deduction account" (EDA) in years in which his
farm loss exceeds $5,000.

This account would include the amounts by

which the ordinary farm deduction~ in any year exceed by more than $5,000 the
total of the ordinary income from farm operations.

The $5,000 ex-

clusion would prevent the proposal from having an impact on the
small farmer.

The amount in the account would be reduced by net

ordinary farm income realized in subsequent years.

The effect of

this excess deduction account would be that any subsequent capital
gain associated with the sale of the farm, or of assets used in
connection with the farm, would be treated as ordinary income to
the extent of the balance in the excess deduction account.
Gain attributable to increases in land values would, however,
be excepted from this general rule and wo~ld be treated as ordinary
income only to the extent that prior deductions of amounts 'Which

- ~l-

would have been capitalized but for special statutory provisions
have served to create that gain.

Thus, the ordinary income on

sale of the land would be limited to the lesser of (a) the excess
deductions account (EDA), or (b) the amount of deductions under
Sections 175, 180, and 182, allowed with respect to the parcel sold.
A taxpayer would not be required to maintain an EDA if he
adopted an accounting method which accounted properly for inventory
costs and required capitalization of capital costs.
These changes will help prevent excessive advantage being
taken under the present liberal farm accounting rules.

This advan-

tage exists under present law because it is the nature of farm cash
accounting not to distinguish between current costs and many capital
investments.

A wealthy taxpayer thus finds it attractive to invest

in farms in a situation in which most of his deductible farm "loss"
is really a capital investment which can be recovered later at
capital gains rates.

This is particularly attractive when farm

losses can be offset against ordinary income from other sources,
but on occasions it also produces unintended benefits for the
wealthy person with only farm income.

To the extent that the

investment is economically sound and thus produces a net economic
gain, this net gain would still be capital gain even with our
changes if it met the other tests of a capital gain.
Finally, we propose to strengthen the

.
•
hobby loss "
provlslons.

Presently, losses are disallowed if a loss of over $50,000 is incurred for five consecutive years.

Even if a hobby business is

_ 42 _

consistently losing over $50,000 a year, there is too much opportunity to rearrange income and deductions to break the string of
five years.

The new rule would disallow the deduction of losses

if losses exceed $50,000 in any three out of five consecutive years.
other structural changes would also be made in these provisions.

(9) Tax-Free Dividends from Accelerated Depreciation and
Public Utilities.
Under existing law, some companies, particularly regulated
utilities, are able to make regular tax-free distributions--primarily as a result of the use of accelerated depreciation.

These

are advertised as "tax-free dividends. II
The problem arises because accelerated depreciation is used
for tax purposes while straight-line depreciation is used for book
purposes, resulting in smaller tax profits than the book earnings
available for distribution of dividends.

Such dividends would

appear to represent distributions of corporate income and not a
return of capital, and they should be taxed.

Accordingly, we

recommend that accelerated depreciation not be taken into account
in the computation of earnings and profits unless accelerated
depreciation is used for book purposes.

This rule would apply

generally, and not just to public utility companies.

It would be

similar to the present rule requiring use of cost depletion rather
th~

percentage depletion in computing earnings and profits.

In order

to permit adequate adjustment to the new rules, i t is recommended that
the proposal be applied beginning after the third year following enactment.
At current levels this would increase revenue by $80 million.

The use of accelerated depreciation by public utilities raises
additional tax problems which require attention.

Regulated public

utility companies in general account for depreciation on a straightline basis for purposes of the regulatory process.

Where accelerated

depreciation is taken for tax purposes, the actual Federal tax paid
is lower than the tax liability that would result from the straightline depreciation taken for regulatory purposes.

Often the regulatory

connnissions permit taxpayers to "normalize" their tax, that is, to
treat as a cost the tax consistent with straight-line depreciation
and treat the difference between this and the actual tax as a reserve
for future taxes, since accelerated depreciation involves tax postponement.

This reserve is treated as a customer contribution to

the capital of the company, and no rate of return is permitted on
it.

In other situations the regulatory commissions require companies

to take into account as the income tax cost of their operations
only the actual tax paid with the result that the tax reduction
due to accelerated depreciation is "flowed through" to the customer
as a reduction in price.
Legislation has been introduced to provide that the regulatory
commissions should not be able to require companies to take these
tax benefits nor to require that the benefits be "flowed through."
The Treasury Department does not believe that the Internal Revenue
Code should deal with the regulatory process to the extent of
specifying how the tax savings should be handled if a particular
corporation freely adopts accelerated depreciation.

_ 44_
On the other hand, the tax law quite explicitly provides a
choice for taxpayers between the use of accelerated depreciation
and straight-line depreciation.

We feel that a regulatory

commission should not take advantage of this election by
providing that it will only give an allowance in the rate calculation for the Federal tax that would be due if the company had
adopted accelerated depreciation.

Where a taxpayer has already

elected accelerated depreciation, the regulatory commission should
have the leeway to continue to make the allowance for Federal tax
on the basis of continued use of accelerated depreciation.
If the Congress takes no action in this situation and if
utility commissions generally proceed to treat companies as though
they had adopted accelerated depreciation and require this amount
to be flowed through, the total impact on the revenues, over the
next few years, could build up to an annual loss of $1.5 billion.

If on the other hand, the Congress enacted legislation that would
in all circumstances prohibit utility commissions from flowing
through tax savings proceeds of accelerated depreciation, there
could be a short-term reveaue loss as high as $0.6 billion due to
some companies feeling free to adopt accelerated iepreciation.

In view of the large revenue loss that is possible in any
change from the p:-esent situation, we think it appropriate for
this Congress to enact legislatio:1 which would tend to preserve
the p~esent state of affairs.

This ean best be done by preservIng

-45 the op-l:ion to use straight-line deprGciation to companies that
have

:.;0

fa!' been llsing a straight-line depreciation.

we recom..:Jend that Federal a:1d :,tate
cluded from

rcq~liring

~GgUl8.tOl~y

a I""!oupany to ad.opt

Ac,~ordingly,

comm:'ssiol1S lJe pre-

9.. 1-:!celerated

deprcciati::m

or computing its income fo:ccate-ma':cingpurposes as if it haa done
so llnless the utility voluntax'ily elec ts :lccelerated

d~;preci'.3.tion

for tax purposes.
(10)

Stock Distributions.

The tax law has recognized for a long time that a distribution
of common stock dividends on common stock does not normally represent a taxable event to the shareholder.

He is simply receiving

additional shares to represent his same unchanged equity interest
in the corporation.

The law bas, however, recognized cases where

such a distribution of stock dividends does change the equity
interest of the shareholder just as though he had received a cash
dividend and reinvested it in more stock.

Present law does not

draw this distinction properly, and we need a general provision
to identify changes in equity ownership associated with stock dividends.

A proposal as to the stock dividend problem was made by the

Advisory Group on Subchapter C established by this Committee in

1956.
Our proposal substantially follows the recommendation of your
Advisory Group. We recommend that Section 305 be amended to make
clear that an increase in a shareholder's interest in a corporation,
When related to a taxable dividend paid to other shareholders, is
to be taxed.

- 46 The new section will have the result that in the case of the so-called
Iltwo class common stock, n in which one group gets cash dividends and another
gets comparable stock dividends, the stock dividends will be taxable.

These

stock dividends represent an increase in the relative equity share of the investors holding the stock dividend-stock just as though they had received
cash dividends and had reinvested them in more common stock.

The new rule

also would treat as a dividend the increase in the equity interest of common
stockholders associated with redemption of stock pursuant to a periodic plan
of redemptions.

For example, an offer by a corporation to redeem 5 percent

of any shareholder I s stock each year results in increasing the proportionAte
interest of those who do not redeem --similar in effect to paying a cash
dividend on some shares and a stock dividend on others.

Further, all stock

dividends on preference shares would be taxed.

The amendment should apply

upon enactment to stock issues after April 22,

1969, and to existing issues

on and after January 1, 1991.
(11)

Capital Losses.

Net long-term capital gains in general are taxed by including only
one-half of the gain in ordinary income.

A net long-term capital loss,

however, may be deducted in full against ordinary income up to an annual
limit of $1,000.

This is not only inconsistent but leads to tax planning

of asset sales to separate gains and losses into alternate years.

We recom-

mend that each dollar of net long-term capital loss be permitted to of:f'set

only 50 cents of ordinary income.

The limit of the annual deduction should

be kept at $1,000 with the present unlimited carryover, except that married
taxpayers filing separate returns should be subject to a limit of $500 eadl.
This provision should be effective for

1969 and later years.

run this change will increase revenues by $100 million.

In the long

- 47 (12)

Restricted stock Plans.

During the past few years, there has been a rapid growth in
the number of so-called "restricted stock plans."

Under these

plans, an employee receives stock or other property which he is
barred from selling immediately or which is subject to other restrictions.

Because of these restrictions, tax is not imposed under

existing administrative rulings until the restrictions expire-for example, when the employee may sell the stock--but the amount
then subject to tax is limited to the value of the stock when the
employee received it.

In effect, any increase in value during the

period the restrictions are in effect is taxed only if the stock
is sold and then as a capital gain.
Last October, the Treasury proposed to change these rules to
provide that the amount subject to tax when the employee may sell
the stock would be its value at that time.

We have carefully re-

viewed this proposal.

We believe that it provides the correct

result in many cases

but may lead to an unwarranted result in

others.

We think that a fresh approach is warranted in this area

and that this may best be accomplished by new legislation.

New

legislation also will have the advantage of eliminating the existing uncertainty.

We propose that, as a general matter, where an employee
receives stock or other property as compensation, he should be
subject to tax when his rights in that property become non-forfeitable and that the amount subject to tax at that time should be

- 48 the full, current fair market value of that stock or other property.
Thus, we recommend that restrictions barring sale for a specified
number of years not be given any effect for tax purposes.

On the

other hand, restrictions under shareholders! agreements which do not
expire by lapse of time, and thus are prompted by bona fide business
rather than tax considerations, would be taken into account.
restrictions imposed by law would be taken into account.

Also,

In these

cases, the stock or other property would be taxed at a value determined
after giving effect to the restrictions.
The rules we propose are comparable to those which have applied
for over 25 years to non-qualified pension and profit-sharing plans.
Because of the similarity, we believe that the same rules should apply
to restricted stock plans.

(13)

Accumulation of Income in Trusts.

A widely used device for the avoidance of the progressive
rate scale for individuals is the creation of trusts to accumulate
income at low rates.

The numerous exceptions to the "throwback

rule, which is intended to apply additional tax at the time that
a trust distributes accumulated income to a beneficiary, have permitted many individuals to escape substantial taxes.

This is

particularly acute when multiple trusts are created.
We recommend that all trust distributions of accumulated income
be taxed to the beneficiary.

The beneficiary would credit against his

tax his share of the taxes previously paid by the trust on such income.
A simplified computation procedure would be provided, as is now applied
to distributions from foreign trusts.

The grantor of a trust would also

be taxed on all income accumulated for the benefit of his wife.

This

proposal should become effective for distributions after April 22, 1969,

Ind

eu~equent

years.

It wfll increase revenue by $70 million a year.

- 49 (14)

Moving Expenses.

We recognize the need to deal with the problems arising under
present law in connection with reimbursement of employee moving
expenses.

These are, in an important sense, costs of earning

income, although they do have strong personal elements.

Because

of this dual nature of the expenses, we believe that the miscellaneous costs of moving including the costs of house hunting trips,
the costs of temporary living quarters at a new location, and the
costs of selling a house (or buying a new one) should be allowed
as a deduction subject to a dollar ceiling.

We propose a ceiling

of $1,000 for these miscellaneous costs with the proviso that deductions be allowed up to an additional $1,500 to the extent that
costs of ·selling or buying a house or breaking a lease are also
involved.

To provide uniform treatment of old and new employees,

an employer reimbursement for moving expenses should always be
included in income, and the employee should take deductions within
the above-stated limits for expenses actually incurred.
vision should become effective January 1, 1969.
of this provision is $100 million.

This pro-

The revenue cost

- 50 (15)

Small Business Corporations (Subchapter S).

We recommend that the Congress enact a set of revisions in the
treatment of so-called Subchapter S corporations which would make the
tax rQles for these small bQsiness corporations and their shareholders
conform more closely to the partnership rQles.
the rules simpler and easier to comply with.

The changes would make
The availability of

this treatment for small business corporations to avoid the double
tax on corporate earnings woQld also be broadened by removing certain
existing limits on its Qse.
The sQbstance of these changes has been worked out through extended
discussion with a committee of the American Bar Association.

It was

the intention of the Congress in enacting Subchapter S to provide that
a nwmber of small corporations should be able to avoid the

~mpact

of the corporate tax if they provided that the full corporate income
would be reflected on the returns of the stockholders in the same
general way in which partnership income is shown on the returns of
the partners.

Unfortunately, the utilization of Subchapter S has

been restricted because of the considerable complexity of the provision.
Under the amendments a simpler set of rules will be available,
particQlarly to a corporation which was always a Subchapter S
corporation.

- 51These changes WOQld require that certain limitations now applica
to partnerships be made applicable to Subchapter S corporations also,
such as the limitation with respect to pension plan contributions on
behalf of shareholder employees.
For the longer rQD this Administration believes that the
Subchapter S option should be made more broadly applicable than
it is now.

Conceptually, this is a far more reasonable way of

dealing with small businesses than is the extension, or even continuation, of a corporate surtax exemption.

expe~t

to give

serious study to possibilities for enlarging the application of
Subchapter S in ways that will preserve the important element of
simplification, and we hope to report back to this Committee
shortly in this area.

(16)

Extension of Special Treatment of Banks Holding Foreign
Deposits.

Interest earned on U. S. bank deposits owned by foreigners
not resident in the United States and not connected with a trade
or business conducted here is exempt from income tax, and the bank
deposits themselves are exempt from estate tax.

However, existing

law provides that these exemptions shall not continue beyond 1972.
The expiration date was enacted in
Investors Tax Act.

1966 as part of the Foreign

At the time, the Congress was concerned that

termination of the exemption would have an adverse impact on
foreign balances in the United states, and the effective date for
terminating the exemption was therefore

defer~ed

for six years.

- 52 The balance of payments continues to be a matter of concern.
While we cannot forecast what the situation will be by 1973, it is
clear that the scheduled termination will make a solution to the
problem more difficult to achieve.

Withdrawals are likely to be

made long before the effective date for terminating the existing
exemptions.

Once impelled to consider withdrawal of their deposits

by the prospective taxation of these deposits, foreign depositors
are likely to be alert to alternative investment opportunities and
will take advantage of them as and when they occur.

It is, there-

fore, important that cancellation of the termination date for the
income and estate tax exemptions be undertaken at an early date,
if it is to be undertaken at all.

Accordingly, we recommend that

the Congress take action in accordance with the Presidentts balance
of payments statement recommendation of April

4 and that the sched-

uled termination of the exemptions be repealed.
Conclusion
These, then, are our present proposals.

We believe these pro-

posals will materially strengthen the structure of our tax system
and provide increased equity.

We will return with further proposals

as soon as we can make good judgments on the basis of further data,
study and discussions.

For example, we are proceeding to study in-

tenSively application of the estate and gift tax laws, the treatment
of assets appreciated at the time of death, the operation of the
foreign tax credit, and tax problems of particular industries and
types of' investment.

- 53 To achieve an equitable tax

structur~

in the short run and in the long run.

action is required, both

In the short run we need to impose

limits on the excessive use of tax benefits and incentives that produce
disproportionate tax burdens among our citizens.

And we must lift

the income tax burden from those in poverty.
In the longer run, we have to apply a stringent analysis to
the tax incentives and preferences which our law contains.

need to develop a program of penetrating research and analysis of
these provisions so that we can proceed with confidence to save what
is good in our tax system and to improve or eliminate what is bad.
That will prove to be a challenging task, but we shall move promptly
and we shall persevere.
Let me conclude with some tpoughts from President Nixon's
statement yesterday:
"Reform of our Federal income tax system is
long overdue.

Special preferences in the law

permit far too many Americans to pay less than
their fair share of taxes.

Too many other

Americans bear too much of the tax burden."
"This Administration, working with the Congress,
is determined to bring equity to the Federal
tax system."

000

Sources

o f Income

and

Ite~~zed

Deductions

With Adjusted Gross Income

fo~

the

154 Nontaxable

of $200,000 or more,

Indi~duals

1966

(Amounts to nearest thousand dollars)

Income
category
~djusted

Gain

1'JeCf1:lct-:r oh

Loss

category

112,145

Total itemized
deductions

137,169

Contributions
Cash
Non-cash

24,015
54,948

125,257
85,015
10,457

Interest
Home mortgage
other

1,102
27,699

26,478
2,244
761

Taxes
State & local
income
Real estate
Other

gross income
112,145

(AGI)
Adjusted gross income
plus excluded
capital gains)
Investment income
Dividends
Taxable interest
Ca~1tal gains (including
50 percent o~ longterm gains)
Estate and trust income
Royalty income
Business income
Wages ano salaries
Farm
Other business
Partnership
Subchapter S Corp.
Rental income
Other income

137,169
85,015
10,457

26,504
2,246
1,035

2
274

6,536
32
1,899
797
133
1,150

-12,758
6,536
-2,623
-8,226
-7,964
-1,018
537

2,655
10,125
8,761
1,151
613
1,460

288

1,172

3/
-

78,580

27,802

8,681
4,657
2,072
1,953

Vl
~

239

Miscellaneous

15,156

Tax computation
and credits
Taxable income
Tax be~ore credits
Tax credits gj
Tax a~er credits

1,505
836
838

,-,,,-

'1/

Depreciation
---

130,458

Medical

Depletion

1/ Capital loss a~ter $1,000 limitation.
Principally investment credit and foreign tax credit.

Amount

Net

927

'1/

---

Limited to depletion and depreciation
reported on individual income tax returns.

--.....

3,559

- 55 Table 5
,The 154 Nontaxable Individual Income Tax Returns
Reporting AGI of $200,000 or More in 1966,
Classified By Major Tax Reducing Factors ~

Major
tax reducing
factor
Deductions
Charitable contrib.
Interest
Taxes: State and
local income
Real estate
Not specified
Miscellaneous, not
specified
Credits

Total

$200,000
to
$500,000
AGI

19
55

$500,000
to
$1 million
AGI
13
16

.
Over
$1 million
AGI

17
1

All nontaxable
returns over
$200,000 AGI

49
72
l2
1
1

12
1
1
12

103

Y Returns

154

are classified according to the principal factor reducing tax
from a high adjusted gross income base,

y Primarily

investment credits and foreign tax credits.

TREASURY DEPARTMENT
WASHINGTON. C.C.
April 22, 1569
TECHNICAL EXPLANATION OF TREASURY TAX REFORM PROPOSALS
TABLE OF CONTENTS:
I-A
I-B
II
III
IV-A

Limitation on Tax Preferences (LTP)
Allocation of Deductions
Relief for Poverty Level Taxpayers
Mineral Production Payments
Private Foundations

IV-B
IV-C
V
VI
VII

Curbing of Abuses in Debt. Financing of Acqu.isitions
-Expansion of Taxation of Income from Unrelated Business and
from Investments of Certain Organizations
Revision of Charitable Contribution Deduction
Corporate Securities
Multiple Corporations

VIII
IX
X
XI
XII

Farm Proposal
Treatment of Accelerated Depreciation by Public Utilities
Stock Dividends
Consistency of Capital Gain and Loss Rules
Restricted Stock Plans

XIII
XIV
XV
XVI

Taxation of Income Accumulated Trusts
Liberalization of Moving Expense Rules
Subchapter S--Small Business Corporations
Deposits in U. S. Banks

I - A-I
Technical Explanation
Limit on Tax Preferences (LTP)
1.

General Description.
The proposal to place a limit on tax preferences (LTP) would impose

a ceiling on the maximum amount of tax preferences that an individual
could claim in anyone year.

This ceiling would equal 50 percent of the

taxpayer's total income; and for this purpose "total income" equals adjusted gross income (exclusive of any long-term capital gain) plus the
total amount of tax preferences.

The amount of preference disallowed

would be added to adjusted gross income and thus be subject to tax at
ordinary income tax rates.

In no case, however, would an individual's

allowable tax preferences (i.e., those that remain not subject to tax)
be reduced below $10,000.
2.

Detailed Description of the Proposal.
A.

Tax Preferences
The items of tax preferences which are subject to the limit

imposed by LTP are as follows:
(1)

Charitable Contributions of Appreciated Property.

The

amount of tax preferences would include appreciation in the value of
property donated to charity.

The amount so included is limited to the

amount allowable as a deduction for the taxable year under the limitation
of section 170 (proposed to be increased to 50 percent of an expanded
base including adjusted gross income (after application of LTP) plus
allowable tax preferences in excess of $10,000*).

This is further explained in the technical explanation on
allocation of deductions.

I - A- 2
When the value of the donated property plus other contributions
exceeds the applicable charitable deduction limitation, only so much
of the appreciation element shall be considered as a tax preference
as is equal to the difference between (a) the deduction limitation,
and (b) the sum of the cash and the basis of the property contributed.
In other words, if a taxpayer's section 170(b) limitation is $40,000,
as computed on the proposed expanded base, and he has contributed to
charity cash of $10,000 and property with a tax basis of $13,000
having a fair market value of $50,000-, only $17,000 would be included
as an item of tax preference for the taxable year in which the contribution
is made.

The $20,000 in excess of the deduction limit which may be

carried over and deducted in a subsequent year would be included as an
item of tax preference for the year to which it is carried.
(2)

Intangible Drilling Expenses and Percentage Depletion.

The taxpayer would also include as an item of tax preference the excess
of (i) intangible drilling expenses under section 263(c) and percentage
depletion expenses claimed during the taxable year under section 613,
over (ii) the allowable amounts of cost depletion and straight-line
depreciation that would have been claimed had the expenses been
capitalized.

For purposes of computing this excess, the mineral

properties will be considered on a property-by-property basis as under
section 614.

I - A- 3
(3)

Accelerated Depreciation.

Tax preferences will also

include the excess of accelerated depreciation on section 1250 property
claimed under methods described in section 167(b)(2), (3), or (4), over
the amount allowable under the straight-line method in section 167(b)(1).
For purposes of computing this excess,

the properties will be considered

on a property-by-property basis.

(4)

Farm Losses.

If a taxpayer adopts a method of accounting

which requires an inventory and capitalization of direct and indirect
costs which would be capitalized under accounting methods generally
applicable to other industries, his farm loss is not considered a
tax preference.

If the taxpayer does not take these steps, however,

his farm loss is considered a preference to the extent it exceeds
the amount of the farm loss computed under such a method.

In the

absence of the taxpayer's establishing the precise amount of the
preference, it is presumed to be the excess of ordinary farm deductions
over ordinary farm income.

Capital gain on farm assets is not taken

into account.
B.

Minimum Allowable Preferences.
A $10,000 floor would be placed on the minimum amount of tax

preferences that a taxpayer could claim.

Thus, in no case would LTP

reduce the amount of allowable tax preferences below $10,000.

To effect

this result, after determining the maximum amount of tax preferences
allowed under the general rule, the taxpayer will compare this amount to
$10,000; the greater of these two is his allowable tax preferences.

I - A- 4
C.

Five Year Carryover of Disallowed Preferences.
If the operation of LTP has resulted in disallowing an amount

of tax preferences in one year and thereby subjecting them to tax in
that year, a five year carryover equal to the amount of such disallowed
preferences is provided.

This carryover can then be used in a subsequent

year to reduce the taxpayer's ordinary income.

However, such reduction

will be allowed only to the extent that in the subsequent year the tax
preferences are less than the limit on such preferences.

For example,

if an individual has salary of $100,000 and tax preferences of $20,000,
the maximum amount of tax preferences he may claim in the current year
is $60,000 (50 percent of $120,000).

If he also had a $50,000 carryover

of disallIDWed preferences from prior years, he could use part of his
carryover to reduce his adjusted gross income by $40,000 (the difference
between his limit on allowable preferences of $60,000 and the preferences
he claimed in the current year of $20,000).

He would then have an

adjusted gross income in the current year of $60,000 rather than $100,000,
and a $10,000 carryover to the next year (assuming the carryover was
not more than five years old).

If the five-year period expires with

respect to certain carryovers, that amount of expired carryover will be
applied to increase the basis of a capital asset at the time it is sold
to the extent a tax preference has been claimed on such asset.
will have the effect of reducing the capital gain on such asset.

This

I - A - 5

General Calculation.
Computation of adjusted gross income with LTP would be

relatively easy and could be easily adapted to the return form.
In general, adjusted gross income is increased by the amount by
which (i) the total amount of tax preferences exceeds (ii) the limit
on tax preference (which is equal to one-half of total income) or
$10,000, whichever is greater.

However, if the limit exceeds the

amount of preferences claimed and if a disallowance carryover is
available, ordinary income may be reduced by the amount of the excess
to the extent of the carryover.

In the case in which adjusted gross

income is less than zero, one-half of the tax preferences will be
disallowed.

This will have the effect of reducing the taxpayer's

net operating loss by the disallowed amount and will accordingly
give rise to an equal LTP carryover.

Taxpayers Subject to LTP.
Individuals, estates, and trusts would be subject to the limit

on tax preferences.

Furthermore, a shareholder in a Subchapter S corporation

or a partrer irn. a partnership would reflect his proportionate amount of
tax preferences claimed by the corporation or partnership in his own
return; he would then add this amount to his own amount of tax preference
items, and the total amount would be subject to the limit.

I - A - 6

Transition Period.
In 1969 the limit on tax preferences will be equal to

70 percent of total income (adjusted gross income plus tax preferences),
and in 1970 the limit will be 60 percent of total income.

In 1971

and thereafter the limit will be 50 percent, so that no individual
will be able to claim more than one-half his total income as taxpreferred exclusions or deductions.

I-B-l-

Technical Explanation
Allocation of Deductions
A.

General calculation rule.

Under the proposal, an individual will be subject to allocation
if two conditions obtain:

First, if he has the type of deductions

subject to allocation (Le., "allocable expenses"); and second, if
he has allowable tax preferences in excess of $10,000.
When these two conditions are met, the total amount allowable
as a deduction with respect to the allocable expenses is a figure
which is obtained by use of the following formula:
as modified) X Total Allocable Expenses
A.G.l. as modified +
Allowable Tax
Preferences $10,000

= Allocable

Expenses
Allowable as Deductions

For the purpose of the allocation formula, the definition of
adjusted gross income would be modified so that adjusted gross incame would be reduced (but not below zero) by the itemized deductions
which are not subject to allocation (e.g., trade or business expenses,
child care expenses, alimony, etc.)

This aspect of the proposal is

explained in more detail later in this explanation.
Taxpayers subjectto the allocation rules include individuals,
estates, and trusts; and the tax preferences claimed by partnerships
and Subchapter S corporations will be passed through
to the partners or shareholders to be accounted for in allocating their
individual itemized deductions.

I-13-2-

As a result of the allocation formula, same taxpayers having
otherwise allowable deductions in excess of their standard deduction may find that the amount allowable is now less than the standard
deduction.

In such case, the standard deduction would be available

to the taxpayer in full.
B.

Definition of "allocable expenses."

The deductible expenses which are subject to allocation under
the proposal (called "allocable expenses") are:
(1)

Interest payments deductible under section 163.

Although

it may be possible to trace the proceeds of a loan to the purchase
of particular investment property and, thus, relate the interest
expense to a particular item of income, the general allocation formula would nrvertheless apply to all

inten~st

incurred as a nonbusiness

expense, as it is generally a completely arbitary decision as to which
expenses or purchases are to be paid from borrowed funds and which with
funds on hand.

Accordingly, the present rule of section 265 which com-

pletely disallows any interest deduction for indebtedness used to purchase
or carry wholly tax-exempt obligations will no longer apply; instead such

interest deduction will be treated under the general allocation formula.*

* There is, however, an exception to the general rule that the
entire deduction for interest expense is subject to allocation rather
than complete disallowance. Under the proposal section 265 (2) would
be amended to disallow completely interest expense directly traceable to the first $10,000 of exempt interest income. This rule
adopts the theory that the $10,000 exempted from "tax preferences"
consists first of exempt interest income and that a person with less
than $10,000 of exempt interest income who is entitled to no deduction
under present law because of section 265 (2) should be in no better
position under the allocation of deductions proposal. If exempt interest income is mOre than $10,000, the proportionate amount of interest erpense traceable to such excess will be placed into the general
aJlnc8tinn nnnl_

I - B-3 (2)

Tax payments deductible under section 164.

The allocation

provision would apply to a tax payment (which is not a business expensl
even though it may technically be related to a specific item of taxab1t
income.

This rule is provided because of the difficulty and comp1exit;

of applying a direct tracing rule and because of the uneven results the
would otherwise occur depending on each State's taxing pattern.
(3)

Personal theft and casualty losses deductible under sec-

tion 165 (c)(3).

While a casualty loss does not represent an

out-of-pocket expense, its deduction is grounded on the theory that
the taxpayer must use his income to replace the property.

Thus, to

the extent that exempt funds are available for this purpose, it is
logical to apply the allocation provision. * Only casualty and theft
losses under section 165 (c)(3) are subject to allocation.
The allocation proposal does not cover losses incurred in
a trade or business deductible under section 165 (c)(l) since such
losses are related to fully taxable income; nor does it cover losses
deductible under section 165 (c)(2) (relating to losses incurred in
a transaction entered into for profit, though not connected with a
trade or business) since such losses will, for the most part, merely
offset capital gains, except for the limited deduction of $1,000
against ordinary income.

* Where the casualty loss exceeds total income, the amount disallowed in computing a loss carryover would be limited to the amount
of exempt income. OtherwiSe it would be possible for more of the
losses to be disallowed than there is exempt income. If the excess
casualty loss is carried forward or back as a net operating loss it
would be subject to allocation in the year to which it is carried.

I - B- 4 -

(4) Charitable contributions deductible under section 170. The
amount of charitable contributions subject to allocation would be
limited to that amount which is deductible under the percentage limitation of section 170 (b), which would be increased to 50 percent of an
expanded income base.

In order to prevent the distortion which would result from
measuring the percentage limitation for the maximum charitable contribution deduction by reference to adjusted gross income while at
the same time disallowing part of that deduction on the basis of excluded i terns which are not part of ad.justed gross income, it is proposed to expand the income base against which the maximum percentage
limitation is applied to include the tax preferences used in
the allocation formula to the extent they exceed $10,000.

The inclu-

sion of these items in the base against which the maximum percentage
limitation is applied will be effected in 197~.

The exclusion of $10,000

from the limitation base is consistent with the fact that .there :ism'allocatim

I-E-5-

against the first $10,000 of exempt income.

Thus, if an individual's

income consists of $100,000 salary and $60,000 of long-term capital
gain,*his maximum charitable contribution deduction would be computed
by applying the appropriate percentage to $150,000 (instead of
$130,000 as under present law).

However, his actual contribution

would be subject to the allocation provision, as a part of it is related to the excluded $30,000 of capital gain income.
Any carryover resulting from a charitable contribution in excess
of the percentage limition will be subject to allocation in the year
to which it is carried as though it were made in that year.
(5)

Medical, dental, etc., expenses deductible under section 213.

(6)

Cooperative housing expenses deductible under section 216.

Section 216 allows a stockholder-tenant a deduction for his allocable
share of expenses incurred by the cooperative housing corporation for
real estate taxes and interest which would otherwise be deducted by
the corporation itself.

Allocation of this deduction is consistent

with the fact that the underlying items--taxes and interest--are
subject to allocation when paid directly by a home-owner.
On the

to be allocated.

hand, trade or business expenses are not required
Thus, for example, taxes or interest which are

attributable to a trade or business expense would not be subject to

*As described later in this explanation, the excluded one-half of
long-term capital gain is considered a tax preference for purposes
of the allocation of deductions proposal.

I - B- 6
allocation, whereas taxes or interest which are attributable to a
personal or investment expense would be subject to allocation.*
C.

Definition of "allowable tax preferences" for purposes of

allocation.
The amount of tax preferences which are taken into account for
allocation purposes is the same total amount of tax preferences which
is allowed after the Limit on Tax Preferences has been applied, with
the addition of tax-exempt interest and the excluded one-half of capital
gains.

However, itemized deductions are allocated and disallowed only

to this amount of tax preferences in excess of $10,000.
In detail, the particular items of tax preferred exclusions and
deductions which are taken into account in allocation are as follows:
(1)

Tax-exempt interesto

Interest (including original issue

discount) received from any obligations described in section 103 (a)
(as limited by section 103 (b)) is considered to be an excluded item
under the proposal.

Thus, allocable deductions will be disallowed

to the extent that they are proportionately allocable to the interest

In addition, the deductions for child care under section
214 and alimony under section 215 are not subject to allocation
under the proposal. Child care expenses are nonallocable because
they are in essence an expense of earning taxable salary; deductible
alimony represents, in effect, an assignment of income which is
fully taxable to the wife.

I-B-7-

on state and municipal bonds. * When tax-exempt bonds sell at a
premium, the net yield realized on them may be substantially less
than the stated interest.

Hence, it is appropriate to reduce such

exempt interest by a proportionate amount of the bond premium in
deter.mining the amount of excluded items.
Any investment expense which is disallowed under section 265
(which would be amended as described later in this explanation)
would be deducted fram the applicable tax preferred items of exclusion
(exempt interest, capital gains, and the appreciation on property
donated to charity) to determine the net amount of those tax preferences.

Similarly, any interest expense allocable to the first

$10,000 of exempt interest income and disallowed under the new section 265 will also be netted out against exempt interest incame.
(2)" Depletion and intangible drilling expenses.
treats as a tax

pr~ference

The proposal

all percentage depletion and intangible

drilling expenses claimed under sections 613 and 263 (c), respectively,
in excess of the amounts that would have been allowable under cost
depletion and straight-line depreciation of capitalized costs.

For

these purposes, the properties are considered on a property-byproperty basiS, as under section 614.

* Furthermore, any tax-exempt interest that is currently being
paid on United states bonds or on obligations of certain corporations
organized under an Act of Congress will be included as a tax preference
to the extent that, to do so, would not interfere with a contractual
obligation guaranteed by the Constitution.

I-B_8_

(3)

Long-term capital gains.

The one-half of net long-term

capital gains deductible under section l202 is considered an
allowable tax preference for purposes of allocation.

(4)

Charitable contributions of appreciated property.

Another

of the tax preference items against which the deductions described
above must be allocated is the appreciation in the value of property
donated to charity for which a tax deduction is taken.

The untaxed

appreciation represents income that has accrued during the period
the property was held; and the transfer of the property by the taxpayer
is the event which properly triggers recognition of such income as a
tax preference against which deductions should be allocated, since
at the time of transfer it becomes evident that the donor will pay
no tax on such appreciation.

Moreover, the donation to charity of

such income gives rise to the charitable deduction.
The amount of appreciation to be included as a tax preference
is limited to that for which a tax deduction is obtained under the
percentage

limitatior.

of section 170.

When the value of the

donated property plus other contributions exceeds the applicable
deduction ceiling, only so much of the appreciation element shall be
considered as a tax preferenee as is equal to the difference between
(a) the deduction limitation, and (b) the sum of the cash and the
basis of the property contributed.

In other words, if a taxpayer's

section 170 (b) limitation is $40,000, as computed on the proposed
expanded base, and he has contributed to charity cash of $10,000

I - B_ 9 and property with a tax basis of $13,000 having a fair market value
of $50,000, only $17,000 would be considered a tax preference in the
taxable year in which the contribution is made.

The $20,000 in ex-

cess of the deduction limit which may be carried over and deducted
in a subsequent year would be treated as a tax preference in the
year to which it is carried.

(5)

Accelerated depreciation.

The amount of depreciation claimed with

respect to section 1250 property in excess of what would have been
allowed under the straight-line method is considered an item of
tax preference.

For these purposes, the arnoWlt of accelerated over

straight-line depreciation will be considered on a property-byproperty basis.

(6)

Farm losses.

If a taxpayer adopts a method of accounting which

requires an inventory and capitalization of direct and indirect costs
which would be capitalized under accounting methods generally applicable
to other industries, his farm loss is not considered a tax preference.

the taxpayer does not take tbese steps, however, his farm loss is considered
a preference to the extent it exceeds the amount of the farm loss computed
under such a method.

In the absence of the taxpayerts establishing the

precise amount of the preference, it is rresumed to be the excess of
ordinary farm deductions over ordinary farm income. Capital gain on farm
assets is taken into account as a capital gain but '..rill not reduce a
farm loss.

I - B - 10 (7)

A special adjustment is made for those persons who utilize

an LTP carryover fram a prior taxable year to the extent that adjusted gross income is reduced.

Allocating deductions to this amount

is proper because the carryoyer, to the extent used in the taxable
year, represents tax preferences which have been disallowed in a
prior year but are allowed in the current year for averaging purposes.

Therefore, the carryover represents tax preferences which are

used to exclude part of the current year's adjusted gross income
from the tax base; and as such, deductions allocable to such excluded income should not be allowed.
D.

Modified definition of adjusted gross income.

The formula for establishing the ratio of expenses to be disallowed uses the concept of "modified adjusted gross income." That
is, the amount of allocable expenses allowable as a deduction is
that amount which bears the same ratio to the total allocable expenses, as modified adjusted gross income bears to modified adjusted
gross income plus allowable tax preferences in excess of $10,000.
"Modified adjusted gross income" is gross income less all allowable
deductions other than those subject to allocation (e.g., less all
trade or business expenses, alimony, child care, and those section
212 expenses allowable under section 265).

In other words, only

that amount of taxable income in excess of those deductions fully
allowable against that income is taken into account in the allocation
formula.

I-B -11-

Treatment of investment expenses.

Under present law, investment expenses are fully deductible except to the extent allocable to wholly exempt income, as provided
in section 265 (1).

Under this proposal, the category of exempt

income against which investment expenses would be proportionally disallowed would be expanded to include

not only wholly tax-exempt in-

terest but also capital gains and the appreciation on
property donated to charity.

Thus, the deduction for investment

expenses would be allowed to the extent it is related to taxable
investment income and disallowed to the extent related to exempt
investment income from these sources.

The effect of this treatment

is that investment expenses are allocable only in relation to the
income to which they give rise and not in relation to other types
of income.

This reflects the fact that investment expenses are de-

ductible because they result from producing investment income; whereas
the medical expense deduction, for example, is granted because of the
nature of the expense.
If an investment expense is disallowed under section 265, an
adjustment would be made in computing the amount of tax preferences:
the disallowed expenses would be deducted from the gross amount of the
tax preferred exclusion, and only the net amount would be considered
a tax preference.

Similarly, taxable investment income is included

in modified adjusted gross income only to the extent that it exceeds
investment expenses which are allowable as deductions under section
212 and section 265.

I-B_12_

Adaptation to the return form.

The handling of the allocation proposal on the return form
would not be a difficult matter.

The application of the allocation

provision would proceed as follows:
(1)

Total the allowable tax preferences after LTP.

excess of $10,000, nothing more need be done.

If not in

If the total is more

than $10,000, the total should be reduced by $10,000.
(2)

Compute the amount of allocable expenses.

(3) Compute modified adjusted gross income. It is adjusted
gross income less all deductions other than personal exemptions and
allocable expenses.

This is the numerator of the allowance formula.

(Net investment income, i.e., taxable investment income reduced by
deductible investment expenses, is included.)

(4) Total the amount of modified adjusted gross income and the
amount of allowable tax preferences.

This is the denominator of the

allowance formula.

(5)

The resulting percentage (i.e., item 3 over item 4) is

applied to the total of allocable expenses.
(6)

The resulting figure is the amount of allocable expenses

allowable as a deduction to reach taxable income

I - B - 13
G.

Transition Period.

For taxable years beginning on or after January 1, 1969, allocation will be required for one-half of the allocable expenses, with
the other one-half being fully allowable as deductions.

For taxable

years beginning in 1970, all allocable expenses will be subject to
allocation.

II - 1

Technical Explanation

Relief for Poverty Level Taxpayers
1.

Background
Under existing law there are single individuals as well as

families who are paying income tax even though their total incomes
are below the poverty levels.

There are almost 28 million persons

at or below the poverty level, of whioh

4.3 million' are subject

to Federal income tax to some degree.
2.

Basic Proposal
Under the proposal no taxpayer at or below the poverty levels

will be subject to Federal income tax. (Poverty levels (rounded)
have been determined on the basis of 1966 HEW poverty levels
increased by 6 percent to obtain 1969 levels)

This would be

accomplished by adjusting the optional tax tables to provide a
low income allowance.

3. Low Income Allowance
The allowance would be sufficient to exclude from tax all families
with incomes below poverty levels.

The allowance will be reflected in

the optional tax tables so that a separate computation would not be
required, thus assuring simplicity of application.
ments will be geared to family

The adjust-

si~e.

The allowances, as shown in Table 1, will be reduced by 50 cents
for each dollar of adjusted gross income over poverty levels.

As a result,

in addition to the elimination of tax for those below poverty levels, tax

II - 2 reductions will be realized on incomes which exceed poverty levels in decreasing amounts.

No individual will have a tax increase.

The

phase out of the allowance enables relief to be provided for those
in.poverty at the lowest possible revenue cost.
TABLE 1

(1)
Famil;y: size

(2)

.(3)

Present Level
New Level of
Maximum
of Nontaxabilit~ Nontaxa.bili,t~Allowanc,e

(4)
AGI Level at
Whi ch Allowance
is Reduced to zero~

900

1700

800

330J.!

1600

2300

700

3700

2300

2900

600

4100

3000

3500

500

4500

3700

4100

400

4900

4400

4700

300

5300

5100

5300

200

5700

5800

5900

100

6100

NOTE:

Column (2) is the HEW 1966 povertr levels increased by
six percent (rounded).

Allowance is reduced 50 cents for each dollar of AGI over
colwnn (2) levels.

3. For practical purposes the allowance is no longer utilized
by the single individual above an AGI level of $3,250 since
the ordinary standard deduction is more generous than the
minimum standard deduction plus allowance for single
individuals with incomes exceeding $3,250.

II -

4. Examples
The following are examples of how the proposed allowances
would operate to reduce or eliminate tax:
Example 1 - A married taxpayer with four children filing a
joint return and having an AGI of $4,700 has, under present law,
exemptions totaling $3600 and a minimum standard deduction of $800.
Re is subject to tax on $300 and would pay $46 in tax.

The pro-

posal would give him an additional allowance of $300 since his AGI
does not exceed poverty levels.

As a result the taxpayer would

have no taxable income.
Exam~le

2 - A married taxpayer with one child filing a joint

return and having an AGI of $2,900 has, under present law, exemptions
totaling $1,800 and a minimum standard deduction of $500.
subject to tax on $600 and would pay $86 in tax.
would give him an additional allowance of $600.

He is

The proposal
As a result, the

taxpayer would have no taxable income instead of $600 as under
present law.
Example 3 - A single individual with an AGI of $2,000 has,under
present law, a $600 exemption and a minimum standard deduction of $300.
He is subject to tax on $1100 and would pay $163 in tax.

The proposal

would adjust the optional tax table by an allowance of $650 which is
computed by reducing the maximum allowance for a single individual of
$800 by 50 percent of the difference between poverty level income and the

II - 4 -

taxpayer's AGI (allowance

= $800 -

50%

($2000 - 1700)

= $650).

As a result, the taxpayer would have a taxable income of $450 and
would pay a tax of $63 instead of $163 as under present law.

5. Effective Date
The recommended changes in the optional tax tables would be
applicable to tax years beginning after December 31, 1969.

VI
2.

Ratable Reporting of Original Issue Discount
A.

Present Law

Under present law, in general, if a corporation issues a bond,
debenture, note, certificate or other evidence of indebtedness
(hereinafter referred to as an indebtedness) which is a capital asset
in the hands of the holder, and the stated redemption price of the
indebtedness at maturity exceeds its issue price, the excess is
original issue discount under section 1232 of the Code.

If the

indebtedness is held to maturity, at such time the holder is taxed
at ordinary income rates on the amount of the original issue discount.
If the indebtedness is sold or exchanged prior to maturity in a transaction which results in taxable gain, the portion of the gain equal
to the original issue discount attributable to the period of time
the indebtedness has been held is taxed to the holder at ordinary
income rates.

The balance of the gain is treated as capital gain.

Thus, under section 1232 taxation of original issue discount is
deferred until the year of redemption or the year in which the holder
sells or exchanges the indebtedness in a taxable transaction.

contrast, the corporation issuing the indebtedness amortizes the
amount of the original issue discount over the life of the indebtedness, thus providing a current interest deduction each year to the
issuing corporation.
B.

Proposal

It is proposed that the tax treatment of the holder of bonds
with original issue discount be made consistent with the treatment

VI - 1
Techni~al

Explanation

Corporate Securities
1.

Denial of Installment Reporting of Gain
A.

Present Law

Under present law, there is a question whether section 453 (b)
of the Internal Revenue Code permits a taxpayer to elect installment
reporting on the receipt of certain corporate evidences of indebtedness, such as publicly traded long-ter.m convertible debentures, as
part of the consideration in a casual sale of real or personal propSome taxpayers who have received such corporate evidences of

erty~

indebtedness in exchange for the stock of another corporation have
been treating the indebtedness as qualifying for installment reporting under section 453 (b).
B.

Proposal

The proposal would eliminate installment reporting on the receipt
of corporate and governmental evidences of indebtedness as part of
the consideration in a casual sale of real or personal property
when the evidence of indebtedness has interest coupons or is in
registered form.
C.

Effective Date

The proposed rule would apply to sales or other dispositions
made after February 24, 1969.

12 -

In essence, the effect of this proposal would be to disallow the
additional deduction granted by section 170 (b)(l)(C) and (g) of the
Code to the extent that such additional deduction allows the taxpayer
to reduce taxable income to less than 20 percent of adjusted gross
income.

For example, assume that a taxpayer's adjusted gross income

is $1,000,000 (after the application of the LTP proposal) and that
bis allowable itemized deductions, including the unlimited charitable
deduction, amounted to $900,000 (after the application of the allocation of deductions proposal).

In this case, his tentative taxable

income would be $100,000 ($1,000,000 less $900,000).

Under this

proposal, the tentative taxable income would be increased by $100,000
so that final taxable income equalled $200,000 (20 percent of the adjusted gross income of $1,000,000).

If, however, only $50,000 of the

$900,000 of itemized deductions was attributable to the unlimited
charitable deduction, only $50,000 would be added to the $100,000 to
make his final taxable income $150,000, or 15 percent of adjusted
gross income.
C.

Eff~ctive

Date.

Ibis proposal would become effective for taxable years beginning
after December 31, 1968.

V-II

Changes in the Unlimited Charitable Contribution Deduction.
A.

Pyesent Law.

Under section 170 (b)(l)(C) and (g) of the Code an individual
can deduct charitable contributions in excess of the general percentage limitation, if in eight out of the 10 preceding taxable years his
charitable contributions and income tax paid exceed

90 percent of

taxable income. ~
B.

Proposal.

This proposal would require those taxpayers claiming the unlimited
charitable deduction

to increase their taxable income by an amount

which, then added to the tentative taxable income figure (i.e., the
figure arrived at after application of the LTP and allocation of deduction proposals), would equal 20 percent of adjusted gross income.
However, this increase could never be greater than the additional
charitable deduction allowed under sections 170 (b)(l)(C) and (g); or,
stated another way, this proposal would never result in disallowing the
charitable deduction allowable under the percentage limitations or
other itemized deductions.

For this purpose, taxable income is computed without regard to
the charitable deduction, personal exemptions, and any net Operating loss
carryback.

-11

The qualification rules in section 170 (b)(l)(C) and (g) would
not be changed under this proposal. For purposes of determining the
amount of taxes paid plus contributions, the amount of tax will equal t~e
tax actually paid and the amount of contribution is the amount of the gIft
before application of LTP, allocation, or this proposal.

10 -

dilution in the equity interest of each share so that each share
will be worth $190 and each right worth $10.

Between January 15,

and January 30 (i.e.) after the stock has gone ex-rights) the
individual sells the stock for $190 per share and claims a
short-term capital loss of $1,000. After January 30, when he re~
ceives the tax-free distribution of rights which have no cost
basis he donates the rights to charity and claims a $1,000
charitable deduction.

Before taking into account the tax effects

the individual would appear to be out-of-pocket $1,000.

How-

ever, after taking into account the tax effects the individual
actually makes an after-tax profit.

Because he is in the

percent tax bracket the $1,000 deduction and the $1,000 loss
produced a tax savings of $1,200 so his apparent $1,000 economic
gift actually increased his after-tax income by $200 as a result
of the double deduction he realized for his single economic gift.
B.

Proposal

In these circumstances it is proposed that section 170 be
amended to provide that no deduction be allowed for the gift of
stock rights unless the donor elects to allocate an appropriate
portion of the basis of the underlying stock to the contributed
stock rights.

Effective Date.

The allo':ution proposal in ('onnection with a gift of stod
rights would apply to gifts made after April 22,

19~9.

v- 9 the year and also claims the right to deduct the $100,000 rental
value from his $900,000 of income.

A deduction is claimed al-

though the fair rental value of the property attributable thereto has not been included in income.
B.

Proposal.

It is proposed that no deduction be allowed for the contribution of the right to use property to a charity.

Effective Date.
lwa

The use of property proposal would apply to gifts made
after April 22, 1969.

6. Contribution of Stock Rights.
A.

Present Law.

Under existing law an individual can, in certain circumstances, obtain a double deduction for a single gift of stock
rights to charity.

A charitable deduction is obtained when

the rights are donated, and a loss deduction may be obtained
if the stock which was purchased at a price that took into
account the value of the rights is sold separate from the
rights at a reduced price.
For example, a company listed on the New York Stock Exchange may have announced on January 1, that it will distribute
stock rights

OJI

January 30, to shareholders of record as of

January 15.

All individual in the 60 percent marginal tax brack-

et purchases])O shares of stock at $200 per share, or a total
of
a~'e

$~)O,OOO" pl

ior to January 15, lmuwiJlg that after the r:ights

distributf d the market vrill discount the shares to reflect

The' Proposal.

To prevent this unwarranted tax benefit it is recommended
that section 170 be amended. to provide that the allowable chari table deduction be reduced by the amount of ordinary income or
net short term gain that would have resulted if the property

had been sold at its fair market value rather than being donated
to charity.

Under this proposal, the taxpayer in the above

example would be entitled to a charitable contribution deduction
of $3,000 ($15,000-$12,000).

Effective Date.

The ordinary income proposals would apply to gifts made
after April 22, 1969.

4A Gifts of the Use of Property.
A.

Present Law.

Under existing law a taxpayer, by granting to a charity
the right to use property for a specified period, may exclude
from income the amounts that would have been included in income
had the property been rented to a noncharitable party; in addition,
the donor claims a charitable deduction for the fair rental
value of the property.
For example, an individual owning a ten story office building which is currently netting $1 million annually may donate
use of one floor for a year to a charity.

His economic gift is,

of course, $100,000, the fair rental value of the space.

How.

ever, for tax purposes he reports only $900,000 in income for

v -7 3. Gifts of Ordinary Income Property.
A. Present Law.
Under present law, when property, which if retained or sold
would have produced ordinary income

(or short-term capital gain),

is given to a charity, there is no tax on the ordinary income
earned with respect t?ereto; in addition, a charitable contribution deduction is allowed for the fair market value of the property.
For example, a married taxpayer filing a joint return with
$95,000 of income after allowing for deductions, and personal exemptions, is in the 60 percent marginal tax bracket and would have an
after-tax net income of $52,820.

If this individual sells an

asset valued at $15,000 which would produce $12,000 of income
taxable at ordinary income

rate~his

taxable income would be in-

creased to $101,000 and, after payment of his tax, he would be
left with $60,480 of after-tax income.

On the other hamrl, by do-

nating the asset to charity he pays no tax on the $12,000 income
and also deducts the full $15,000 value of the gift from his
other income thereby reducing his taxable income to $80,000.
After payment of Federal income tax he would be left with $61,660.
Thus, under present law by donating the asset to charity rather
than selling the asset, the taxpayer makes $1,180, the amount by
which he improved his after-tax position.

v - 6(a) the grantor does not retain a reversionary
interest; or
(b) the grantor retains a reversionary interest
which will or may reasonably be expected to take effect in
possession or enjoyment commencing after the expiration of
ten years from

~he

date of the transfer.

However, in circumstances where the income from the trusts
is taxed to the grantor, it is proposed that the- taxpayer be permitted a charitable deduction notwithstanding the fact that he retains a substantial reversionary interest.

In this respect it

should be noted that under present law a grantor that creates a
trust to pay income to a charity is not permitted to deduct an
amount representing the value of the charitable interest if he has
a substantial reversion in the property.

It is therefore recom-

mended that this rule be amended in order to permit a deduction
for the value of the charitable income interest transferred in
trust, the interest of which will be or may be reasonably expected
to take effect in possession or enjoyment within ten years commenCing with the date of the transfer of that portion of the trust.

Effective Date.

The repeal of the two-year charitable trust exception and the
denial of a deduction for charitable income trust gifts where the
income has not been taxed to the grar.tor shall be applicable in
cases of trusts created after April 22, 1969.

v
B.

- 5

Charitable Deduction for Income Gifts with Non-Charit. able Remainders.

(1) Present Law.

Under existing law,a grantor in a high tax

bracket desiring to make a substantial gift to a friend or a member
of his family may first transfer property to a trust to pay the income to a charity for a term of years, remainder to the intended
ultimate beneficiary. _ Under existing law, he would claim an

~ncome

tax deduction for the value of the charitable interest and would
also exclude from his gross income the income earned by the trust.
For example, assume a taxpayer in the TO-percent bracket
transferred property worth $100,000 currently earning interest at
the rate of five percent to a trust for two years specifying that
$5,000 be paid the charity each year, remainder to A.

If he had

retained the property for two years he would have received $10,000
in interest taxable at TO percent for an after-tax return of
$3,000.

On the other hand, by transferring the property to a

trust he received a charitable deduction of $9,498.50 (the present value of the charitable interest).

The $10,000 received by

the charity is not included in income and the deduction claimed
reduces his tax on other income by $6,648.95.
(2)

Proposal.

It is proposed that the grantor be denied

an income tax deduction for the value of an income interest
transfe~red

in trust which is committed to charity in circum-

stances where the income from the trust payable to charity is
not taxed to the grantor; i. e. ,

- 4

2 • Charitable Income Trusts·.
-.

A. The Two-year Charitable Trust.
(1) Present Law.
ing a trust

Under section 673 of the Code a person creat-

the income from which is payable to others is treated

as the owner of the trust and taxable with respect to trust income if
either the principal or the income may revert to him within 10 years
after the transfer of property to the trust.

o~ecial

exception con-

tained in section 673 makes this rule inapplicable if the income is
payable to a charity for a two-year period.

This provision conflicts

directly with the percentage limitations governing the deductibility
of contributions applicable to the vast majority of taxpayers.
For example, the maximum deductible contribution that could be
made each year by an individual who did not qualify for the unlimited
deduction and who has $100,000 of dividend income (and no other income)
would be $30,000 (or $50,000 under Part 1 above).

However, by

transferring 60 percent of his stock to a trust with directions
to pay the annual income ($60,000) to charity for two years and
then return the property to him, the taxpayer may presently exclude the $60,000 from his own income each year and thus circumvent the general provisions limiting deductible charitable
contributions to a percentage of adjusted gross income.
(2)

Proposal.

It is proposed that the special two-year

charitable trust rule contained in section 673(b) be repealed.

v - 3
Amount contributed to charity

$55,000

Percentage Limitation:
Adjusted gross income
Net Allowable Tax
Preferences
($11,000 - 10,000)

$100,000
1,000
$101,000

Charitable Limitation
(50% x $101,000)

$50,500

Maximum Charitable Contribution Deduction
(Lesser of eligible contributions or
maximum limitation)

$50,500

In this respect, it should be noted that under section 170 (b)

(5)

the amount by which eligible contributions exceeded 50-percent limit
($4,500 in the above example) may be carried forward for up to five
years subsequent to the year of contribution.
C.

Effective Date

The increase in the limit on the deductibility of contributions
from 30 percent to 50 percent of taxpayers' adjusted gross income
shall be applicable to taxable years beginning after December 31, 1968.
The limit may be computed on the expanded income base for taxable

year~

beginning after December 31, 1970, when the LTP and allocation of deductions proposal will be fully in effect.

v
"expanded income base."

The expanded income base includes

adjusted gross income* plus the taxpayers' allowable tax preferences** in excess of $10,000.
Under the proposal, taxpayers confining their contributions
to the five types of organizations generally described above would
be entitled to deduct all contributions provided the total deduction
claimed did not exceed the 50-percent limit.

On the other hand, a

taxpayer who does not confine his contributions to the type of
publicly supported institutions listed above (for example, a taxpayer
who made contributions to a private charitable trust that did not
receive substantial support from the general public) will not be entitled to deduct contributions in excess of an amount equal to 20
percent of the same expanded income base on which the 50-percent
limit is figured.

Of course, that taxpayer could, in addition to

the amount contributed to such a trust, deduct contributions to
organizations of the type listed above,

prov~ded

contributions in

each classification do not exceed the respective 20 percent and
50 percent limits.
For example, a taxpayer has $100,000 of adjusted gross income.
In addition, he has $11,000 of allowable tax preferences.

He con-

tributes $55,000 to an educational institution during the taxable year.
His maximum allowable charitable contribution deduction is computed
as follows:

* Adjusted gross income is defined for these purposes after application
of T.JTP.
** These are fully defined in the technical explanation covering the
allocation of deductions proposal.

Technical Explanation
Revision of Charitable Contribution Deduction
1.

Increase in Limitation from 30 Percent to 50 Percent.
A.

Present Law

Section 170 of the Internal Revenue Code provides for the deduction of charitable contributions.

Section 170'(b) limits the

deductibility of contributions to 20 percent of adjusted gross
income but also provides for additional deductions equal to 10
percent of adjusted gross income for a total

~imit

of 30 percent

provided any contributions claimed in excess of the 20-percent
limit are made to organizations defined generally as follows:
(1) churches, (2) educational organizations, (3) hospitals and
certain medical research organizations, (4) governmental units,
and (5) other specified organizations which receive a substantial
part of their support from the general public.
B.

Proposal

Under the proposal, the additional 10-percent allowance-which, in most cases, makes the effective limit on deductible
contributions 30 percent of adjusted gross income-'-would be increased
from 10 percent to 30 percent, thereby making the effective limit
on the deductibility of contributions 50 percent of the taxpayers'

DJ-C -15 -

Similarly, income from a member of a social club received by the social
club's title-holding company in exchange for providing exempt function facil
ties would not be subject to the unrelated business income tax.

On the othe

hand, income from a non-member would be taxable.
All transactions between the title-holding company and its parent
exempt organization would be ignored.

Thus, rent paid by a social club

to its title-holding company would not be income to the title-holding
company and would not give rise to a deduction by the social club.
Similarly, dividends paid to the social club would not be taxable.
The unrelated business taxable income of the title-holding company
would be computed in the same manner as that of the parent.

3. Effective Date.
These provisions will become effective for taxable years beginning
after December 31, 1969.

IV-C' - 14 -

The computation of unrelated business taxable income would be
subject to the same rules as social clubs with one addition.

The

business lease rules under present law and the proposed debt-financed
acquisition rules would be applicable to property permanently committed
to the insurance function.
of the debt-financed

Thus, for example, if all the conditions

a~quisition

rules applied, income of a fraternal

beneficiary society subject to those rules would be taxable even though
the property producing the income were

permanentl~

committed to the

insurance function.
C.

Title Holding Companieso

Under present law, a corporation organized for the exclusive purpose
of holding title to property, collecting income therefrom, and turning
over the entire amount thereof, less expenses, to an exempt organization
is itself exempt from tax.

However, the unrelated business income tax

applies to title holding companies if the organization for which it
collects income is subject to the unrelated business income tax.

This

treatment would be extended to all title holding companies since all
organizations for which theycollect income would be subjected to the
Mrelated business income tax by this proposal.

In the case of social clubs and fraternal beneficiary societies, title
holding companies for their benefit would be subject to the unrelated
bUsiness income tax.

However, the rules for determining the' tax exempt

character of the income would be applied as if the purposes of the titleholding company were those of the exempt parent.

Thus, for example, if a

title-holding company subsidiary of a parent fraternal beneficiary society
received rental income, that income would be exempt or taxable depending
upon whether or not the income were from property permanently comrni tted to

the insurance "functIon In The harms of the title-holding company.

IV-C - 13 fashion as income of social clubs.

The portion of that remaining

amount that is membership income in exchange for exempt function
facilities would be exempt and all other amounts would be included
in computing unrelated business taxable income.
With regard to insurance function income, all income from property
(and losses and deducti~ns directly connected to such income or property) permanently committed to providing for the payment of life, sick,
accident, or other benefits to members of the soci€ty (or dependents),
or for operating expenses of providing such benefits, would be excluded
from the unrelated business income tax as l1income from property permanently committed to the insurance or other beneficial function. 1t
Property ,muld be permanently committed to the insurance or other
beneficial function if it is held solely for the purpose of providing
for such benefits, meeting operating expenses in providing such benefits
or producing income for those purposes, and it is impossible, at any
time prior to providing all such benefits, for any part of the property
or income to be used for or diverted to any other purpose.
All income not falling within the categories of membership income
for exempt function facilities or income from property perITanently
committed to the insurance function would be includable in the computation of unrelated business taxable income.

DT-C - 12 ..

dining room at the club would fall within this category.
The specific exemptions under the tax for gains and losses
from the sales, exchanges, or other dispositions of property
constituting capital assets would be made inapplicable to social
clubs.

Such gains or losses would be subject to the normal rules

of income tax

treatment~

In all other respects, the computation of social club income subject to the unrelated business income tax would be the
same as that of other tax-exempt organizations.

Thus, for example,

net operating losses, charitable contributions, and the specific
$~,OOO deduction would be available in computation of unrelated

business taxable income.
(2)

Fraternal beneficiary societies.

The tax exemption for

fraternal beneficiary societies would be limited to-(i)

Income from dues, fees, or other amounts paid by

members for providing to such members or their guests goods,
facilities, or services in furtherance of the exempt function
(both fraternal and beneficial) of the organizationj and
(ii)

Income from property permanently committed to the

insurance or other beneficial function (insurance function
income) •
Thus, with the exception of the treatment of income from property permanently committed to the insurance or other beneficial function of the fraternal organization, the remaining amounts would be
subject to the unrelated business income tax in exactly the same

D/-C - 11-

all of these cases, the income would be exempt only if it met the
tl-ro-part test described above.
The computation of income subject to the tax would be similar
in most respects to the computation presently applicable under the
unrelated bustness income tax in general.

However, consistent with

the elimination of the ,"trade or business regularly carried on"
tests, deductions would be allowable if directly connected with §Jl
activity generating income subject to tax, rather than only if
directly connected with an unrelated trade or business regularly
carried on.

For example, fees paid by a social club for the manage-

ment of an income-producing portfolio of securities, otherwise
deductible as an expense for the production of income, would be
allowed as directly connected with that income-generating activity, even though that activity may not constitute a trade or
business regularly carried on.
The specific exceptions for investment income (interest,
dividends, annuities, rents, and royalties) would be made inapplicable ,nth respect to social clubs.

Thus, all investment in-

coree ,muld be subject to the two-part test described above.
Under tre t"\vo-part test, income from interest , dividends, annuities, rents, and royalties would ordinarily be taxable since,
:i n

most cases, they vTould not be received in exchange for exempt

function faeili ties.

Hovrever, such income could be exempt if it

,Tere received :rom the merribership in exchange for exempt function
facilities.

For example, rent paid by a member for a prilTate

IV~C

- 10 -

business regularly carried on" generally applicable under the unrealted business income tax.

Income from an investmentJl would

be subject to the tax whether or not the activities engaged in by
the social rlub in eenerati:r{3 tho.t income were sufficient to meet
the "trade or business" test of the unrelated business income tax.
Similarly, an admission fee paid by a nonmember for entry into an
annual fundraising dance would be taxable, whether or not the
annual fundraising dance were an activity sufficient to meet the
t es t

" regu 1ar 1 y

rarrlell nne
';J

The three specific exceptions to the term "unrelated trade
or business II would not be applicable to social clubs.

Thus, income

would not be exempt from tax simply because it was generated by a
trade or business carried on by persons who worked for the organization without compensation, because it was carried on by the organization primarily for the convenience of its members, or because
it consisted of selling merchandise received as contributions.

jj The elimination of the present exemption from the unrelated business income tax for dividends, interest, rents, royalties, annuities,
and gains from the sale of property for social clubs under this
proposal is discussed below.

IV-C - 9 -

to be generated from providing exempt function facilities such as
food or drink at the club bar or restaurant or playing facilities
at the club golf course or tennis court, and (2) the income would
have to be from ammmts paid by the membership.
Under part 1 of the test, any income which was not in exchange
for exempt function facilities would be subject to the tax, regardless of whether it was from member or nonmember sources.

Thus,

for example, interest paid to a social club on a loan would be
subject to the tax whether that loan were to a member or a nonmember.

Under part 2 of the test, income from providing exempt

function facilities would nevertheless be taxable if it is received from sources outside the membership.

For example, amounts

paid by a nonmember for a dinner at the club restaurant would be
subject to the tax.

the other hand, a similar amount paid by a

member would not be subject to the tax, since it would be income
from a member in exchange for providing exempt function facilities.
Thus, under the proposal, all income, other than that from
members in exchange for exempt function

facilitie~

would be in-

cluded in gross income, whether or not the activities generating
the income were sufficient to meet the requirements of a "trade or

-c- 8 -

businesses carried on by charitable organizations, colleges or universities
primarily for the convenience of their members, students, patients,
officers or employees. would continue to be limited to those classes of
organizations.

Since churches fit within the class of "charitable

organizations," they would be _covered by this exception.
Churches would not be audited to determine if they were carrying
on an unrelated business unless the Secretary or his delegate has cause
to believe that the church is carrying on such business and notifies
the church in writing before commencing an audit.
limited to the Regional Commissioner level.

Delegation would be

Of course, nothing would

preclude the Internal Revenue Service from examining an organization
to determine if it is in fact a church.
B.

Imposition of tax on certain income of social clubs and fraternal

beneficiary societies.
(1)

Social clubs.

Under this proposal, the tax exemption for

income of social clubs would be limited to the income from dues,
fees, or other amounts paid by members for providing to such members or their guests goods, facilities, or services constituting
the basis for the tax exemption (referred to as providing "exempt
function facilities").

All other income would be taxable. under the

unrelated business income tax with certain modifications to be discussed below.

Thus, in order to be exempt from tax, social club in-

come would have to meet a two-part test:

(1) The income would have

rv"C-7The proposal would extend the present list of organizations subject
to the tax to include all exempt organizations.

In addition, social

clubs and fraternal beneficiary societies would be subject to an additional provision discussed below.

This change would subject these or-

ganizations to the existing provisions of the unrelated business income
tax as presently applied to other tax-exempt organi.zations, such as
charitable or educational organizations.

Thus, income from an unre-

lated trade or business regularly carried on by a church, social welfare organization, cemetary company, credit union, or other exempt organization would be subject to the tax.

Unrelated business taxable in-

come would be computed in the same manner as that described above for
organizations presently subject to the tax.

Thus, the allowance of the

deductions and the exceptions, additions, and limitations applicable to
the computation of unrelated business taxable income under present law
would apply to the income derived by such organizations from regularly
carried on trades or businesses.

The present business lease rules or the

proposed debt-financed acquisition rules would also apply to these
organizations.
The three special exceptions to the meaning of the term "unrelated
trade or business" under present law would remain unchanged.

Thus, a

trade or business in which substantially all of the work in carrying it
on is performed without compensation for a church, social welfare organization, or local employee association; or which consists of selling
merchandise received as gifts or contributions, would not be considered

.
Sf However, the present exception for
as an unrelated trade or busllless.
~ As discussed below, these exceptions would not apply to social clubs
and fraternal beneficiary societies.

~c.

business income tax) whether or not some of the assets used in that
business were subject to an outstanding indebtedness.
Most capital gains and losses are excluded from unrelated business
taxable income.

Thus, gain on the sale or exchange of shares of stock

would be excludable.
The net operating loss deduction generally applicable under the income tax is allowed in computing unrelated business taxable income.

is computed, however, without taking into account any amount of income or
deduction which is excluded from the computation of the unrelated business income tax.

Thus, for example, deductions which are not directly

connected with an unrelated trade or business could not be used to increase the amount of the net operating loss.
In certain specified cases, all income derived from research (and
all deductions directly connected with such income) is excluded from unrelated business taxable income.
Charitable deductions, meeting the qualifications and within the
limitations of the provisions dealing with such deductions generally,
are allowed whether or not they are directly connected with the carrying on of a trade or business.
A specific deduction of $1,000 is provided.
In the case of a trade or business conducted by a partnership of
which an exempt organization is a partner, the exempt organization includes in income or deductions its share of the partnership gross income or deductions.
2.

The Proposal.

A. Extension of unrelated business income tax to all exempt organizat i

om; •

IV -Cunrelated business taxable income.
interes~

excluded.

~ -

Investment income, such as dividends,

annuities, royalties, and most rents from real property are
However, in certain cases of rent received on a "business

lease," a portion or all of that rent is includable in income.

general a tlbusiness lease" is defined as a lease of real property for
a term of more than 5 years if at the close of the taxable year there is
an outstanding indebtedness which was incurred in acquiring or improving the property.

A lease will not be considered a business lease if it

is entered into primarily to advance the organization's exempt purposes
(other than through the use of funds) whether or not there is an outstanding indebtedness on the property.

The amount of business lease

income taken into account is the same percentage of total rental income
from the property as is the outstanding indebtedness to the adjusted
basis in the property.
Under a separate proposal dealing with debt-financed acquisitions
of property, certain changes in the Itbusiness lease lt rules would be made.
That proposal would modify the "business leaseltrule by, in general,
eliminating the 5-year term requirement and extending the rule to any
property, rather than just real property.

However, as an exception,

any property all the income from which is taken into account in computing the unrelated business income tax in general would not be considered
property subject to the debt-financed acquisition rules.

Thu·s, for ex-

ample, income generated from the active conduct of an unrelated trarle
or business regularly carried on would not be taxed under the debt
financed acquisition rules (but would be under the general unrelated

-c - 4 -

charitable organization from a retail store selling furniture which was
operated wholly by volunteers without compensation would not be subject
to the tax.
B. A trade or business operated by a charitable organization or
by a college or university primarily for the convenience of the organization I s members, students, ,patients, officers, or employees would not
be considered an unrelated trade or business.

Therefore, income from

the operation of a school cafeteria for students would not be subject to
the tax.
C. A trade Dr business which consists of the selling of merchandise
substantially all of which has been received by the organization as
gifts or contributions also would not be considered an unrelated trade
or business.

For example, income derived by a tax-exempt organization

from the operation of a so-called thrift shop where those who desire to
benefit the organization contribute old clothes, books, furniture, et
cetera, to be sold to the general public would not be subject to the tax.
In general, the income subject to tax (called unrelated business
taxable income) is computed in the manner similar to the computation of
taxable income for income tax purposes.
adjustments are made.

However, several significant

Deductions normally allowable under the general

rules of income tax may be deducted only to the extent that they meet
the additional test of being "directly connected!! with the carrying on
of the unrelated trade or business.

In order to be directly connected the

deduction must have a proximate and primary relationship to the carrying
on of that business.
Certain exceptions, additions, and limitations apply in computing

Dl-C - 3 -

Business activities are considered to be "regularly carried on" if
they manifest a frequency and continuity, and are pursued in a manner
generally similar to comparable commercial activities of non-exempt
o:cganizations.
A trade or business is considered to be unrelated if the activities
involved in conducting the b~siness are not substantially related (aside
from the need for funds) to the performance by the organization of its
exempt function.

For the conduct of a trade or business to be substan-

tially related to an exempt function, it must contribute importantly to
the accomplishment of the exempt function.

For example, income from

admission charges for a student performance derived by an educational
organization operating a school training children in the performing
arts, such as acting, singing, and dancing, would not be subject to the
tax since student participation in performances before audiences is an
essential part of their training.

These activities, therefore, contri-

bute importantly to the accomplishment of the educational organization's
exempt purpose.

On the other hand, if this educational organization

IIere to operate a furniture factory, the income derived from these actjvities vould be subject to the tax, since the activities of manufacturing and distributing furniture do not contribute importantly to the
accomplishment of the organization's exempt function of teaching students in the performing arts.
Th
"ree specific exceptions are provided to the concept of "unrela td"
e

trade or business:
A. An=' trade or business in vrhich substantially all of the work of
:'2.rry::Lng;
[L

l~:r."e~2.ted

OIl

!)erformed \·ri thout compensation would not be considered

t:rade c:c

bus~ness.

For example, Income aerived

[,7 a

IV-0 - 2 -

(9)

cemetery companies of a mutual or nonprofit nature;

(10)

Credit unions;

(ll)

Small mutual insurance companies in lUdted lines of
insuranc e; and

(12)

Certain crop financing corporations.

In general, the unrelated business income tax is impo$ed at
the corporate rates upon income generated from (1) a trade or business
(2) regularly carried on (3) that is not substantially related, asid.e

from the need for funds, to the organization's exempt

p~rposes.lI

The

term "trade or business If has the same meaning under these provisions
as it has under the income tax provisions dealing with the deducti-

bility of business expenses.

Generally, any activity carried on for

the production of income from the sale of goods or the performance of
services would constitute a tttrade or business,"

In the case of an organization which is a trust, the individual rather

than the corporation rates apply.

IV-C - 1
Technical Explanation
Expansion of Taxation of Income from Unrelated Businesses
and from Investments of Certain Organizations
1.

Present Law.
Under present law many types of non-profit organizations meet-

ing the requirements of the Internal Revenue Code (sec. 501) are exempt
from Federal income tax.

Notwithstanding this exemption, certain of

these organizations are subject to an income tax--called the unrelated
business income tax--on income derived from a regularly carried on unrelated trade or b'lsiness.

Among the several organizations subject to

the unrelated business income tax are charitable, educational, or religious organizations (other than churches), labor, agricultural or
horticultural organizations, business leagues, certain mutual banking
institutions, and certain employee benefit plans.

The organizations

not subject to the tax are:
(1)

Churches (including conventions or associations
or churches);

(2)

Social welfare organizations;

(3)

Social clubs;

(4) Fraternal beneficiary societies;
(5)

Voluntary employee beneficiary associations;

(6) Teachers' retirement funds;
(7)

Benevolent life insurance companies, local in nature;

(8)

Mutual ditch, irrigation, telephone or like companies;

Dl- B - 13 -

reduced by the same fractionj and it is necessary to provide a corresponding limitation on the investment credit attributable to the
property.

The present bills add a sentence to section 48(a)(4) to

accomplish this result, specifying that the fraction applicable under
,

section 5l4(b) for the year in which the property is placed in service
will also reduce the base upon which the investment credit is computed.
B.

Withholding on Certain Income of Foreign Organizations.

Chapter 3 of the Internal Revenue Code provides rules for the withholding
of tax on interest, dividends, rent, and other periodical income of
foreign taxpayers.

Section 1443 of that chapter extends these rules

to foreign exempt organizations which are subject to the unrelated
business income tax.

Because rent has been the only class of

periodical income heretofore taxable under the unrelated business incorre
tax, section 1443 presently provides for withholding only on rent.

With

the present bills' @8neral provision for the taxation of unrelated
debt-financed income, whether or not the income is rent, a conforming
amendment to se"ction 1443 becomes necessary.

Section 4( c) of each

bill makes that amendment, substituting the term "income" for "rents"
in section 1443.

IV -B- 12 -

Taxable Year 1912 and Following.

Starting in 1972, all

organizations would have to report income from property which they
had aC<luired through debt financing (irre'spe cti ve of when the debt
was incurred).

By delaying the full impact of the bills for five

years, organizations which had acquired property through debt financing
will have sufficient time to dispose of these assets in an orderly
market.

Moreover, even if an organization wishe s to retain assets

which were mortgaged prior to the introduction of the bills, the
five.-year transition may enable organizations to liquidate their
indebtedness entirely from exempt income from the property or from
other assets.

Finally, even those organizations which retain their

unrelated assets and which are unable to dischar@e the acquisition
indebtedness in full

by 1972 will be able toreduce the taxable portion

of the income from the property by reducing the amount of the debt
during the five-year period.

Miscellaneous Matters

Investment Credit.

Under section 48(a)(4) of the Internal

Revenue Code, tax-exempt organizations are allowed an investment credit
for certain investments in property used predominantly ln the conduct
of an unrelated trade or business.

Where the credit is produced by

investment in debt-financed property, the income from the property will
be taxable only

after reduction by the debt/basis fraction provided by

the new section 5l4(b)j deductions associated with the property are

IV-B - 11 -

the bills would not affect pre-June 28, 1966, indebtedness of a church
be cause churche s are not currently sub je ct to the rule s dealing with
debt-financed property.

Similarly, the bills would not impose an

immediate tax on mineral royalties where the acquisition -indebtedness
was incurred before June 28, 1966, because mineral royalties do not
now fall within the category of business lease income under existing
law

Since an extension or renewal of a debt is not considered a

creation of a new debt, an extension of a debt incurred before June 28,

1966, would not result in. immediate taxation unless the income would
have been taxed under existing law.
While the bills generally would immediately tax income from
property with respect to which a debt was incurred after June 27, 1966,
two transition rules are provided for the year of enactment, however.
First, income attributable to the portion of the year prior to date
of enactmen"G will be governed by existing law; only the income attributable to the remainder of the year will be taxed under the new rules.
Second, in the case of income which would be business lease income
under existing law, taxable income for the portion of the year following
enactment will be computed under existing lawo

This means that the

new rules will not apply to business lease income until the first
taxable year beginning after enactment.

IV..R ... 10 ...

some situations, eliminate tax altogether.

It accomplishes that

result by enlargiIlg deductions in early years, in which taxability
would otherwise be high because of the large amount of indebtedness
outstanding.

To the exteut that the useful life of the property is

longer than the term of the indebtedness (and it would seem difficult
to argue that a sale has occurred if it is not), acceleration of
depreciation shields otherwise taxable income by means of deductions
shifted from periods in which no tax at all would be paid.

Hence, the

bills' limitation of depreciation to the straight-line method is
necessary to make their approach meaningful.
G.
e~empt

Multiple Use of Property.

If property is used partly for

and partly for non-exempt purposes, the income and deductions

attributable to the exempt uses are excluded from the computation of
unrelated debt-financed income, and allocations are to be made, where
appropriate, for acquisition indebtedness, adjusted basis, and deductions
assignable to the property.

Effective Date Provisions
A.

Taxable Years 1966-1971. During a five-year transition

period eXtending through 1971, the bills would apply to income from
property with respect to which a debt was incurred on or before
June 27, 1966, only if the income would have been subject to tax as
business lease income under exi'sting law.

Thus, during this period

rv
F.

-B -

Allowable Deductions.

9The

~rcentage

used in determining

the ta.xa.ble portion of total gross income would also be used to compute
the allowable portion of deductions "directly connected with" the debt-.
financed property or the ipcome from it.

The direct connection

requirement is carried over from section 512 of present law.

The

general approach of the bills is to allow all deductions that would be
allowed to a normal taxpayer, to the extent consistent with the purpose
of the bills and the nature of the special problems to which they are
directed.

For example, net operating loss and charitable contribution .

deductions would be allowed, subject to the limitations imposed by
existing law on organizations taxable on unrelated business income
(e.g., the percentage limitations on the charitable deduction are computed with reference only to the organization's unrelated business
income, not its total income).
The deduction for depreciation would be restricted to the
straight-line method, however.

Accelerated depreciation ordinarily

has the effect of deferring tax on income from depreciable property.
However, under the approach of tbe proposed bills, an exempt organimt
would become a taxpayer only for a limited period of time -- while
acquisition indebtedness remains outstanding -- and would during that
time be taxed on a de clining proportion of its income.

In that settir

accelerated depreciation can be used for more than mere tax deferral;
it can be used to reduce the total amount of the tax payable or, in

IV -B.. 8 -

Basis.

For purposes of the denominator of the debt/basis

fraction, adjusted basis would be the average adjusted basis for the
portion of the year during which the property is held by the exempt
organization.

The
use of .average adjusted basis is for purposes only
,

of fixing the debt/basis fraction.

Where property is disposed of,

gain or loss will) as usual, be computed with reference to adjusted
basis at the time of disposition.
If property is distributed from a taxable corporation to
the exempt organization, the exempt organization would be required to
use the basis of the distributing corporation, with adjustment for any
gain recognized on the distribution either to the exempt organization
(as, for example, might be the case if the exempt organization had an
ac~uisition

indebtedness applicable to its stock in the distributing

corporation) or to the taxable corporation (for example, as recapture
of depreciation under sections 1245 or 1250).

This rule would prevent

an exempt organization from aC<luiring the property in a taxable subsidiary to secure accelerated depreciation during the first several
years of the life of the property, enabling the subsidiary to payoff
a large part of the indebtedness during those years and the exempt
organization to obtain a stepped-up basis (advanta~ous both for
depreciation purposes and for purposes of enlarging the denominator
of the debt/basiS fraction) on li<luidation of the subsidiary.

IV-B - 7 (3)

Indebtedness incurred in conjunction with federally

financed or supervised housing programs.
D.

tlAverage Acquisition Indebtedness".

For purposes of the

nwnerator of the fundament.al debt/basis fraction, acquisition indebtedness would be averaged over the taxable year.

The averaging mechanism

precludes an exempt organization from avoiding the tax by using other
available funds to payoff the indebtedness immediately before any fixed
determination date.

If debt-financed property is disposed of during

the yea:r, tlaverage aC<luisi tion indebtedness tl would mean the highest
aC<luisition indebtedness during the preceding 12 months.

Without such

a rule, an exempt organization could avoid tax by using other resources
to discharge indebtedness before the end of one taxable year and dispose
of the property after the beginning of the next taxable year

For example

suppose exempt organization E has purchased income-producing property
for $20,000 and incurred an indebtedness, still unpaid, of $15,000 to
make the purchase.

If E sells the property on December 31 for $50,000,

75 percent of the $30,000 capital gain would be included in gross income.
Suppose, however, E uses other available resources to

dischar~the

indebtedness on December 31, and sells the property January 2.

Without

the described special rule for dispositions, the numerator of the fraction
would be zero, and no part of the gain would be taxable.

Under the

special rule an organization would have to commit its own funds at
least 12 months in advance of disposition to escape tax on §ain from
the disposition.

IV-E - 6 -

incurred in acquiring or improving the property or would not have
been incurred "but for

the acquisition or improverr.ent of the property.

If an indebtedness is incurred after the property was acquired or

improved, it would have to meet a further requirement:

it would not

be l1acquisition indebtedness 11 unless its incurrence was reasonably
foreseeable at the time of the acquisition or improvement.

Under special

rules, if property is acquired subject to a mortgage, the mortgage
would be treated as an acquisition indebtedness incurred by the organization when the property is acquiredo

The extension, renewal, or re-

financing of an existing indebtedness would not be treated as the
creation of a new indebtedness o The latter rule would preclude the
argument that a refinancing was not reasonably foreseeable at the time
of the original acquisition of the property and that, therefore, the
obligation extant after the refinancing is not an acquisition indebtedness.
There are three exceptions to these rules.
(1)

They are:

Property which an exempt organization receives,

subject to indebtedness, by devise, bequest, or, under certain
conditions, gift.

The exception permits organizations receiving

such property a lO-year period of time within which to dispose
of it free of tax or to retain it and reduce or discharge the
indebtedness on it with tax-free income.
(2)

Property which exempt organizations acquire by the

issuance of annuities.

The exception is subject to certain

limitations, designed to prevent abuse.

Dl-B - 5 -

(4)

Property all the use of which is in a trade or

business exempted from tax by section 513(a)(1), (2), or (3).
These exce~tions apply where (a) substantially all the work in
carrying on the business is performed without compensation
(e.g., a church thrift shop), (b) a section. 503(c)(3) organization carries on business primarily for the convenience of
members, students, patients, officers, or employees (e.g., a
college cafeteria), or (c) the business consists of selling
merchandise substantially all of which has been received as
contributions (e .g.,
(5)

Goodwill Industries).

Real property which organizations plan to devote to

exempt uses within 10 years of the time of

ac~uisition.

typical situation for which this exception is intended is that
of a college temporarily receiving small amounts of rental income
from real estate which it has purchased close to its campus for
future use in a planned expansion program.
C.

IIAcquisition Indebtedness".

would become lIdebt-financed propertyll

Income- producing property
--

and its income taxable -- only

where there is an "acquisition indebtedness lt attributable to it.
The latter term would be very similar to lIbusiness leases indebtedness"
as defined in existing law.

Generally, an lIac~uisition indebtedness

would exist with respect to any property whenever the indebtedness was

IV-B -

"Debt-Financed ProIBrty".

Debt-financed property would, with

five exceptions, be all proIBrty (e.g., rental real estate, tangible

personal property, corporate stock) which is held to produce income and
with resIBct to which

ther~

is an "acg,uisition indebtedne·ss" at any time

during the taxable year (or during the preceding 12 months, if the
property is disposed of during the year).

The five exceptions from

this definition would be these:
(1)

Property all of the use of which is related to the

exercise or performance of the organization's exempt functiono
Thus, a college could finance constructi.on of a dormitory for its
students with borrowed funds and pay off the indebtedness from
student rents without subjecting any of those rents to tax.
(2)

Property all of the· income from which is already subject

to tax as income from the conduct of an unrelated trade or business.

This exception would prevent double taxation of income

from financed property used in a trade or business which is
taxable under existing law.
apply to

org~tnizations

The exception would, of course, not

pre sently excepted from tax on incone

derfving from unrelated busine ss.

(3)

Property all of the income from which is derived from

research activities excepted from the present unrelated business
income tax.

There are three classes of such research:

(a) that

performed for governmental bodiesj (b) that performed by colleges,
universities, or hospitals for any person; and (c) that performed
by certain fundamental research organizations for any person.

-:8 -

3 -

Income Sub je ct to Tax
A.

TlUnrelated Debt-Financed Income Tl •
•

While H.

R. -12663

and

12664 would apply to income whether or not it is "rent" 1 they would in
large part use rules similar to those of the existin& leaseback provision
in determining what income is to be taxed and in computing how much of
it is taxable.

Under the new rules, the tax base would be "unrelated

debt-financed incomeTl.

Such income would be the gross income taken into

account under the new section 514(b) with respect to lldebt-financed
property", less the deductions allowable under the new section 514( c)
with respect to such property.

In general, subsections (b) and (c) of

section 514 bring into the computation of the tax base a portion of the
total gross income and deductions attributable to debt-financed property,
determined by applying to those totals the fraction
average acquisition indebtedness for the taxable year
average adjusted basis of the property during the taxable year.
An addition to existing law is that gains from the sale or other disposition
of debt-financed property are included in the gross income figure.

conduct of an unrelated trade or business.

The organizations not

now subject to the tax (e.g., churches, civic associations, fraternal
associations) would be taxable only on the new category of income.
This revision would not affect the tax imposed by existing law on unrelated business activities of exempt organizations;lI its only effect
would be to make all exempt organizations taxable on certain debtfinanced income.
Churches would not be audited to determine if they were carrying
on an unrelated business unless the Secretary or his delegate has cause
to believe that the church is carrying on such business and notifies
the church in writing before commencing an audit.
limited to the Regional Commissioner level.

Delegation would be

Of course, nothing would

preclude the Internal Revenue Service from examining an organization
to determine if it is in fact a church.

Changes in these rules are also recommended, however. See the .
material entitled Expansion of Taxation of Income from Unrelat~d BUSlnesses and from Investments of Certain Organizations.

IV-B-l

Technical Explanation
Curbing of Abuses in Debt Financing of Acquisitions
1.

General

H.R. 12663 and 12664, introduced in the 90th Congress, would use the
general approach of the statute enacted in 1950 to deal with the leaseback
problem (now section 514 of the Internal Revenue Code).

Income derived

from property acquired or improved with borrowed funds would be taxable
if the use of the property is
purpose or function.

unr~lated

to the organization's exempt

To make as much use as possible of the solution

already adopted by Congress, H.R. 12663 and 12664 would integrate this
proposed tax into the existing statutory structure.

As a result, such

basic concepts as the distinction between IIrelated 11 and ttunrelated \I
acti vi ties "ldould be defined by existing law, and the necessity for new
and unfamiliar definitions would be reduced.

Organizations Subject to Tax
Section 1 of E. R. 12663 and 12664 would amend section 5ll(a),

which imposes the unrelated business tax, to make the tax apply to all
orcanizations exempt from tax by reason of section 40l(a) and section
501 (c)

Se ction 2 of the bills would expand the definition of t'unrelated

business taxable income" provided in section 512 to include a new
cateGory of unrelated income -- "unrelated debt-financed income".

The

organizations already subje ct to the unrelated business tax (e .g.,
chari table organizat.ions, :Labor unions) vlould be taxable both on this
ca te Gory of in come and, as at pre sen t, on income de ri ve d from the active

IV - A -

exemption for prohibited transactions would be made inapplicable to
transactions after the effective date.

For transactions before the

effective date the old sanction would apply.
(~)

uses of income.

Unreasonable accumulations and other improper

rhe propoSed substantive rule would reach

although not all of the acts which result in loss "of exemption under
the present law dealing with income accumulations and "other improper
uses of income.
Therefore, in any case where an act constitutes a violation of
both-the proposed rules and present law, only the proposed sanctions
would apply.

Where the act constitutes a violation of the present,

but not the proposed law, the old sanction of loss of exemption would
apply.

Dr - A - 28

effective date of this legislation.

Any organization which applies

would be exempt from the entire period, unless it fails to comply in
which case loss of exemption would be from the date of notification
of failure to comply.
(iv)
sanctions.

Relationship between proposed and existing

In general, the existing sanction o.f loss of exemption

can arise (1) as a result of failure to continue to qualify under the
general exemption statute; (2) as a result of engaging in prohibited
transactions; and (3) as a result of un.reasonable accumulations or
other improper uses of income.
(~)

exemption statute.

Failure to continue to qualify under general
loss of exemption would continue to result frOm

the failure to maintain qualification under the exemption statute.
If the acts giving rise to this failure are the same as those constituting a violation of the proposed rules, the specific sanction
and equity powers would apply notwithstanding the fact that loss of
exemption results in taxation of the organization's income.

If the

acts giving rise to this failure do not constitute violations of the
substantive rules added by these proposals, the new equity power for
the preservation of assets for charitable purposes upon loss of exemption would nevertheless apply.
("~)

Prohibi ted transactions.

All transactions which

are prohibited under existing law would be prohibited under the new
self-dealing proposals •. Therefore, the existing sanction of loss of

IV - A - 27

case warrants.

However, no action by a state court would defer or

abate the imposition of the specific sanctions for self-dealing,
adequate return to charity and

improp~r

business interests.

Thus,

for example, the institution of a state court action based upon a
self-dealing transaction would result in the deferral of any action
by the federal court to rescind the transaction.
vi~w

However, the re-

of the civil penalties under the specific sanction would not be

deferred.
In any case where the appropriate sanction or equitable remedy
requires distributions to a publicly supported charity, the governing
body of the foundation would be given the opportunity to select the
public charitable recipients.

In the event of failure of management

to select any public charities, the appropriate state authorities
for supervision of charitable trusts and corporations would be asked
to make the choice, with final authority in the District Court in the
absence of selection by foundation management or state authorities.
Finally, in order to give the states a substantive right to enforce
the prohibitions against self-dealing, inadequate return to charity
and improper business interests, a new rule would be added which would
condition the grant of exemption upon inclusion in the organization'S
governing instruments of requirements to comply with these statutory
standards of behavior.

Old organizations would be given five years

to apply for exemption with amended organizational instruments. Any
organization which fails to apply would lose its exemption from the

IV-A-26

foundation and private persons could all be joined in one suit would
depend upon the general rules of venue under the Judicial Code of
the United states.
The equity action would spell out the particular specific
sanctions and equitable remedies sought against each defendant.
Either party would be entitled to trial by jury; however, the
determination of the specific sanctions and appropriate equitable
remedies would be exclusively for the Court.

Thus, for example,

any questions concerning the persons who knowingly authorized the

foundation to engage in a self-dealing transaction could be determined by the jury; however, the review of the civil penalty and
appropriate equitable relief would be determined by the Court.
The Justice Department would have authority to settle cases to
the same extent as the Internal Revenue Service.
(iii) Correlation with State authorities.

the event that appropriate state authorities institute action against
a foundation or individuals based upon acts which constitute a violation of the self -dealing, adequate return to charity, or :iJnproper
business interest rules, the United States District Court before wham
the federal civil action is instituted or was pending would be required
to defer action on any equitable relief for protection of the foundation or preservation of the assets for charity until conclusion of
the state court action.

At the conclusion of the State court action,

the District Court could consider the state action adequate or provide
further equitable relief, consistent with the State action, as the

IV - A - 25

violation to the appropriate state authority.

The Internal Revenue

Service would have authority to reach an agreement with the foundation
and persons involved.

Thus, for example, if a foundation in violation

of the adequate return to charity rules voluntarily agreed to payout
all deficient amounts plus 10 percent of those amounts for each year
of deficiency, the Internal Revenue Service could agree to that settlement of the case and dispose of it administratively.
However, the Service would not be authorized to settle a case by
excusing a foundation from the mandatory divestiture requirements of
the adequate return to charity and improper business interest sanctions.
(ii)

Judicial proceedings.

Persons subject

to penalties could seek review in the Tax Court or in a suit for
refund in the District Court or Court of Claims under the normal
procedunE for review of tax cases.
equity action by the

Governmen~

However, upon institution of an

described below, power to review

penalties would be vested exclusively in the District Court.

Thus,

any action to review penalties pending in the Tax Court or Court of

Claims would be terminated and be made part of the District Court
equity action.
If equity action is necessary, the Internal Revenue Service would
refer the case to the Justice Department for the institution of a
civil suit pursuant to the equity powers.

The United States would be

plaintiff and the foundation and all persons against whom remedies
or sanctions are sought would be defendants.

The extent to which the

IV - A - 24

(c)

Loss of exemption.

a private foundation for any

r2a.~30n,

Upon loss of exemption by

the invocation of equity pO'wers

to insure that the foundation's assets are preserved for charitable
purposes would be mandatory.

The specific form of the remedy to

provide such insurance would be up to the United states District
Court.

For example, in cases where the loss of exemption is tem-

porary under existing provisions which permit foundations to regain
exempt status, the appropriate remedy might simply be to insure that
the foundation holds its assets until exempt status is reacquired.
In cases where the loss of exemption is permanent, the appropriate
remedy might be divestiture of the assets formerly held exclusively
for charitable purposes to a public charity.
tion

In cases where exemp-

surrendered voluntarily in order to escape the requirements

imposed upon private foundations, the appropriate remedy might be
to require the organization to create a separate organization with
the assets for.merly devoted exclusively to charitable purposes and
hold those assets for those purposes.
Cd)

Proceedings to enforce sanctions.
Ci)

Administration procedure.

Cases involving

violations of the substantive rules detailed above would be handled
in the normal manner by the Internal Revenue Service.

The Internal

Revenue Service would set the amount of any penalty in the first instance,
which would be determined, assessed and collected as taxes.

The Revenue

Service would send to the foundation involved and each person against
whom any civil penalty is to be imposed a "notification of violation,"
containing a brief description of the violation involved.

At the same

time , the Internal Revenue Service would send a copy of the notification of

D1 - A - 23

the substantive rules, and (2) equity
powers (including but not
,
limited to, power to substitute trustees, divest assets, enjoin
activities and appoint receivers) to ensure that foundation assets
are preserved for charitable purposes and that violations of the
substantive rules will not occur in the future.

For example, the pur-

chase of securities owned by a foundation :in a self-dealing transaction coull
be rescinded if the market value of the assets had increased.

If the

securities had first increased and then declined, the trustees could
be surcharged for depriving the foundation of the opportunity to
dispose of the assets at a higher price.

If the value of the

securities declined immediately after the self-dealing transaction,
the appropriate remedy might be to do nothing under the equity
powers.
The mandatory specific sanctions would apply regardless of the
action or non-action under the equity powers.

Thus, even if no

remedies were necessary to protect the foundation or preserve the
assets for charitable purposes, the civil penalties and divestiture
requirements under the specific sanctions would be mandatory.

IV - A - 22

(iii) Improper business interests.

An improper

business interest (whether in excess of the foundation-controlled
business rule or an interest in a donor-controlled business) would
be required to be sold or contributed to a publicly supported charity.
In addition, a civil penalty of from $500 to $5,000 upon each member

of the foundation's governing body (directors or trustees as the case
may be) would be imposed by the Internal Revenue Service for each
year during which an improper business interest was held.

The

divestiture requirement and civil penalties would be enforced under
the proceedings described below.
In addition, in the case of an interest in a
donor controlled business the statute of limitations on assessments
against the donor for the year of donation would be left open
until the year following the year of divestiture and the value
placed on the donated interest would take into consideration
facts surrounding the divestiture which bear upon the value of
the interest at the time of donation.
(b)

Equi ty powers.

In addition to the specific

sanctions described above, United States District Courts would be
invested with (1) equity powers (including but not limited to, power
to rescind transactions, surcharge trustees and order accountings) to
remedy any detriment to a foundation resulting from any violation of

IV - A - 21

A separate civil penalty would be imposed for each violation
of the substantive prohibition.

Thus, two self-dealing sales would

result in two separate penalties against each of the persons liable
for such penalties.
In addition, no deduction would be granted for any amount trans-

ferred to a foundation in a self-dealing transaction.

For example,

any exces.s value over the purchase price paid by a foundation
in a self-dealing bargain purchase transaction would not give rise
to a charitable contribution deduction.

Furthermore, any interest

paid to a foundation in connection with a self-dealing loan transaction would not be deductible.

However, the basis of assets pur-

chased from a foundation in a self-dealing transaction would be
permitted to reflect the amount paid the foundation.
(ii)

Adequate return to charity.

A private foun-

dation which failed to distribute an adequate return to charity under
the substantive rules would be required to distribute all of the deficient amounts plus 12 to 25 percent of those amounts (determined by the
Internal Revenue Service) for each year in which the deficiencies existed
to a publicly supported charity.

No part of the 12 to 25 percent addi-

tional payout requirement could be used to meet the adequate return
to charity requirements for the future.

These distribution reqUirements

would be enforced under the proceedings to be described below.

IV - A - 20

engage in a self-dealing transaction.

The penalty would be set by the

Internal Revenue Service, under procedures hereinafter described,
between $500 and $5000 regardless of the magnitude of the self-dealing
transaction.

However, the $5000 figure could be exceeded, up to a

ceiling of 10 percent of the value of foundation assets involved in the
self-dealing transaction.

For example, a purchase of $10,000 of founda-

tion assets by the foundation's creator could result in a civil penalty of
from $500 to $5000.

However, a purchase of $100,000 of foundation assets

could, if the Internal Revenue Service chose to value those assets,
result in a civil penalty of up to $10,000 (10 percent of $100,000).
The value of foundation assets involved in a self-dealing transa.ction
would be only the value of what has been transferred from the foundation.
Thus, in the case of a lease of foundation property, the fair rental value
of the property, rather than the value of the property itself, would
constitute the value of foundation assets involved in the self-dealing
transaction.

Amounts transferred to the foundation in connection with

the self-dealing transaction would have no effect on this figure.

IV - A - 19

Sanctions to Enforce Substantive Requirements.
A.

Present law.

Under present law, the only sanction for violation of any of the
statutory requirements imposed upon private foundations is loss of
exemption.

The consequences of loss exemption are disqualification as a

recipient of charitable contributions and taxation of taxable income (if
any).

Loss of exemption can be either retroactive or prospective depending

upon circumstances not here relevant.
B. Treasury proposals.
(1)
be provided.

General description.

Two distinct sets of sanctions would

Specific sanctions for each of the three substantive rules in

the form of civil penalties against errant individuals and divestiture requirements against the foundation would be provided as deterrents.

Imposi-

tion of these specific sanctions would be mandatory upon a finding of
violation.

In addition, United States District Courts would be invested

with a set of equity powers sufficient to remedy any violation of the substantive rules in such a way as to insure no financial detriment to the
foundation and to preserve the assets of the foundation for charitable
purposes.
(2)

Detailed description.
(a)

Specific sanctions.
(i)

Self-dealing.

A civil penalty of from $500 to $5 00c

or,if greater, 10 percent of the value of the foundation assets involved in the
self dealing transaction would be imposed against the self dealer and
against any foundation manager who knOwingly caused the foundation to

IV - A - 18

6. Direct Grants to Individuals.
A.

Present law.

Present law permits a private foundation to make direct grants
to individuals consistent with its charitable or educational programs.
B.

Treasury proposal.

Private foundations (but not other charitable organizations) would
be required to make available to the general public the names of individuals
who are recipients of direct grants, together with a general description

of the proposed activities at the time of the grant and the completed
activities upon termination of the project for which the grant was made.
Any work of the recipient containing the results of the activities

financed by the grant would also be required to be made available to the
general public.
Information would be considered "made available to the general
public" if the foundation maintains the information for inspection at
its principal location and makes copies available to persons who request
such information for amounts not in excess of the cost of copying.
Failure to comply with this requirement would result in a civil
penalty of from $500 to $5000 upon each member of foundation management
for each grant program under procedures described below.

IV - A - 17

5. Prohibition Against Political Activity
A.

Present Law.

Under present law, foundations,'as well as other charitable
organizations, are prohibited from participating or intervening in any
political campaign on behalf of artY candidate for public office.
On the other hand, such organizations are per.mitted to engage in
educational activities which present a full and fair exposition of the
facts and in activities which defend civil rights secured by law,
even though such activities may have an effect upon political campaigns.
B.

Treasury Proposal.

A private foundation (but not otherc'haritable organizations)
would be prohibited from engaging in any activity which 'airectly
affectea'a political campaign, regardless of its educational or
other connection with the exempt purposes of the organization.

Thus,

for example, voter registration drives, educational campaigns about
issues presented for consideration by the general electorate, or
panel discussions with the candidates would be prohibited.

Violation

of this prohibition would result in loss of exemption and invocation
of equity powers to preserve the assets for charitable purposes as
described below.

IV - A - 16

Nonexempt trusts in which more than 50 percent of the income or
corpus is to be paid or permanently set aside for charitable purposes
would be subject to these rules in the same manner as private foundations.
Existing trusts of this nature would not be covered.

Sanction for Failure to File Information Return
A.

l.'l'ese:nt 1CiW.

Under present law foundations are required to file information returns.

The penalty for failure to comply with this requirement

is imprisonment not exceeding one year and a fine not exceeding $10,000.

Treasury PropoGul.
A foundation loThich fails, without reasonable cause,. to file

a timely and complete information return would be subject to a penalty
of $10 for each day of delay beyond the prescribed filing date.

maximum penalty under this provision would be $5,000.

The

A similar

penalty with a similar maximum would be imposed upon officers, directors or trustees responsible for filing such returns if, after notice
from the Internal Revenue Service, they omit (without reasonable
cause) to remedy the failure to file within a specified reasonable
time.

rv - A - 15
The three exceptions to this meaning of "business" under the
"Foundation controlled business" rule would not apply.

The same

concepts of related and unrelated trade or business would apply.

(3)

Rules applicable to both foundation-controlled and

donor-controlled business rules.

The five-year holding period for.

required divestiture under these rules could be extended upon securing approval from the Internal Revenue Service.

Such an extension

would not be granted solely upon the grounds of inability to find
an acceptable buyer or sell at a fair market price, since the alternative of distribution by contribution would be available.

Extension

would be granted, however, in cases where divestiture of the

i~proper

business interest would have serious consequences on the market for
the securities.
Foundations would be given five years from the effective date to
make the reductions in present holdings required by these rules.
Extension could be granted as stated above.

Existing foundations

whose governing instruments, as presently drawn, compel them to
hold specified business interests would be exempt from. these requirements, but only if local law prevents suitable revision of such
instruments.
The general prohibition against self-dealing would not apply to
the sale of assets owned by a foundation on the effective date of this
legislation divestiture of which is required under these provisions.
However, that general prohibition would apply to business interests
acquired after the effective date.

IV - A -

The persons whose stockholdings would be added to the donor's
to determine control would be the donor's brothers, sisters, spouse,
in-laws, aunts, uncles, nieces, nephews, ancestors and lineal
decendants.

In addition, if corporations controlled by, or trusts

for the benefit of, the

do~or

and these related persons own stock,

such stock would be attributed to the appropriate person to the extent of his interest therein.

Finally, if the donor

a corporation,

the stockholdings of officers, directors, controlling shareholders
(and the members of their families referred to above) would be added
to that of the corporation in determining control.
As long as the corporation is donor-controlled, any interest
held by the foundation at the end of' the five-year holding period
would be required to be sold or contributed to a publicly supported
charity.

Thus, a foundation holding a 5 percent nonvoting preferred

stock interest in a corporation 100 percent of' whose voting stock is
owned by the donor would be required to dispose of that 5 percent
interest.
period.

Donor control would be deter.mined at the end of the holding
Thus, if, although present at the time of donation, control

is not present at the end of the holding period, no divestiture under
this rule would be required.
Both interests in corporations and unincorporated businesses
would be subject to this rule.

However, in the case of an unincor-

porated business, the 35 percent limitation would apply to the combined
interests of the donor (and related persons) and the foundation in the
capital or profits, rather than total combined voting power.

N - A - 13

if (1) substantially all of the work in carrying it on is perfor.med
without compensation; (2) it is carried on primarily for the convenience of the members, officers, or employees of the foundation; or

( 3 ) it consi sts of selling merchandise substantiaJ.ly all of which has
been received as gifts or contributions to the foundation.
For example, a foundation which solicits and receives as contributions old clothes, books, or furniture,could conduct a business of
selling those articles to the general public; a foundation engaged in
the rehabilitation of handicapped persons could maintain a store to
sell i terns made in the course of the rehabilitation training; and a
foundation would be permitted to operate a cafeteria or restaurant,
primarily for the convenience of its employees.
(2) Donor-controlled businesses.

A private foundation would

be required to sell or contribute to a publicly supported charity any
donated interest in a donor-controlled corporation conducting an unrelated trade or business within five years from the date of donation.
A corporation would be considered "donor controlled" if the combined ownership of the donor (and certain related persons) and the
foundation

constitu~more

power of the corporation.

than 35 percent of the total combined voting
Foundation ownership would include both

direct and indirect stockholdings.

Thus, stock held by a trust for

the benefit of a foundation would be considered as owned by the
foundation to the extent of the foundation's beneficial interest in
the trust.

IV-A-12

For example, two foundations with the same substantial contributor
would be related.

Similarly, a foundation whose substantial contribu-

tor is the wife of the substantial contributor of another foundation
would be related to such other foundation, since the wife would be
prohibited from engaging in financial transactions with both foundations. Where the stock

ho~dings

of the related foundations total.mQre

than the permissible percentages, each foundation would be responsible
for reducing its holdings so that the group holdings do not constitute
more than the percentage limitations.

Thus, for example, if founda-

tion A holds 15 percent and foundation B holds 40 percent beyond the
five-year holding period, foundations A and B would
tion of the rule.

be in viola-

If foundation B refuses to comply and foundation A

wishes to comply, foundation A would have to eliminate its holdings.
Three forms of activities for the production of income would be
specifically excluded from the meaning of "businessll -Lending, other than that resulting from the active
conduct of commercial lending or banking;
Holding of royalties and mineral production payments
as inactive investments; or
Holding of leases of real property (and associated
personal property) of a passive nature.
The present law defining businesses which are not substantially
related to a foundation I s exempt activities (for purposes of the unrelated business income tax) would be applied to this provision.

The

three specific exceptions to that definition would also be applied to
this provision.

Thus, a business would not be considered unrelated

IV - A - 11
voting power would constitute control only if the foundation, in fact

exercised control.

Control would be exercised in fact if foundation

officials (trustees, officers, directors, etc.) direct the management
or policies of the business.
Nonvoting stock would be ignored for purposes of computing
trol.

co~-

Thus, a foundation holding 15 percent of the voting stock and

100 percent of the nonvoting stock of a corporation

wo~ld

not be

required to divest any interest in the corporation.
Control would be determined by considering the stock owned,
directly or indirectly, by the foundation.

Thus, stock owned by

a trust for the benefit of the foundation would be considered as
indirectly owned by the foundation to the extent of its beneficial
interest therein.

Voting stock owned by a donor, on the other hand,

would be ignored since it is neither owned directly nor indirectly
by the foundation.

(However, such stock would be considered under

the donor-controlled business rule to be explained below.)
Both interests in corporations and unincorporated businesses
would be subject to this rule.

However, irt the case of an unincor-

porated business, the percentage limitations would apply to interests
in the capital or profits, rather than total combined voting power.
In order to prevent avoidance of these limitations through the
use of "multiple foundations, 11 all of the stock interests of " relate d"
foundations would be added together to determine control.

foundations would be ones with which one or more of the same persons
may not engage in financial transactions under the self-dealing rules.

IV - A - 10

3. Improper Business Interests.
A.

Present-Law.
(1) Direct operation of business.

Under present law a

foundation may not be organized or operated for the primary purpose
of conducting an unrelated_trade or business.

To the extent that.

an unrelated trade or business is conducted within this limitation,
its profits are subject to tax under the unrelated business income
t~.

Operation of business through a corporation.

There

are no limitations upon conducting an unrelated trade or business
through the ownership of a controlling interest in a corporation.
Of course, the profits of such a corporation are taxable under the
regular corporate income tax.
B.

Treasury Proposal.
~)

Foundation controlled businesses.

A private foundation

would be required to sell or contribute to a public ally supported
charity a controlling interest in a corporation conducting an unrelated trade or bllsiness within five years from the date of receipt
of that interest by donation.

A foundation would be prohibited from

acquiring a controlling interest by any means other than by donation.
Control would be conclusively presumed by the ownership of more
than 35 percent of the total combined voting power of the corporation.
Stock interests between 20 and 35 percent of the total combined

IV - A - 9
interest can, for any reason, be held by the trust, charitable distributions
eQual to the larger of

5 percent of the value of that remainder interest or

the full amount of realized income on that remainder interest would be required.
C.

Effective aate.

The adequate return to charity requirements would apply to foundations
presently in existence as well as those to be created in the future.

How-

ever, for those foundations presently in existence, a two-year transition
period would be provided so that they would have adequate time to adjust
their investments.
Furthermore, a rule would be provided exempting from the adequate
return to charity requirements income required to be accumulated or corpus
prohibited from invasion by the governing instruments of existing organizations.

Of course, these existing organizations would be subject to the

present prohibitions against unreasonable accumUlations and other improper
uses of accumulated income under existing law.

IV-A-8

A private foundation would be considered "nonoperating\! if it does
not have substantially more than half of its assets devoted directly to
ooddoes not directly expend substantially all of its income for the
active conduct of charitable activities.

Holding assets for the

production of income or distributing income to operating charities
would not meet the "devoted directlytl asset test or the "directly
expended" income test.

Thus, for example, a private foundation which

holds investment assets and distributes the income from those investment assets to an operating charity would be a nonoperating private
foundation subject to this provision.

On the other hand, a private

foundation which has, as its only substantial asset, a public museum,
and which uses

income for the operation of the museum would be an

operating foundation not subject to this provision.
Income of a nonexempt trust permanently set aside for charity
would be required to be distributed in the year following the year of
realization.

For example a nonexempt trust required by its governing

instrument to permanently set aside 20 percent of its income for charitable purposes would be required to distribute 20 percent of its realized
income in the year after the year of realization.

Income interests would

not be subject to the 5 percent rule.
A charitable contribution consisting of a remainder interest in a
nonexempt trust would not be subject to the 5 percent or realized income
rule until the intervening interest terminated.
interest would be subject to both rules.

At that time the remainder

Thus, for example, if under the

terms of the trust after the intervening interest terminated the remainder

~-A-7

Two exceptions to this rule would be provided.

The first would

allow a foundation to treat as an expenditure amounts which are set
aside for a definite charitable purpose specified at the time the
funds are set aside, provided the purpose requires accumulations by the
foundation rather than the intended charitable recipient and the
foundation receives a favorable ruling in advance permitting such an
accumulation.

Under this exception, the funds would actually have to be

expended within 5 years, unless the organization is granted an extension
for an additional period not to exceed 5 years.

No limitation would be

imposed on the number of 5-year extensions that could, if justified, be
granted.
A second exception would allow a private nonoperating foundation to
avoid the adequate return to charity requirements to the extent that it
had, during the immediately preceding 5-year period, expended amounts in
excess of those requirements.

For example, a

fo~dation

with zero income

for 6 years on $100,000 of corpus and $10,000 per year in distributions
for the first 5 of those 6 years would not be required to distribute
anything in the sixth year.

Its required distribution to charity for

the first 5 years would be 5 percent of $100,000 per year, or $25,000.
Therefore, it is entitled to forego the adequate return to charity
requirements in the sixth year up to $25,000.
The proposal would apply only to private nonoperating foundations
and nonexempt trusts empowered by their governing instruments to
permanently set aside amounts for charitable purposes.

IV - A - 6
Investment assets which can be valued by reference to regularly
available sources, such as stock exchanges or over-the-counter markets,
would be valued at fair market value at the beginning of the foundation's
accounting period.

For other assets, cost or, if contributed, the value

r, would be used with a revaluation
claimed as a deduc t ion by the dono
procedure once every 5 years.
Any liabilities directly connected with investment assets would be

taken into consideration in valuing investment assets.

However, liabilities

incurred in connection with an organization's exempt functions, as, for
example, borrowing to finance a scholarship program, could not be used to
.offset the value of any investment assets.
Realized income would include investment income such as rents,
interest, dividends, short-term capital gains and income subject to the
unrelated business income tax after certain adjustments (SUCh as the income

tax paid). Deductions would be allowed for expenses directly connected
with the generation of this income.

Long -term capital gains and contributions

would not be considered income for this purpose.
The purposes for which the amounts would have to be expended would
be-

(1)

contributions to publicly supported charitable organiza-

(2)

contributions to privately supported operating organiza-

(3)

direct expenditures for charitable programs; and

(4 )

purchases of assets which the foundation devotes directly

tions;

to charitable activities.

IV - A -

Effective" Date.
These provisions would apply to transactions engaged in after the

effective date of the provisions.

In the case of the use of property

in which both the foundation and the donor have an interest, the rule
prohibiting such use would apply only to interests acquired by the foundation after the effective date of these provisions.
2.

Adequate Return to Charity.
A.

Present law.

Under present law, certain exempt organizations are prohibited from
accumulating income unreasonably, using accumulated income to a substantial
degree for purposes other than those constituting the basis for the organization's exemption or investing accumulated income in such a manner as to
jeopardize the carrying out of the function constituting the basis for
the organization's exemption.
B. !reasury proposal.
This proposal would require a private nonoperating foundation to
distribute the larger of 5 percent of the value of its investment assets
or the full amount of its realized income in the year following the
close of the accounting period.
An organization's "investment assets II would include all assets other

than those devoted directly to charitable activities.

For example, a

portfolio of stocks and bonds would constitute investment assets subject
to the 5 percent rule.

On the other hand an organizatiJn which maintains a

park open to the community as part of its charitable activities would not
be required to value the park as part of "investment assets" against
which the 5 percent rule would be applied.

rv-A-4
The private persons subject to these provisions would be:
(1)

the creator of, sUbstantial contributor to or an

official (director, officer, trustee, etc.) of the foundation;
(2)

directors, officers and persons who own 20 percent or

more of the stock (or interest in the capital or profits) of a
corporation or partnership which is a substantial contributor to the
foundation;
(3)

a corporation or partnership 20 percent or more of the

stock or interest in the capital or assets of which is owned by the creator,
substantial contributor or official of the foundation;

(4)

brothers, sisters, spouse, in-laws, aunts, uncles, neices,

nephews, ancestors and lineal descendants of any persons in (1) or (2)
above;

(5)

an estate or trust for the benefit of any of the persons

in (1) or (2) and

(6)

a trust of which any person in (1) or (2) is considered

the owner under Subpart E of part 1 of subchapter J (relating to grantors
and others treated as substantial owners).

In applying the ownership test in paragraphs (2) and (3) above, stock
or interests in partnerships owned by brothers, sisters, spouses, in-laws,
aunts, uncles, neices, nephews, ancestors, lineal descendants and trust
and estates for their benefit would be attributed.
In addition, a nonexempt trust empowered by its governing instrument
to permanently set aside amounts for charitable purposes would be prohibited
from engaging in self-dealing transactions with any income or corpus which
it has so permanently set aside.

IV - A - 3

The general prohibition would apply to both direct and indirect transactions involving the transfer or use of foundation assets.

Thus, for

example, a loan by a donor to a corporation which he controls, followed by
a gift of the corporation's note to the foundation, would be prohibited.
The following transactions would be specifically exempted from the
general prohibition against self-dealing:
(1)

reasonable compensation for personal services actually

rendered and reimbursement for expenses actually incurred;
(2)

facilities and services of the foundation made available

on a nonpreferential baSis;
(3)

purchases by the foundation of incidental supplies (at no

more than fair market value);

(4) interest free loans.to the foundation, and their repayment;
(5)

transactions between a foundation and a corporation pursuant

to the terms of securities of such corporation in existence at the time
acquired by the foundation (e.g., the call of a callable bond);
(6)

transactions between a foundation and a corporation pursuant

to any liquidation, merger, redemption, recapitalization or other corporate
adjustment or reorganization, but only if all of the securities of the same
class as that held by the foundation are subject to the same terms and such
terms provide for receipt by the foundation of no less than fair market
value; and
(7)

purchases (at no less than fair market value) of foundation

assets owned on the effective date of the legislation divestiture of which
is required by the improper business interest rules recommended herein.

IV - A - 2
B. Treasury proposals.
The proposal would add a new rule for private foundations in the
form of a general prohibition against engaging directly or indirectly in
any transaction involving the transfer or use of any assets in which the
foundation has an interest with a donor or parties related to the donor.
Self-dealing transactions which a foundation would be prohibited from
entering into under this general rule would include (although not be
limited to) lending, borrowing, purchasing, selling or leasing.

Corpora-

tions controlled by private foundations would be prohibited to the same
extent as the controlling private foundation.
In addition, a special rule would prohibit use by the donor and certain

related persons of property in which the foundation has an interest acquired
from the donor, regardless of any interest in the property retained by the
donor.

For example, use by the donor of property in which the foundation

has been given an undivided interest by the donor would constitute a selfdealing transaction, regardless of the fact that the donor retained an undivided interest in the property.

Of course, use of foundation property

in which the donor has no interest, such as water rights which the foundation
own! off the donor's

~rivate

beach, would be prohibited under the general rule.

IV - A-I
Technical Explanation
Private Foundations
The Treasury proposal with respect to Private Foundations prohibits
self-dealing, provides for an adequate return to charity, and prohibits
ownership of certain business interests and certain political activities.
It also provides sanctions for failure to file
enforcement of the new provisions.

info~ation

returns and for

These provisions would be made appli-

cable only to corporations or trusts exempt from income tax as ones organized
and operated for religious, charitable, scientific, literary, or educational
purposes, or the prevention of cruelty to children or animals.

However,

the provisions would not apply to the following organizations:
(1)

Organizations which normally receive a substantial part

of their support from the general public or governmental bodies;
(2)

Churches or conventions or associations of churches;

(3)

Educational organizations with regular faculties,

curriculums, and student bodies; and

(4) Organizations whose purpose is testing for public safety.
Nonexempt trusts empowered by their governing instruments to payor
permanently set aside amounts for certain charitable purposes would also
be subject to these provisions.
1.

Prohibition
A.

Again~t

Self-dealing.

Present law.

Present law places limited restrictions upon transactions between
certain exempt organizations and their donors (and certain other related
persons).

In general, these restrictions require that certain specified

transactions be conducted at arms length.

III -

5 -

3. Effective Date.
The proposed rules would be made effective for transactions
consumated or entered into on or after April 20 1969.
whiCh the parties

consumm~

Transactions

prior to April 20 1969 would continue

to be treated under present law.

III - 4 -

subject to a mortgage.

Thus, the income derived from the property used

to satisfy the production payment will be taxed to the owner of the
nineral property and will be subject to the allowance for depletion.
In the case of a working interest burdened by a retained production payment, the production costs attributable to minerals applied to satisfy
the production payment would be deductible in the year incurred.

similar result vTill be obtained in the case where a production payment
is retained by the lessor in a leasing transaction, by treating the
retained production payment as a bonus granted by the lessee to the
lessor payable in installments.
Example.-A, the owner of a

producing oil and gas lease, sells the

lease to B for $1 million and retains a production payment of

$3 million

(plus interest at 5-1/2 percent) payable from 75 percent of the production
from the lease.

Simultaneously, A sells the retained production payment

to C for $3 million cash.

A will treat the gain on the sale of his

J nterest

B will include the -production -payment revenue in

as capital gain.

his ['"ross income, subject to depletion, during the payout period, and will
deduct as current expenses the lifting costs incurred with respect to the
oil used to satisfy the production payment.
GS

C will treat the $3 million

a nonta,x:able return of capital and will treat the interest as ordinary

in2ome.

III - 3 -

Accordingly, the proceeds of the "sale" of the carve-out would not be
taxable to the seller thereof, but income derived from the property
subject to the carve-out would be.taxable to him in the years of production, subject to the allowance for depletion.

Costs of producing

the mineral subject to the carve-out would be deductible in the year
incurred.
The tax result to the purchaser of the production payment would
not in most cases be affected by this proposal.

He would be treated

as receiving a return of capital plus interest.
Examp1e.-The A coal company transfers a $300,000 production payment
to B bank.
~rofits

The production payment is payable out of 90 percent of the net

to be derived from the operation of the coal properties and bears

5-1/2 percent interest.

The payout period is estimated to be 3 years.

the year of the transaction, A treats the proceeds as a loan (nontaxable
receipt)

In each of the 3 payout years, A includes as taxable income

subject to depletion the amounts used to discharge the production payment,
and deducts the expenses incurred in each year to produce the coal subject
to the carve-out.

If the payment is made on the basis of $100,000 each

year plus the interest due, the B bank will treat the $100,000 as a return
of

~rincipal,

and will treat the interest as ordinary income.

ABC Transactions and Retained Production Payments.

Where a mineral property is transferred subject to a production payment
(whether or not created by the immediate transferor), it is proposed that
the transferee of the mineral property be treated as if he acquired the

III - 2 -

ABC Transactions.

The retained production payment is utilized in connection with the
so-called ABC transaction.

In an ABC transaction A, the owner, sells a

mineral property toB (who will own and operate the property) for a small
downpayment, and A reserves a

production payment (bearing interest) for

the major portion of the purchase price.

A then sells the production

payment to C who is often a bank, a tax-exempt charity, or pension fund.
A realizes capital gain on the sale of his interest to C and B.

receives income subject to depletion (normally cost depletion sufficient
to eliminate taxable income) on the production payment.

B excludes the

production payment from his income but, until recently, B was permitted to
deduct currently the expenses of producing the minerals applied to the
production payment.
2.

The Proposal.
The proposal generally would treat production payments as loan

transactions. 1/ As a result, the owner of the mineral interest subject
to the production payment will take income and expenses with respect to
the r-roduction payment into account in the same taxable year.
A.

Carved-Out Production Payments.

It is proposed that a carved-out production payment,

whether relatir

to a ,wrking interest or a nonoperating interest, be treated as a loan.

This proposal does not apply to production payments pledged for,
or because of, exploration or development. Such transactions do not
operate to distort the depletion allowance.

II! - la -

production payment receives depletable income during the payout period.
The purchaser of the working interest excludes the amounts used to pay
off the production payment during the payout period but, until recently,
deducts the costs of producing the minerals subject to the production
payment.

III-l

Technical Explanation
Mineral Production Payments
1.

Background.
A production payment is a right to a fixed amount of production from

a mineral property if, as, and when the production occurs and, depending
upon the manner in which it-is created, it may be classified as either a
carved-out production payment or a retained production payment.

The pro-

duction payment may be for a specific dollar amount, and it usually bears
interest.

The payment is secured by an interest in the minerals, and

usually the known mineral reserves available are substantially in excess
of that required to payoff the production payment.
A.
I~

Carved-Out Production Payments.
the case of a carved-cut production payment, the owner of the

mineral interest sells the payment to an outside party, usually a
financial institution.

Under present law, the purchaser of the pro-

duction paynent treats the payments received as income subject to the
allouance for depletion (usually cost depletion).

The amounts utilized

to pay the production payment are excluded from income by the owner of
tte l,urdened

interest during the payout period but, the expenses attri-

butable to producing that income are deducted in the year incurred.
B.

Retajned ?roduction Payments.

In tte case
::~ne:t'a~

a retained production payment, the owner of the

interest sells the working interest but reserves the production

-paY:::1en:; in hinself.

Under present lavT, the

c~,mer

of the retained

VI - 1
Technical Explanation
Corporate Securities
1.

Denial of Installment Reporting of Gain
A.

Present Law

Under present law, there is a question whether section 453 (b)
of the Internal Revenue Code permits a taxpayer to elect installment
reporting on the receipt of certain corporate evidences of indebtedness, such as publicly traded long-term convertible debentures, as
part of the consideration in a casual sale of real or personal property!

Some taxpayers who have received such corporate evidences of

indebtedness in exchange for the stock of another corporation have
been treating the indebtedness as qualifying for installment reporting under section 453 (b).
B.

Proposal

Effective Date

The proposed rule would apply to sales or other dispositions
made after February 24, 1969.

VI - 2

Ratable Reporting of Original Issue Discount
A.

Present Law

If the

The balance of the gain is treated as capital gain.

Thus, under section 1232 taxation of original issue discount is
deferred until the year of redemption or the year in which the holder
sells or exchanges the indebtedness in a taxable transaction.

Proposal

It is proposed that the tax treatment of the holder of bonds
with original issue discount be made consistent with the treatment

xB.

Convertible Securities and Stock Rights

For purposes of the new exception, any security convertible
into stock or any right to acquire stock will be treated as outstanding
stock of the corporation.

Thus, a taxable increase (hereafter referred

to as a section 305 distribution) will result if the ratio at which any
debenture is convertible into stock, or the amount of stock purchasable
under a warrant

is increased and the increase is related to a taxable

distribution.
C.

Constructive Stock Distributions

If a corporation redeems any portion of its stock pursuant to a
plan of periodic redemptions, a section 305 distribution will be considered as made with respect to the stock of any shareholder whose
proportionate interest in the assets and earnings and profits of the
corporation is thereby increased.

The amount of distribution

with respect to any shareholder will be determined by reference to
the amount of stock that would have been required to be distributed to
such shareholder immediately before the

redemption in order to give

such shareholder the same increase in proportionate interest.
For purposes of this rule, a reduction in the ratio at which one type
of a corporation's stock may be converted into another type will
be treated as a redemption of stock.
The following examples illustrate the application of this rule:

x ·3Example (2).

Corporation Y has outstanding, in addition to its

common stock, a class of preferred stock which is limited and preferred
as to cash dividends.

On January 1, 1970, Y pays a cash dividend on

the preferred stock and on July 1, 1970, it makes a common stock distribution with respect to its common stock.

The two distributions

are considered related, but the proportionate interests of the cornman
shareholders in the assets and earnings and profits of Yare not increased.

Therefore, the stock distribution is not taxable.

Example

(31.

(i)

Corporation Z is organized on January 1, 1970,

with two types of stock outstanding, type A stock and type B stock.
Each type B share may be converted, at the option of the holder, into
type A shares.

During 1970, the conversion ratio is one share of type A

stock for each share of type B stock.

At the beginning of each subse-

quent year, the conversion ratio is increased by .05 shares of type A
stock for each share of type B stock.

Thus, during 1971, the conversion

ratio would be 1.05 shares of type A stock for each share of type B
stock; during 1972, the ratio would be 1.10 shares, etc.
(i1)
stock.

On December 31, 1970, Z pays a cash dividend on the type A

On January 1, 1971, when the conversion ratio is increased to

1.05 shares of type A stock for each share of type B stock, a distributic
is considered as made with respect to each share of type B stock of a
right to acquire .05 shares of type A stock.

Since both distributions

are considered related and since the proportionate interests of the type
shareholders in the assets and earnings and profits of Z are increased,
the rights distribution to the type B shareholders would be taxable undel
section 301.

2 -

by the granting of a choice to shareholders.

This has led to a

potential substantial revenue loss and to inequities among the
•
recipients of corporate dividend distributions. To make it clear
that this circumvention of the statute is not to be permitted, the
proposal would provide for two additional exceptions to section 305.
2. Proposal
A.

DisEroportionate Distributions

The first of the new exceptions to section 305{a) would proyide
that if stock (or rights to stock) are distributed in conjunction with
a taxable dividend distribution (that is, a distribution to which
section 301 applies) that is made with respect to another portion of
the corporation's outstanding stock, then the distribution of the
stock (or rights to stock) would be taxable if such distribution has
the effect of

incr~sing

the recipient's proportionate interest in

the assets and earnings and profits of the corporation.

For purposes

of this exception, a distribution would be considered to be made in
conjunction with another distribution if it is made within 12 months of
the other distribution or if both distributions are made pursuant to
a single plan.
The following examples illustrate the application of this exception to section 305(a):
Exam~le

(I).

A and B each own 50 percent of the outstanding stock

of a corporation X.

On January 1, 1970, X makes a stock distribution with

respect to A's stock, and on July 1, 1970, it pays a cash dividend on
BIs

stock.

Since the distributions are considered related and since Als

proportionate interest in the assets and earnings and profits of X is increased, ~ .tcck di.tribution to him would be taxable under section 301.

Technical Explanation
Stock Dividends
1.

Background and Purpose
At present, section 305(a) of the Internal Revenue Code provides,

in general, that a distribution made by a corporation to its shareholders of its stock (or rights to acquire its stock) is not taxable.
Section 305(b) contains two exceptions to this rule.

First, the

distribution is taxable if it is made in discharge of preference
dividends for the taxable year of the corporation in which it is
made or for the preceding taxable year.

Second, the distribution

is taxable if it is, at the election of any of the shareholders,
payable either in stock (or rights to acquire stock) or in money or
other property.
While in enacting section 305, Congress sought to avoid the confusion and uncertainty existing under prior law, it intended, through
section 305, to continue the taxation of stock dividends where the
shareholder had a choice between receiving cash or stock.

The ability

to choose a stock dividend in lieu of a cash dividend offers to the
shareholder the opportunity to defer the payment of tax (and, in some
cases, avoid it entirely) and to convert what would be ordinary income
into capital gain.
Since the enactment of section 305, some corporations have used
various devices which achieve substantially the same results as obtained

IX - 5
even though the taxpayer elects to return to straight-line depreciation.
Similarly, the commissions would continue to have authority to require
flow-through if the taxpayer voluntarily elects accelerated depreciation
in the future.

3. Effective Date.
The proposal in connection with accelerated depreciation and rate
making for public utilities would apply on or after January 1,

1969.

In order to permit adequate adjustment to the new rules, it is
recommended that the proposal with regard to the computation of earnings
and profits be applied beginning after the third year following enactment.

IX -

If utility commissions generally proceed to treat companies as
though they had adopted accelerated depreciation and require this
woount to be flowed through, the total impact on the revenues, over the
next few years, could build up to an annual loss of $1. 5 billion.

If,

on the other hand, the Congress enacted legislation that would in all
circumstances prohibit utility commissions from flqwing through the
proceeds of accelerated depreciation, there could be a short-term
revenue loss as high as $0.6 billion due to the adoption of accelerated
depreciation by certain utilities which would not act in this manner
if they anticipated the possibility of flow-through.

Thus, since a

substantial revenue loss will occur as a result of either of the abovementioned changes, it is proposed that the present state of affairs
be preserved.
B.

Proposal.

Under the proposal regulatory commissions would be prohibited from
requiring a utility which has always used straight-line depreciation to

aAOpt accelerated depreciation or to compute its tax as if it did.
This is in accord with the intent of the tax law which explicitly
provides a choice for taxpayers between the use of accelerated depreciation and straight-line depreciation.
viously elected accelerated

depreciatio~

Where a taxpayer has preregulatory commissions would

continue to have authority to require flow-through--i.e., make the allowance
for Federal tax on the basis of continued use of accelerated depreciation,

IX -

In the case of utilities claiming accelerated depreciation for tax purposes, "normalization" ignores the effect of acceleralied depreciation
on

the~ax

payment; that is, the utilities claim as an expense the tax

that would be paid had straight-line depreciation been used, and the
difference between the actual tax paid and the

hi~er

tax based on

straight-line depreciation is treated as a reserve for future taxes.

This

reserve is ordinarily treated as a customer contribution to the capital
of the company, and no rate of return is permitted on it.
tax

re~lction

The immediate

gives the utility additional working capital over what

it woulQ have had had it been on a straight-line method and enables
it to reduce its requirements for equity or debt-financing.
In other Situations, the regulatory commissions have required
companies to take into account as the income tax cost of their
operations only the actual tax paid, with the result that the tax
reduction due to accelerated depreciation is "flowed through" to
the customer as a reduction in the price of utility services.

This has caUf

some utilities to continue to use straight-line depresiation since they obtaj
working aapital benefit. However,in some situations,the regulatory commissior
have given companies credit only for the income taxes that would have
been paid had accelerated depreciation been claimed even though
straight-line depreciation has been used for tax purposes.

Conse-

quently, a number of utilities have argued that the regulatory agencies
should be prohibited from requiring a utility to adopt accelerated
depreciation and flow-through of the benefits thereunder without the
express consent of the utility.

IX- 2

The problem arises because accelerated depreciation is not used for
book purposes so that book earnings exceed taxable profits. That is, dividends
which are in fact paid out of book earnings exceed taxable earnings and profits.
~ch

dividends are treated as a return of capital which reduce the share-

holder's tax basis in his stock (to the ~tent it exceeds the adjusted
basis of the stock, it is treated as capital gain) but do not result
in ordinary income.

Proposal.

Under the proposal accelerated depreciation would not be taken
into account in the computation of earnings and profits unless
accelerated depreciation is used for book purposes.

The depreciation

deduction in the computation of earnings and profits would be limited
sole:q to that computed under the straight-line method as provided in
section l67(b )(1) unless accelerated depreciation is used for book rurposes.
2. Accelerated Depreciation and Rate Making for Public utilities.

Present law.

utilities, as a general rule, use straight-line depreciation for
book purposes.
s~cified

Since rates are fixed in order to achieve a

return after taxes, the depreciation claimed for tax purposes

and. its effect on the amount of the Federal income tax paid are important factors

in the determination of rates.

For many years, regulatory agencies

ha~ been dealing with the problem of how to treat

reduction in

Federal taxes due to the use of accelerated depreciation pursuant to section

167(b)(2), (3) and (4) of the InterXlal Revenue Code in determining book after-tax
profits.

They have followed two pracedures--normalization and flow-through.

IX - 1

Technical Explanation
Treatment of Accelerated Depreciation
by Regulated utilities
1.

Tax-free Dividends.
A.

Present law.

A corporate distribution is taxable as a dividend to the extent the
distribution is made out of earnings and profits accumulated after February 2

1913, or out of earnings and profits of the current year.

The amount in

excess of current or accumulated earnings and profits reduces the adjusted
basis of the stock; and any remaining excess is treated as gain from the sale
or exchange of property.

In computing earnings and

profits, depreciation is presently deductible in the amount allowable
for income tax purposes, rather than any other amount which might be
charged to accumulated depreciation on the books.
Under existing law, some corporations, particularly regulated utilities
are making tax-free distributions primarily as a result of the use of
accelerated depreciation which exhausts earnings and profits for tax
purposes.

This is particularly true if the benefits of accelerated de-

preciation are "flowed-through" to the consumer resulting in a rate
reduction and lower income.

VIII - 11
The section 1245 recapture would apply only to sales in years
commencing on or after January 1, 1970.
The extension of lives of livestock would apply to livestock
aCQuired after January 1, 1970.
The changes in section 270 would apply only to years commencing
on or after January 1, 1970.

VIII - 10
~

1970

Ordinary Income
Capital GainS!
Total Income
AdaJ/

Measure of
Allowable
Ded~ctions

other
Deductions
Less Measure
of Allowable
Deductions
Deductions
Disallowed

1972
$150,000

1973
$400,000

1974

$200,000

$300,000

- °-

75,000

$200,000

$375,000

$150,000

$550,000

$100,000

50,000

$200,000$600,000

$150,000

50,000 -

Total Allowable
Deductions
Less Specially
Treated Deductions

1971

$100,000

150,000

$250,000

$425,000

300,000

- ° -

100,000

400,000

- ° -

$425,000

$100 6°°0

*200,000

$150,000

$500,000

$250,000

-° -

$175,000

425,000

100,000

200,000

150,000

$ 75,000

*150 ,000

-° -

25,000

°-° -

- °- °

-hi

5. Effective nates.
Taxpayers would be required to keep an EDA for all years commencing on or after January 1, 1969, but gains realized in 1969 would be
exempted from its operation.

Capital gain income is included only to the extent of the taxed
one-half.
d! Deductions are disallowed only to the extent they exceed gross
1-noome and $50,000. Th±S''1.s-,'the $50,000 of allowable loss. It must,
however, first be offset against the specially treated deductions.
~ If other deductions are less than the measure of allowable deductions, no deductions are diSallowed.

VIII - 9
EXAMPLE

These changes may be shown by the following example:
Ordinary
Income

Year

Specially
Treated
Deductions

Other
Deductions

Business
Capital
Gain

Present
§ 270

wss))

-° -

$500,000

$150,000

$ 50,000

150,000

100,000

250,000

.-° -

100,000

1973

400,000

- 0 -

300,000

None

1974

100,000

- 0 -

175,000

-° -

75,000

1970

$200,000

$300,000

1971

300,000

1972

None

.As now computed, the loss would not exceed $50,000 in five consecutive years, and section 270 would not be applicable.
Under the proposal, the loss in each year would be computed by
including only one-half of capital gain in income.

The losses thus

would be:
1970

None

1971

125,000

1972

100,000

1973

None

1974

75,000
Since the loss exceeds $50,000 in three of the five years, a

recomputation of income in each year would be necessary.

The deduc-

tions disallowed would be computed as follows:

This column is the amount which would be used to determine whether
the loss exceeded $50,000 in any year.

VIII - 8

There are two additional problems related to section 270.

The

first lies in the computation of the size of the loss to ascertain
whether it exceeds $50,000 in the requisite number of years.
other difficulty arises in computing the amount of the
deductions when

~he

The

dis~llowed

section is otherwise applicable.

Under the proposal both of these

computa~;ions

would be altered.

At present the amount of the income included in the computation includes the full amount of the capital gain realized on the sale of
property used in the trade or business even though only one-half of
that amount is subject to tax.

Under the present proposal, gross

income of the trade or business for purposes of determining the amount
of loss under section 270 would be reduced by the untaxed half of
capital gains attributable to the business.
The proposal would also alter the amount of disallowed deductions.

Under present law specially treated deductions consisting

of interest, taxes, casualty and abandonment losses, farm drought
losses and expenses, and items which a taxpayer may either capitalize
or expense are wholly excluded from computation of the loss and in
determining the disallowed deductions.

Under the proposal, these de-

ductions will remain fully allowable if otherwise allowable, but
they will reduce the amount of otherwise allowable deductions.

VIII - 7

depreciation deductions taken after December 31, 1968, would be subject to this recapture rule.

This rule would be effective even

though the taxpayer had no excess deductions account.
B.

Extension of livestock lives

Livestock which may qualify under section 1231 (b) of the Code,
which treats net gains as capital gain, would be redefined into two
categories.

First, as to all livestock now

qua1ifyin~

other than

race horses, the holding period, now 12 months, would be extended to
two-thirds of the useful life of the animal or two years, whichever
is the shorter.

A race horse in the hands of the breeder (or any

other person who deducted raising costs including a taxpayer having
a basis deter.mined in whole or in part by reference to the basis in
the hands of one who has deducted raising costs) would not be treated
as property used in the trade or business of racing unless it had
been raced for a two year period.

A race horse would not be treated

as breeding livestock and thus qualify under section 1231 (b)(3)
unless the particular animal had been bred.

Revision of 'section 270
Section 270 disallows certain deductions when the taxpayer in-

curs losses in a trade or business in excess of $50,000 for five
consecutive years.

This section would be amended so that the recom-

putation would be made if the $50,000 loss amount were exceeded in
any three of five consecutive years.

VIII - 6

($65,000) less basis ($15,000)).

Of that amount $40,000 is treated

as ordinary income, and $10,000 is treated as capital gain.
Example 3.
The taxpayer incurs soil and water conservation expenses in the
amount of $30,000 on unimproved farm land in 1969.

His farm deduc-

tions in that year, including the $30,000 amount, exceeded farm
ordinary income by $15,000.

The land which would qualify as a sec-

tion 1231 asset under present law is sold at a $50,000 gain in 1973.
At that time the amount in the EDA is $100,000.

The total amount of

prior deductions under sections 175, 180, and 182 with respect to the
land is the $30,000 amount expended in 1969 for soil and water conservation expenses.

The gain on the sale of the land is treated as

ordinary income to the extent of $30,000, and the balance is treated
as capital gain.

3. Capital Gain on Livestock
Two changes are proposed with respect to capital gains on
livestock.
A.

Recapture of excessive depreciation of livestock

Under section 1245, as added by the Revenue Act of 1962, a disposition of personal property may result in the recapture of depreciation deductions taken with respect to such property.

However,

livestock is excepted fram the application of this rule.

In order

to put livestock on the same footing as all other personal property,
the exception for livestock would be eliminated.

However, only

VIII .. 5
productive state in 1974.

The income of his other fam operations

is exactly equal to the expenses of these operations, but the taxpayer incurs development costs 'on the fruit trees in the amount of
$5,000.

In 1970, 1971, 1972, 1973, he incurs developmental expenses

of $15,000 each year with respect to the fruit trees, and other far.m
income and expenses net out to zero.

In early 1974, he sells the

orchard for $85,000 in a transaction which would quality for capital
gain treatment under present law.

No amount has been deducted on

account of the land pursuant to sections 175, 180, or 182.

The sales

price is allocable $20,000 to land and $65,000 to the fruit trees.
The EDA account totals $40,000 computed as follows:
EDA
Subtractions

Balance

Year

Additions

1969

.. °.

1970

$10,000

1971

10,000

20,000

1972

10,000

30,000

1973

10,000

40,000

1974

$40,000

-° -

The EDA has no effect on the gain on the land ($10,000) which
is treated as capital gain.
on the trees.

The EDA does, however, affect the gain

The total gain on the trees is $50,000 (sales price

VIII -

4
EDA

Year

Additions

1969

$15,000

1970

- 0 -

1971

-° -

Subtractions

Balance
$15,000

$6 ,500

8,500

- °-

1972

-° -

8,500

This chart summarizes the following transactions:

In 1969, the

taxpayer enters $15,000 in the excess deductions account (EDA) (the
excess of the $20,000 loss oyer $5,000).

In 1970, the EDA is reduced

by the net ordinary income from farming ($5,000).

Since the amount

in the EDA is larger than the capital gain on the sale of the bull,
the $1,500 income on the sale of the bull is treated as ordinary
income.

The EDA is accordingly also reduced by the amount of

gains treated as ordinary income ($1,500) by reason of this
At the end of 1970, the EDA is $8,500.

ca~ital

pro~osal.

The loss in 1971 does not

add to the account, howeyer, because the loss is less than $5,000.
Thus, the account remains at $8,500.

When the liyestock is sold in

1972, only $8,500 of the $12,500 gain is treated as ordinary income,
and the balance of the gain is treated as capital gain.
Example 2.
In 1969, the taxpayer purchases

unim~royed

farm land (at a cost

of $10,000) on which he plants fruit trees (at a cost of $15,000,
which cost is capitalized).

The trees are expected to reach the

VIII - 3
A taxpayer would not be required to keep an EDA if he used accounting methods which are generally applicable to business enterprises other than farming.
of

inv~ntories

Such methods

gener~

include the use

where necessary to determine income properly.

Sim-

ilarly, such methods require that all costs properly attributable to
property used in the trade or business and having a useful life
beyond one year be capitalized without regard to any special provisions of the Internal Revenue Code or regulations permitting such
capital expenditures to be deducted currently.

Where inventories

of livestock are involved, a method would be acceptable under this
proposal only if the inventory valuation reflected direct costs and
a proper allocation of indirect costs incurred by the taxpayer in
raising the animals.
EXAMPLES

Example 1.

The taxpayer, a corporate executive, owns a farm with respect
to which, in 1969, ordinary deductions exceed ordinary income by
$20,000.

In 1970 the far.m produces net ordinary income of $5,000

and, in addition, a prize bull, which has a zero basis, is sold for
$1,500 in a sale which would qualify for capital gains treatment under
existing law.

In 1971, the farm shows a net loss of $3,500.

1972, his ordinary farm income just equals farm expense, but he sells
breeding livestock which he held more than tw:o years, v'alued at
$12,500 but without any basis.
The taxpayer's EDA would be computed as follows:

VIII - 2

The farm loss would be computed by reducing farm gross income,
other than income subject to capital gain treatment, by the amount
of deductions attributable to the farming operation.

For this pur-

pose farm income would not include receipts from mineral royalties,
timber sales, sand and gravel sales, or rents except share crop
arrangements under which the landlord bears same risk of loss.
Farm deductions would include all amounts attributable to the farming
operation.
Gain realized on a disposition of property used in farming
which

Q~der

current law would otherwise be capital gain would be

treated as ordinary income to the extent of the amount in the excess
deductions account, including any excess deductions in the year of
sale.

The EDA would be reduced by the amount of such gain.

Gain at-

tributable to increases in land values would not be subject to this
rule, however, unless there were prior deductions which created the
increase in land values.

Thus, gain on land would be ordinary in-

come only to the extent of prior deductions under sections 175, 180,
or 182 with respect to the parcel sold, but in no event in excess
of EDA.
All losses attributable to farming would continue to be available to offset other income of the years in which incurred or income
of other years as a net operating loss carryover.
affect the allowance of any such losses.

The EDA does not

VIII - 1
Fam. Proposal
Technical Explanation
1.

Background
Under existing law, the sale of many farm assets -- whether

livestock, orchards, land, or other assets -- generally results in
long-term capital gain under section 1231 although all or a substantia
part of the cost of raising or developing such assets may have been
reflected in ordinary losses on the cash method of accounting.

most instances, such fam. losses have offset ordinary income fram
other sources.

The combination of deferral of tax attributable to

the cash .accounting method and the benefit of deducting costs against
ordinary income, offset only by later capital gains, requires
changes in tax treatment.

In addition, there are structural defects

in the hobby loss limitations in section 270, which, while not confined to farm losses, frequently have potential application in this
area.
2.

These defects require correction.

Excess Deductions Account
This proposal would apply to all taxpayers who incur total

ordinary farm deductions in excess of total ordinary farm income.

the case of corporations such excess would be added in full to an
excess deductions account (EDA).

All other taxpayers would add such

excess to the extent it exceeds $5,000 each y€ar to an EDA.

A tax-

payer would keep such an EDA for all taxable years commencing after
December 31, 1968.
any subsequent year.

The EDA would be reduced by net farm income in

VIr " 11 D.

Additional first year depreciation.

Under present law a taxpayer may elect to take, as a depreciation
deduction, 20 percent of the cost of certain qualified property in the year the
property is acquired.

The aggregate cost of the property subject to

this special provision is

l~ted

to $10,000 per year.

Corporations

which constitute a parent-subsidiary group, defined somewhat differently
than the parent-subsidiary definition contained in the multiple surtax
exemption provisions, are restricted to one $10,000 limitation per
group.

The proposal would conform the parent-subsidiary definition to

that used in the multiple surtax exemption provisions and extend the
present law restriction on multiple additional first-year depreciation
deductions to brother-sister controlled groups as defined under this
proposal.

This restriction would make use of the definitions and

special rules under the surtax exemption provisions but since any
depreciation deduction not allowed in the first year by reason of
these changes would be allowable in subsequent years under the normal
depreciation rules, no transition rule is necessary.

3. Effective Date.
These provisions would become effective for taxable years beginning
after December 31, 1968. For those covered by the transition schedule,
the full effect of the provision would take place with taxable years
beginning in 1974.

TII~W-

As with the minimum accumulated earnings credit, the restrictions
on the number of limitations on the small business deduction for life
insurance companies would apply to parent-subsidiary controlled groups
as defined under present law and brother-sister controlled groups as
defined under this proposal. _
C.

Investment Credit.

The investment credit provisions allow a taxpayer to use his investment credit to offset 100 percent of the first $25,000 of tax liability but
only 50 percent of amounts above $25,000.

These provisions also allow a

taxpayer to use up to $50,000 of his cost of acquiring used property in
the computation of his investment credit.

Corporations which constitute

a parent-subsidiary group, defined somewhat differently than the parentsubsidiary definition contained in the multiple surtax exemption provisions
and somewhat differently for each limitation, are restricted to one of
each of these two limitations per group.

The proposal would conform the

parent-subsidiary definition to that used in the multiple surtax exemption provisions and extend the present law restriction on multiple
investment credit limitations to brother-sister controlled groups as
defined under this proposal.

This restriction would make use of the

definitions and special rules under the surtax exemption provisions, but
since the investment credit contains provisions for carrying over from
one year to the next excess investment credit (including any amount of
credit disallowed under this proposal), no special transition rule is
necessary.

VI1 - 9 -

$100,000 of retained earnings would be protected.

Similar allocation

rules would apply during the transition period where a group of
corporations is allowed less than one credit per corporation.
The restrictions on the number of minimum accumulated earnings
credits would apply to parent-subsidiary controlled groups as defined

under present law and brother-sister controlled groups as defined under
this proposal.
B. The Limitation on the Small Business Deduction for Life
Insurance Companies.
Under present law, life insurance companies are allowed a small
business deduction of 10 percent of investment yield, up to a maximum
of $25,000.

Present law does not restrict, solely on the basis of

membership in a controlled group of corporations, the number of these
limitations that can be claimed.

The proposal would limit the maximum

number of such limitations available to a controlled group of corporations in accordance with the transition schedule applicable to the surtax
exemption. As under present law, the 6-percent penalty would not attach
to multiple use of the $25,000 limit in accordance with the transition
schedule.

Rules similar to those applicable in the case of the surtax

exemption would be provided for allocating the $25,000 limitation on
the small business deduction for life insurance companies.

However,

consistent with the substantive provision itself, no one member of the
group would be entitled to a deduction of more than 10 percent of its
investment yield, which is the limitation imposed under present law.

VII - 8 -

permitting earnings and profits to accumulate instead of being distributed.
The tax doe s not apply to earnings and profits of the taxable year which
are retained by a corporation for the reasonable needs of the business.
Furthermore, even if reasonable needs are not present, the first
$100,000 of accumulated earnings on a cumulative basis is exempt from
the tax.
Present law does not restrict, solely by virtue of being a member
of a controlled group of corporations, the number of these credits that
can be claimed.

The proposal would limit the maximum number of minimum

accumulated earnings credits available to a controlled group of corporations in accordance with the transition schedule applicable to the
surtax exemption.

As under present law, the 6-percent penalty would not

be imposed on those groups claiming multiple benefits during the transition period.
The one minimum accumulated earnings credit available to a group,
after the transition period, would first be allocated evenly to each
member of the controlled group, and then, to the extent that any member
does not have sufficient accumulated earnings to utilize fully its pro
rata share of the credit, that excess credit would be allocated evenly
to the members of the group who do have unprotected accumulations.
example, if in the first year of operation, one of two corporations
constituting a controlled group retains earnings of $25,000 and the
other retains earnings of $75,000, the credit would first be divided
equally beb·reen the two corporations and then the excess credit from
the first ($25,000) would be allocated to the second, and the entire

For

VII. - 7 tion, or (iv) any combination thereof.

For purposes of this· provision,

. . 1 s t ockh0 lder If means an individual who owns (within
the t erm "
prJ.ncJ.pa

the meaning of the constructive stock ownership rules contained in
the multiple surtax exemption provisions) 5 percent or more of the
voting power or value of shares in such corporation.

Direct or indirect

control of an exempt organization would include any kind of control
whether or not legally enforceable and regardless of the method by which
control is exercised or exercisable.
In the brother-sister case, stock in a corporation owned by
an

exempt organization would be ignored if such organization is controlled,

directly or indirectly, by (i) such corporation, (ii) an individual, estate
or trust Who is a principal stockholder of such corporation, (iii) an
officer of such corporation, or (iv) any combination thereof.

"Principal

stockholder" and "directly and indirectly controlled" would have the same
meaning as those referred to above.

In addition, the 50 percent stock

ownership requirement for application of the excluded stock rules would
be expanded from one to five persons in the case of brother-sister controlled groups, consistent with the change in the definition of a
brother-sister controlled group.
2. other Tax Benefits To Which This Proposal Applies.

The $100,000 Minimum Accumulated Earnings Credit.

Section 535(c)(2) of the code provides a minimum accumulated earnings
credit of $100,000 for purposes of applying the accumulated earnings tax.
This tax applies only to a corporation which is formed or availed of for
the purpose of avoiding income tax with respect to its shareholders, by

VII - 6 -

(4)

Excluded stock.

Under present law, some taxpayers might seek to avoid the
percentage of ownership tests through use of controlled tax-exempt
foundations.

For example, an individual who owns two corporations might

seek to avoid the 80 percent portion of the brother-sister controlled
group test by transferring a 2l-percent stock interest to a·

nonstock~

tax-exempt foundation which he, or interests related to him, control.
Under the multiple surtax exemption provisions of existing law, stock
owned by certain specified persons and entities (such as certain
employee pension plans) is treated as if it were not outstanding for
purposes of applying the percentage of ownership tests involved in the
parent-subsidiary and brother-sister controlled group definitions.
However, for these rules to apply, one person must own at least 50 percent
or more of the voting power or value of shares of each of the corporations
to be included in the group.
These rules are designed to defeat attempts to circumvent the
percentage of ownership tests by transferring stock to the specified
entities.

The proposal would add organizations exempt from tax under sec-

tion 50l(a) controlled by certain specific persons to the entities whose
stock holdings would be ignored for purposes of applying the controlled
group definitions.

In the parent-subsidiary case, stock owned by such

an organization would be ignored if the organization is controlled
directly or indirectly by (i) the parent corporation or subsidiary corporation, (ii) an individual, estate or trust who is a prinCipal stockholder of the parent corporation, (iii) an officer of the parent corpora=-'The constructive stock ownership rules of existing law might preclude the
use of foundations organized in corporate form vnth outstanding stock in

VII - 5 -

The following two examples illustrate the operation of this two-part
test:
Example 1
Percent of Stock OWnership
(pt. 1)
Corporation
No. 1

Percent of Identical
OWnership (p~ 2)

Corporation Coxporation Corporation
No. 2
No.2
No.1

Shareholders:

A---------------B------------~w--

Total

30
70

75
25

30
25

100

Example 2
Percent of stock ownership
(p~ 1)
Corporation
No.1
Shareholders:

A--------------B--------------Total

80
20
100

Percent of Identical
ownership (pt. 2)

Corporation Corporation Corporation
No.2
No.2
No. 1
20
80
100

20
20

In both examples, individuals A and B together own 100 percent
of both corporations.

Thus, part (1) of the test is met.

However, under

p~t (2) of the test, the stock holdings of A and B are restricted to the

lowest percentage of an.y member to be included in the group.

Thus, in

Example 1, because stockholder A owns only 30 percent of Corporation
No.1 he is considered to own only 30 percent of Corporation No.2.
~t (2) of the test is satisfied in Example 1, but not in Example 2.

Consequently, the corporations in Example 1 would constitute a brothersister controlled iraup while those in Example 2 would not.

VII - 4a Part (1) of this test is satisfied if the group of five or
fewer persons as a whole owns at least 80 percent of the voting stock
or value of shares of each corporation, regardless of the size of the
individual holdings of each person.

Thus, for example, part (1) (but

not necessarily part (2)) is met whether one person owns 80 percent of
the voting stock of

each.co~~oration,.four

persons each own 20 percent

of the voting stock of each corporation, or one person owns 60 percent
of the voting stock of one corporation and 40 percent of another, and
another person owns 40 percent of the voting stock of the first and 60
percent of the second.
Part (2) of the test is satisfied only if the same five or
fewer persons own more than 50 percent of the voting stock or value of
shares of each corporation, considering stock owned by a particular person
only to the extent that it is owned identically in each of the corporations.

Thus, for example, a person who owns 80 percent of the voting

stock of one corporation and 30 percent of another would be considered
as owning 30 percent of both corporations for purposes of part (2) of
the test.

VII
(3)

_4 _

Definition of controlled group.

As indicated above, the restrictions on the claiming of multiple
surtax exemptions would apply to corporations which are components members
of a parent-subsidiary or brother-sister controlled group.lJ
(a)

Parent-subsidiary controlled group.

The present

definition of a parent-subsidiary controlled group--corporations connected
through 80 percent stock ownership, ei ther directly or through one or
more intermediary corporations with a common parent would remain unchanged.
(b)

Brother-sister controlled group.

Present law defines

a brother-sister controlled group as a group of corporations in which the
voting stock or value of shares of each member is owned 80 percent by the
same person (Le. individual, estate or trust).

Under the proposal, the

present definition would be changed so that a group of corporations would
constitute a brother-sister controlled group if (1) the same five or
fewer persons own at least 80 percent of the voting stock or value of
shares of each corporation, and (2) these five or fewer individuals own
more than 50 percent of the voting power or value of shares of each
corporation considering a particular personfs stock only to the extent
that it is owned identically with respect to each corporation.

This

definition is the same as that under section 1551 (relating to the
disallowance of surtax exemptions and accumulated earning credits in
cases of transfers in order to secure the exemption or credit).
17There are two minor kinds of controlled groups~ (1) combined groups
conSisting of three or more corporations each of which is a member of a
parent-subsidiary or brother-sister controlled group and one of which is
both a common parent and a brother-sister corporation, and (2) certain
insurance company groups. Membership in both types depends in part upon
membership in a parent-subsidiary or brother-sister controlled group.
Therefore, these groups are affected by these proposals in the same manner
as parent-subsidiary and brother-sister controlled groups and are not
independe:r.t1¥ di SC1lSSe.d h~ein.

VII - 3 -

Taxable years including the
first Dec.
after

Maximum number of

surtax exemptions

Fourth Dec.

31--------------------------------------------

Fifth Dec.

31---------------------------------------------

Sixth and subseQuent Dec. 31'~----------------------------

During the transition period the present provision for election
to claim multiple surtax exemptions upon payment of the 6 percent penalty
would be continued, subject to the maximum number available under the
transition schedule.

For example, in the second year, a controlled

group of 100 corporations could claim multiple surtax exemptions, but
would be restricted to 50 under the transition schedule.

If it did, it

would be reQuired to pay the penalty of 6 percent of the amount of
income (50 x $25,000 = $1,250,000) subject to the surtax exemptions as
provided under existing law.

The penalty would be allocated to each

member to the extent that it claimed a surtax exemption.
(2)

Allocation of surtax exemptions.

The one $25,000 surtax exemption available to a controlled
group after the transition period would be divided eQually among the
members of the group, or allocated according to a plan consented to by
all members of the group.

The group would be allowed to change the plan

from year to year if all members consented.

In the absence of consent

by all members, the surtax exemption would be allocated equally.

During

the transition period these allocation rules would apply in the same
manner, but to the limited amount of surtax exemptions under the transition schedule and with the proviso that no more than $25,000 be allocated
to anyone corporation.

VII - 2 -

General description of recommendation.

The proposal would limit, gradually over a 6-year transition period,
corporations which are members of a. parent-subsidiary or brother-sister
controlled group to one $25,000 surtax exemption per group.

During the

transition period the present option to claim multiple surtax exemptions
(subject to the maximum number allowable under the transition rule) upon
p8\YIDent of a 6-percent penalty tax would be continued.

The exemption

(or exemptions during the transition period) available to the group
would be allocated either evenly or under any other plan consented to by
all members of the group which did not allocate more than $25,000 to any
one member of the group.

The definition of a brother-sister controlled

group under present law would be broadened to include groups of corporations owned and controlled by five or fewer persons, rather than only
those owned and controlled by one person as provided in existing law.

Specific provisions.

(1)

Limitation of surtax exemptions.

The proposal would limit the maximum number of surtax exemptions
that could be claimed by a controlled group of corporations in accordance
with the following transition schedule:
Taxable years including the
first Dec. 31 after

Maximum number of
surtax exemptions

Jan. 1, 196~--------------------------------------------

100

Second Dec. 31-------------------------------------------

Third Dec. '31--------------------------------------------

VII - 1

Technical Explanation
Multiple Corporations
1.

Surtax Exemptions.
A.

Present law.

Existing law provides for a two rate structure for corporate income
tax with the lower rate, called the surtax exemption, applicable to the
first $25,000 of corporate income.

Many large corporate organizations

carry on business activities through a series of separate corporate
entities, dividing the total income of what is in reality one large
enterprise among numerous corporate entities, each one of which claims
a surtax exemption.

In many cases, the corporations are arranged so

that most of them have less than $25,000 of income with the result that
almost all of the enterprise's income is claimed to be taxable at
reduced rates.

In order to restrict somewhat the tax benefits of multiple

surtax exemptions, present law provides that corporations which constitute
a parent-subsidiary or brother-sister controlled group (defined as two
or more corporations related through stock ownership in certain specified
ways) must share one $25,000 surtax exemption, or elect to continue
claiming separate surtax exemptions upon payment of a penalty tax of 6
percent of the first $25,000 of income of each corporation.

This penalty

tax has only the effect of reducing the surtax exemption benefit from
$6,500 to $5,000.l/
YThe value of the surtax exemption is a constant amount for all corporatio:
that utilize it fully equal to the amount of additional tax on $25,000 that
would have to be paid if that $25,000 were taxed at the higher rate than th
lower corporate rate. The value of the surtax exemption, under existing
corpor"1te rates is 26 percent (48 percent less 22 percent) times $25,000,
or $6,500.

VI - 7
can demonstrate to the satisfaction of the Secretary or his delegate
that the amount in excess thereof is related to the cost of borrowing
and is not attributable to the conversion feature of the indebtedness.
This exception is needed in order to increase the ceiling in the event
of rising interest rates and changing market and credit conditions
generally.

Effective Date

Since the Treasury Department and the Internal Revenue Service
regard this proposal as merely declaratory of existing law, the propos~

would be retroactive.

VI - 6

3. Limit on Deduction of Convertible Indebtedness Repurchase Premium
A.

Present Law

The issue has been raised under existing law whether a corporation which repurchases its own convertible indebtedness at a premium

may deduct the entire difference between the stated redemption price
at maturity and the actual repurchase price.

It is the position of

the Treasury Department and the Internal Revenue Service that the
amount of the deduction is limited under existing law to an amount
which represents a true interest expense, i.e., the cost of borrowing,
and that the Code provides no allowable deduction for the amount of
the premium attributable to the conversion feature since the repurchase with respect to this amount is, in effect, merely a capital
transaction.
B.

Proposal

Under the proposal, if a corporation repurchases its own convertible indebtedness at a price in excess of the issue price plus
any amount of discount deducted prior to repurchase, or (in the
case of bonds issued subsequent to February 28, 1913) minus any amount
of premium returned as income prior to repurchase, the amount of the
corporation's deduction would be limited to an amount not in excess
of a normal call premium for corporate indebtedness.

exception

to the normal call premium rule with respect to the corporation's
deduction would be permitted in those cases in which the corporation

VI - 5
be capital gain.

If A holds the bond to maturity, he reports no gain

or loss on retirement ($100 stated redemption price less $100 adjusted
basis).

If, however, A sells the bond to B on June 30, 197~ for

$92 .50, his ratahle share of the 1974 original issue discount is
$1, taxable as ordinary ineome.
$5.50.

A will also have a capital gain of

B, the second holder of the bond, must include in gross income

$2 of original is sue discount and $3 interest income for each taxable
year (until the bond is sold, exchanged or redeemed).

However, B

is allowed a deduction of $1 each year, which is his ratable portion
of the excess of his purchase price for the bond over A's adjusted
basis ($92.50 purchase price less $87 adjusted basis to A divided
by 5.5 years).

At the end of each taxable year, B increases his

basis by $1 ($2 less $1).
Under the proposal, a corporation issuing an indebtedness in
registered form would be required to supply the holder with an annual
information return (Form 1099) with respect to the ratable amount of
original issue discount to be included in the holder's gross income
each year.

Effective Date

The proposal would apply to indebtedness ·issued by a corporation
after the date of enactment of the legislation.

VI - 4
under section 171.

Subsequent holders of the indebtedness

wo~ld

treated in a similar manner.
If the corporation reacquires the indebtedness at any time prior
to the stated maturity date, any excess of the amount received by the
holder over the basis of the indebtedness in his hands at that time
will be capital gain.
The foregoing rules would not apply where there is no original
issue discount as defined in section 1232 (b)(l), which excludes
certain minor amounts.
The rule would not apply to bonds issued by any government or
political subdivision.
The proposal may be illustrated by the following example:
On January 1, 1970, A, an individual, purchases at original
issue for $80, X corporation's 10-year 3 percent coupon bond which
has a stated redemption price of $100.

The ratable amount of original

issue discount to be included in A's gross income in each taxable year
(until the bond is sold, exchanged or redeemed) is $2 (1/10 of $100
stated redemption price less $80 issue price).

In addition, A would

include in gross income each year the $3 of interest income received.
Each year that A holds the bond he would also increase his basis by
the reported $2 of original issue discount.

If X corpora~ion pur-

chases the bond on January'l, 1975, for $105 A will have a gain of
$15 ($105 amount realized less $90 adjusted basis) all of which will

VI - 3
by the issuing corporation.

Thus, when a corporation issues its

indebtedness for less than face value, the amount of the original
issue discount as determined under section 1232 of the Code would
be included in the holder's gross income on a ratable basis over the
life of the

indebtedness.~

The rule would not apply unless the evi-

dence of indebtedness is issued in registered for.m or with interest
coupons attached.

However, the rule would apply regardless of whether

the exchange is for cash, stock or other property (including the
assets of another corporation).

The basis of the indebtedness in

the hands of the holder would be correspondingly adjusted, i.e.,
increased ratably, as the original issue discount is included in gross
income.
If, prior to maturity, the holder sells or exchanges the indebtedness in a transaction resulting in a taxable gain, the excess of the
amount realized over the adjusted basis of the indebtedness would be
a capital gain.

The second holder would then be treated as standing

in the place of the first holder, so that the balance of the original
issue discount not yet included in gross income by the first holder
would be included ratably over the remaining life of the indebtedness
by the second holder.
indebtednes~

However, if the second holder purchases the

for an amount in excess of the adjusted basis of the

indebtedness in the hands of the first holder, the ratable amount of
the excess would be allowed as a deduction to the second holder over
the remaining life of the bond, similar to amortization of bond premiums
~ The corporation would be required to amortize the original issue
discount over the life of the indebtedness; it would not be permitted
to amortize to an earlier permissible call date.

x- 5 Exam~le

(1).

Corporation M has 1000 shares of stock outstanding.

C. and D each own 500 shares of the M stock.

Pursuant to a plan

authorized by the Board of Directors, M offers to redeem up to 5 percent of each shareholderts stock each year for five years.

During 1970,

C has 25 shares of his stock redeemed for cash, but D continues to hold
all of his stock.

Dts proportionate interest in the assets and earnings

and profits of M is increased by 1.28 percent (D owned 50 percent of
the M stock immediately before the redemption and 51.28 percent
mediately thereafter).

im~

Since the distribution in redemption pursuant

to a plan in these circumstances would be essentially equivalent to a
dividend, the cash C receives is taxable under section 301.

D receives

a taxable distribution under section 301 which is measured by the number
of shares which would have been distributed to him had the corporation
sought to increase his interest by 1.28 percent and had C continued to
hold 500 shares.

In the instant case, the taxable distribution to D is

26,3 shares.
Example (2).

(i)

Corporation N has two types of stock outstanding,

500 shares of type A stock which is owned by E and 500 shares of type B
stock which is owned by F.

Each type B share is convertible, at the

option of the holder, into type A stock.

At the end of each year, the

conversion ratio is decreased one percent for each $1 of cash dividends
that are paid on the type B stock during that year.

On January 1, 1970,

the conversion ratio is one share of type A stock for each share of type B
stock.

During 1970, corporation N pays a $5 cash dividend per share on

the type B stock and on December 31, 1970, the conversion ratio is reduced
to .95 shares of type A stock for each share of type B stock.

x- 6 (ii) Under the proposal, the type B stock is treated as if it
were type A stock in an amount equal to the number of type A shares
into which it would be converted.

Hence, immediately before the

reduction in the conversion ratio, 1000 shares of type A stock are consideredw
be o.tBtaod1ngand immediately thereafter, 975 shares of type A stock
are considered to be outstanding.

F, therefore, is considered to have

redeemed 25 shares of type A stock and E, whose proportionate interest
in the assets and earnings and profits of N has been increased, is considered to have received, using the calculations employed in Example (1),
a distribution of 26.3 shares of type A stock.

Since the distribution

is related to Fls cash dividend, it would be taxable under section 301.
D.

Preferred Stock Distributions

Under the second proposed exception to section 305, any distribution
by a corporation of its stock (or rights to acquire the stock) made or
considered as made with respect to its preferred stock, or an increase
in the conversion ratio of preferred stock into other stock of the corporation, or an increase in the redemption value of preferred stock, would
be treated as a distribution of property to which section 301 applies
whether or not related to a taxable dividend.

Where the redemption value

of preferred stock is in excess of the issue price, the amount of dividend
in each year is computed by dividing the excess of redemption value over
issue price by the number of during which the preferred shares cannot be
called for redemption.

This rule will not applYI however 1 to the extent of

a call premium not exceeding 10% of the issue value of the stock where the
stock cannot be called for at least five years.

X~7-

Effective Date
The amendments made by the proposal would not apply, except on
or after January 1, 1991, to a distribution of stock (or rights to
acquire stock) made or considered as made with respect to stock that
is outstanding on April 22, 1969, except that the exception for disproportionate distributions would apply with respect to stock outstanding on that date unless the stock on which the related section
301

d;~tribution

is made was also outstanding on

~y~~~

22, 1969.

XI - 1

Technical Explanation
Consistency of Capital Gain and Loss Rules
1.

Pres ent Law
Under present s€ction 1211 of the Internal Revenue Code, all tax-

payers may deduct capital losses to the extent of capital gains, and
in the case of individuals, capital losses which exceed capital gains
may be deducted against ordinary taxable income of. the taxpayer up to
$1,000 per year.

There is an unlimited right to carry an excess

forward to future taxable years.
The mechanics of present law are as follows:

Long term capital

gains and long-term capital losses are offset against each other and
a

long-term capital gain or loss determined.

Similarly, short-term

capital gains and short-term capital losses are offset against each
other and a

short-term capital gain or loss determined.

If the

taxpayer has in the same year a combination of either net long-term
capital gain and

net short-term capital loss or net long-term capital

loss and net short-term capital gain, the larger amount is reduced by
the smaller, and the excess retains its original character.

However,

in computing the current deduction against taxable income, no distinction is made between long-term capital losses and short-term capital
losses; each is allowed dollar-for-dollar against ordinary taxable
income, subject to the $1,000 limitation.

-2-

In the case of long-term capital losses, this dollar-for-dollar
offset is

inconsistent with the fact that only a maximum

of one-half of long-term gains is subject to tax and that if the
long-term gains and losses were realized in the same year, they would
offset each other in the tax computation.
In order to make the treatment of capital losses parallel to the
treatment of capital gains, the proposal would permit the deduction
of only 50 percent of net long-term capital losses against ordinary
taxable income.

Net short-term capital losses would continue to be

deductible in full as under present law, and the present overall
$1,000 limit would continue as a ceiling on the combined total of
allowable annual deductions for net long-term and short-term losses.
A further problem under present law has been the
advantage which may be gained by married couples who file separate
returns.

When separate returns are filed, the $1,000 limit on the

current deduction of net capital losses is in effect doubled for
the couple since a separate $1,000 limit applies for each spouse.
If both spouses have capital transactions and a joint return is
filed, their gains and losses are pooled together and netted against
each other as if there were only one taxpayer who had realized all
of them.

The married couple is treated as a single economic unit

in this manner and can realize substantial benefits over filing
separate returns.

For example, one spouse's long-term capital

XI - 3 -

loss

can be used to offset the other spouse's short-term capital

gain which would otherwise be taxable at ordinary income rates.
It is inconsistent with this treatment to then let them be treated
as two taxpayers when this proves more advantageous, as for
example, if both have capital losses.
Each spouse must have his own losses in order to claim them on a
separate return.

However, in community property states all capital

gains and losses from community property are split between the spouses
by operation of community property law.

Taxpayers in cammon law states

may also secure two $1,000 limitations by filing separate returns, but,
as stated, only if the assets sold are in joint names or each spouse
sells assets owned separately.

Furthermore, couples in common law

states who file separate returns must be willing to give up the
split-income rates applicable to joint returns, and the overwhelming
nlWlber of such couples would not gain from so doing.

Thus, in some

situations, present law provide an artificial incentive for filing
separate returns, and the advantage to be derived from so dOing is
substantially greater for couples in community property states than
for couples in common law states.
2.

Proposal
The proposal would eliminate this problem by applying the same

rule for purposes of the capital loss limitation as is presently
applied with respect to the $1,000 standard deduction limitation.

That is,

. the limitation would be lowered to $500 for each spouse, instead of $1,000,
in the case of a married person filing a separate return.

XI - 4 -

Provision would be made for the carryover of net long-term
capital loss to the extent that it exceeds twice the amount allowed
as a deduction against taxable income as outlined above.

This provision

changes present law by requiring that the amount which may be carried
over must be reduced by double the amount of long-term capital loss
allowed as a deduction.

This change is necessary to effect the new

rule that only one-half of net long-term capital losses will be
deductible against taxable income.
As under present law, carryover is permitted for the full amount

of any net short-term capital loss which is not abosrbed against
ordinary taxable income under the $1,000 limitation.
The application of the proposal may be illustrated by the
follOwing examples:
Example A.

An individual has a long-term capital loss of $3,000

and no other capital gains or losses.

He would be entitled to a

current deduction limited to $1,000, and would be permitted to carry
over to the following year a long-term capital loss of $1,000.

he had no capital gains or losses in the subsequent year, he could
deduct $500.
Example B.

An individual has a long-term capital loss of $1,800

and a short-term capital loss of $600 in the same year.

In a case

such as this# where there is both a net long-term capital loss and
a net short-term capital loss in the same year and the total of
these losses exceeds the amount that may be deducted under the overall
$1,000 deduction limitation, it is necessary to determine the

XI -

5 -

character of the loss which is deducted currently so that the
character of the loss carried forward may be established.

Under

present law, it is provided that the $1,000 limitation is first
absorbed by the short-term losses.

This rule would not be changed.

Thus, in this example, the entire $600 of short-term loss would be
deductible first; $400 of the long-term capital loss would then be
deductible.

Under the new 50 percent rule for long-term losses,

this $400 deduction would represent $800 of the total long-term
capital loss, thus leaving $1,000 of that loss to be carried over
and treated as a long-term capital loss in the follOwing year.
If he had no capital gains or losses in the subsequent year he
could deduct $500.

3. Effective Date.
This proposal would apply to taxable years beginning after
December 31, 1968.

A transitional rule will be provided for the

application of the proposed amendments.

Thus, the extent to which

net capital losses which occur in a taxable year prior to the first
year in which the proposal becomes effective may be carried over
into such first year will be governed by present law.

Further

carryover of such losses into succeeding years would be governed
by the new provisions.

For example, if an individual realized a

$3,000 long-term capital loss in 1968, $1,000 of which was deductible
in 1968, he could carry over $2,000 of that loss into 1969 (the first
year in which the proposal is effective) and, if he has no other
losses in 19 69, claim a deduction for $1,000 with respect to that loss.
He would have no carryover into 1970.

XI! ... 1

Technical Explanation
Restricted Stock Plans
1.

Present Law
The theory upon which the existing regulations are based is

that a restriction upon the transferability of property reduces-often significantly and almost always immeasurably--the value of
that property.

Consequently, the transfer of restricted stock to

an employee is deemed to be an open transaction until the restrictions
affecting value lapse, at which time tax is imposed.
Under existing regulations, the amount treated as compensation
at the time of lapse is the lesser of (i) the unrestricted fair
market value at the time of transfer, or (ii) the unrestricted fair
market value at the time of lapse, reduced in either case by any
amount paid by the employee.
tages for the employee:

This tax treatment has several advan-

Even though he receives a nonforfeitable

interest in property, the imposition of tax is deferred possibly until
he retires when his marginal tax rate may be substantially smaller
than during his active working life.

Any increase in value between

the time of transfer and the time of lapse is taxed--if at all--as a
capital gain and not as ordinary income, as would be the case if the
employee received unrestricted stock at the time the restrictions lapse.
2.

The Proposal
A.

Time of Imposition of Tax

XII - 2 -

Under the proposal, an employee would be subject to tax at the
time he acquires a nonforfeitable interest in the restricted stock
(or other property).
would

b~ t~~en

For this purpose, only substantial forfeitures

into account. Thus, for example, requirements that the

stock be returned to the employer if the employee commits a crime
against the employer, or if he accepts employment with a firm in
competition with the employer, would be disregarded as insubstantial.
On the other hand, a requirement that the stock be returned to the
employer if the employee fails to complete an additional period of
service with the employer would be considered substantial, and the
employee would not be considered to acquire a nonforfeitable interest
until he completes that period of service.
B.

Amount of Compensation

The amount treated as compensation at the time the employee acquiref
a nonforfeitable interest would be the current fair market value of the
stock or other property determined, with two exceptions, without regard
to any restrictions, reduced in any case by amount paid by the employee
as consideration.

In the case of stock of the employer corporation,

restrictions which would be taken into account in determining fair
market value are:
(1) restrictions imposed by federal securities law
or imposed solely to comply with federal securities law,
and
(2) restrictions which by their terms will never lapse.

XII - 3 Thus, an employee who receives stock of the employer corporation
subject to a so-called investment letter would be considered to
receive compensation equal to the fair market value of the stock.
However, if the employer has agreed to register the stock for public
sale, or if there is an understanding that the stock will be registered, the investment letter would be disregarded in determining
value.

Such an understanding would be presumed to exist if there

is a registration within the two-year period following the transfer.

An employee who receives stock of the employer corporation subject to the condition that it can only be sold to the corporation
or other shareholders of the corporation at a formula price would
also be treated as receiving compensation equal to the restricted
fair market value of the stock.

Such a restriction is an inherent

element of the property received by the employee, and its effect on
value will never be removed.

Failure to take account of this re-

striction would therefore be improper.

In the case of an employee who receives stock of the employer
corporation subject to a restriction which by its terms will never
lapse, he would be considered to receive compensation if such restriction is cancelled or otherwise ceases to apply unless the employee
and the employer can establish that the cancellation was not intended
to be compensatory, both parties treat the transaction consistently
(by a closing agreement with the Internal Revenue Service if the Service deems this necessary).

Where the cancellation is compensatory,

the amount treated as compensation at the time of cancellation would

m - 4
be the excess of the then current fair market value (without regard
to the restriction) over the then current fair market value (with
regard to the restriction).
Under the proposal, the employer would be allowed a deduction
in respect to the transfer of restricted stock or other property at
the same time as the employee is considered to receive compensation
and in an amount equal to that treated as compensation to the employee.

3. Effective Date.
In general, the proposed tax treatment would apply to any transfer of restricted stock made after June 30, 1969.

However, existing

rules would apply to transfers made after that date but before
February 1, 1970, if pursuant to a written plan adopted and approved
before June 30, 1969.

Existing rules would also apply to transfers

of restricted stock made before January 1, 1972, if pursuant to a
binding written contract entered into before April 22, 1969, or if
upon the exercise of an option granted before April 22, 1969.

XIII - 1
Technical Explanation
Taxation of Accumulated Income In Trusts
1.

General Background.
Our present tax system is premised on a progressive rate scale which

increases the percentage of income paid in taxes as income increases.

When

taxpayers create additional entities for the purpose of spreading income
among several taxpayers thereby lowering the overall tax rate, this progressive system is abused.

One marked abuse is the creation of trusts to

accumulate income at relatively low rates and to distribute that income
with little or no additional tax even when the beneficiary is in a high tax
bracket.
This abuse comes about because under present law, if a person creates
a trust and does not retain certain controls over the trust property, he
is not taxed on the income of the trust.

Rather, the trust itself is taxed

unless the income is currently distributed or required to be distributed
to the trust's beneficiaries.

Thus, the tax on income accumulated by the

trust is paid by the trust, a separate taxpayer with its own exemptions,
deductions, and rate of tax.

If the income is distributed to the bene-

fiCiaries, they are taxed, but the amount of taxable income may not exceed
the distributable net income of the trust.
Present law attempts to solve the problem with a special rule known
as the throwback rule.

In substance, the throwback rule provides that

the excess of an "accumulation distribution" over distributable net income for the current year (generally taxable income less capital gains
not required to be paid out or not paid out to beneficiaries) is taken
back through the 5 preceding years and treated as a distribution of the

XIII - 2 preceding years to the extent of the trust's undistributed net income;
that is, its "unused" distributable net income for those preceding years.
The character of the items making up the distribution is determined by
the composition of the distributable net income for the year to which
attributed.

Thus, to the

included in the

exte~t

beneficiary~s

that the distributions would have been

income for each preceding year had they

been distributed in the preceding years, they are included in the beneficiary's income of the current year.

In addition, the beneficiary is

regarded as having received and paid to the Federal Government the taxes
paid by the trust on the accumulated distributions.

The beneficiary's

tax for the year of receipt, however, is not to exceed what the beneficiary
would have paid had the amounts been distributed when earned.

This throw-

back process is limited, however, to the 5 years preceding the year of
distribution.

Thus, any part of the distribution attributed to years

early than the fifth preceding year is received tax free by the
beneficiary.
In addition to the time limitation, there are several exceptions
to the throwback ruleo

If the accumulation distribution falls within

one of the exceptions, the beneficiary receives it tax free, and the
general purpose of the rule is frustrated.
(1)

The exceptions are--

a distribution of income which was accumulated prior to

the beneficiary's attaining the age of 21;
(2)

a distribution of accumulated income to a beneficiary to

meet his "emergency needs ";

XIII - 3 (3)

a distribution of accumulated income which is a final dis-

tribution and which is made more than 9 years after the last transfer
to the trust;

(4)

a distribution of accumulated income not in excess of $2,000;

(5)

certain gifts of specific sums of properties paid in not more

than three installments; and

(6)
prior to
2.

certain periodic mandatory distributions under trusts created

1954.

The Proposal.
The proposal would apply to any trust which has accumulated income.

Such trusts WOUld, however, fall into one of two categories, namely, (1)
trusts created by one spouse for the benefit of the other spouse, and (2)
all other trusts which accumulate income.
A • The trust for a spouse.
In a case where a spouse creates a trust for the benefit of the other
spouse, all the income of the trust which may be used for the benefit of
the beneficiary spouse is taxed to the spouse who created the trust as the
income is earned.

This proposal effectuates the concept that a husband and

wife should be treated as one economic unit.
Example.-A husband creates a trust and contributes $50,000 in I-percent
bonds to the trust.

The income is to be accumulated for 3 years and then

distributed to his wife.

The interest income of $3,500 will be added to

husband's other income and taxed at the husband's marginal tax rate.

XIII- 4 B.

Other trusts accumulating income.

For other trusts, the proposal does two things.
the

exce~tions

to the present throwback rule.

5-year throwback to an unlimited throwback.
kee~ing

and to provide

sim~lification,

It would eliminate

It would also convert the
To avoid burdensome record-

the proposal provides for the com-

putation of the unlimited throwback by a new, short method.

Basically,

this is done by an averaging device, the mechanics .of which are as
follows:
(1)

An average annual income is computed by dividing the total

accumulated income distributed by the number of preceding taxable years
of the trust from which the distribution was deemed to have been made.
(2)

An average annual tax increase is then computed by adding the

average annual income (as computed in step (1)) to the beneficiary's
income for the present taxable year and the two preceding taxable years;
recomputing the beneficiary's tax for those years taking into account
the added income; adding the increases in tax for those years together;
and dividing by 3.
(3)

This average annual increase in tax is then multiplied by the

number of preceding taxable years of the trust from which the distribution
was deemed to have been made.

This amount is the limitation of the bene-

ficiary's tax liability, i.e., the beneficiary must pay tax on the total
distribution in the present taxable year but in not more than the amount
determined by this averaging device.

The limitation is before the appli-

cation of any allowable credit for taxe.s paid by the trust.

Special rules

XIV';' 1

Technical Explanation
Liberalization of Moving Expense Rules
1.

Background and Present Law.
The moving expenses incurred by a taxpayer as a result of a job-

related move of his household to the area of a new principal business
post give rise to two basic income tax questions:

(1) whether such

expenses are deductible; and (2) whether reimbursement by an employer
of an employee's moving expenses is income to the employee.

Prior to

the Revenue Act of 1964, there were no Internal Revenue Code provisions specifically dealing with moving expenses.

Thus, the law in the

area developed from administrative rulings and court decisions.

Prior

to 1964, moving expenses were not deductible under any circumstances.
Reimbursements for moving expenses were, generally, taxable, except
for reimbursements for direct expenses of a transferred employee.
"Direct" expenses included only the cost of transporting the taxpayer,
members of his household, and their belongings from the old to the
new residence, including any meals and lodging en route.

Reimburse-

ment for all other expenses, such as house-hunting trips, real estate
costs, and so forth (referred to as "indirect ll moving expenses), was
taxable.

Even reimbursement for direct expenses was taxable in the

case of a new employee (as opposed to a transferred old employee).
With the intention of promoting labor mobility and of equalizing the
tax treatment between reimbursed and unreimbursed employees, Congress
in the Revenue Act of 1964 enacted the present section 211 of the

xrv
Internal Revenue Code.

2 -

Section 217 permits, under certain prescribed

conditions, the deduction, from gross income, of job-connected moving
expenses, which are defined as including the expenses of transporting
the taxpayer, members of his household and their belongings from the
old residence to the new residence, including meals and lodging en

route, i.e., the same direct costs reimbursement which are excludable
by transferred old employees.

The deduction is available to new em-

ployees and to unreimbursed transferred employees.
Other than to provide that the moving expense deduction would not
be allowed for a reimbursed expense which is not included in gross
income, Congress chose in 1964 not to deal specifically with the reimbursement question.

Thus, the pre-1964 law, under which transferred

employees may exclude reimbursements for direct moving expenses
remains in effect today.

This treatment gives the reimbursed old em-

ployee an unwarranted tax preference over new and unreimbursed employees.

While the latter may deduct their expenses under section

217, they may do so only if they satisfy the qualification tests under
that section; however, reimbursed old employees may simply exclude
from income the reimbursement for direct moving expenses and forego
the deduction, and thereby receive the favorable tax treatment without the need to satisfy the tests for deductibility.
though

Furthermore, al-

the items of reimbursement which may be excluded are limited

by administrative ruling to the same direct expenses as are deductible
under section 217, this limitation has been challenged in litigation.

XIV - 2a -

While the administrative position has been sustained in most cases,
one recent Tax Court decision, currently on appeal by the Government, has permitted exclusion of reimbursement for certain indirect
expenses which are not deductible under section 217-

To the extent

that such reimbursements are held by courts to be excludable from
income, reimbursed old employees are given a clear tax preference
over the unreimbursed and new employees, whose tax benefit is limited
to the deduction of only the direct expenses allowed under section 217-

General Summary of Recommendations.
In order to eliminate fully the present distinction in tax treatment

between reimbursed old employees on the one hand and unreimbursed
and new employees on the other, it is recommended that the Internal
Revenue Code be amended to provide specifically that all reimbursements for employee moving expenses are
gross income.

includible in the employee's

Whether or not reimbursed, all employees will be able

to claim deductions as prescribed in section 217, subject to the limitations and requirements of that section.

XIV - 3 -

It is also proposed that the limited categories of moving expenses
which are deductible under the present section 217 be liberalized to
permit deductions of certain of the more significant indirect expenses
which are commonly incurred in connection with a move.

Thus, deduc-

tion would be permitted for house-hunting trips, temporary living
expenses, and certain real estate costs, but deductibility of these
expenses would be subject to an overall dollar limitation of $2,500 of
which expenses related to house-hunting trips, and temporary living
expenses could constitute in the aggregate no more than $1,000.
3 • Inclusion in Gross Income of MoviDg Expense Reimbursements.
The proposal provides that all reimbursements or payments for mOving
expenses are includable in gross income of the person receiving the
reimbursement or on whose behalf the payment is made.

Thus, section

61(a)(1) would be amended to make clear that "compensation for
services," as the term is used in that paragraph, includes reimbursements and payments for every type of mOving expense.

This

would reverse the ]1resent administrative position that some reimbursements may be excluded, and would reverse the court decisions which
have held certain reimbursements excludable.

The amendment would

apply, as does the paragraph which it amends, to reimbursements
which are in the nature of compensation for services, whether the
recipient is an employee or an independent contractor.

MOving ex-

penses reimbursements received other than as compensation for services
will be treated the same as under present law.

For example, a re-

XIV

imbursement or payment by a corporation of a stockholder's moving
expenses may be includable in gross income as a dividend under
section 61(a)(7); a reimbursement which clearly represents. a gift
would be excludable under the general rule of section 102.
Amounts paid on account of a taxpayer's moving expenses are includable in gross income regardless of the manner in which payment
is made.

For example, gross income is realized whether the taxpayer

pays the expenses and receives reimbursement or whether the payor
makes payment on the taxpayer's behalf directly to the third party
who renders the services for which payment is due.
Under present law remuneration for services of an employee is
subject to withholding of income and social security taxes.

Moving

expense reimbursements, in the case of employees, are subject to this
general withholding rule.

However, present law provides an excep-

tion to the withholding requirements to the extent that at the time
of the reimbursement or payment it is reasonable to believe that a
moving expense deduction will be allowable to the employee under
section 217 of the Code with respect to the expenses being reimbursed.
This rule of present law would be continued.

Thus, withholding would

be required on moving expense reimbursements or payments made to
employees only to the extent that no deduction with respect thereto
is provided in section 217, as amended by the bill.

Reimbursements to

transferred employees which are excludable from gross income under
present law and which would become includible under the bill are deductible
under section 217, and, thus, they would not be subject to. withholding.

XDJ·

5 -

As under present law, withholding would be required on any reimbursement
to the extent it exceeds the employee's anticipated expense.

Deduction for Moving Expenses.

General.

Section 217 of the r,nnp would be revised to expand the presently
limited categories of expense for which deduction is allowed, and
to provide an exception from one (If the tests of qualification for
deduction (~, the 39-week rule)

in certain cases where an action

of the taxpayer's employer, or the death or disability of the taxpayer,
makes it impossible for the taxpayer to satisfy the test.
As under existing law, a general rule would provide that a deduction
shall be allowed for certain business-related moving expenses of employees.
Also as under present law, self-employed persons

would not be entitled to

the deduction.
B.

Definition of deductible moving expense.

The term "moving expenses 11 would be specifically defined for purposes
of the deduction permitted by the general rule.
would consist of several categories of expenses.

The specific definition
Only those expenses

specifically included within this definition would qualify for the
moving expense deduction.
The cost of transporting the taxpayer and the members of his household, and the cost of transporting his household goods and personal
effects from the former residence to the new place of residence, which
costs are deductible under present law, will continue to be deductible.
These are the same expenses which, under present administrative interpretation, are excludable from gross income in the case of

XIV-6-

reimbursed transferred employees, and which will be includlble in
gross income under the proposal.
Four new categories of costs would be added to the definition of
moving expenses deductible under present law.

The first of these

covers expenses for premove house-hunting trips.

The costs of trans-

portation, meals and lodging for the taxpayer or his spouse, or both,
are included, provided that both the old residence and the new principal place of work are located within the United States.

The trip with

respect to which a deduction is claimed must be a bona fide househunting trip.

Travel expenses related to seeking employment will not

be deductible, even if some house-hunting is done during the same
trip.

Thus, the direct transportation expenses of a premove trip will

not be deductible unless the taxpayer has already secured employment
in the new location prior to embarking on the trip.

Similarly, only so

much of the meals and lodging expenses as is incurred subsequent to
securing employment (whether or not the employment was secured before
the trip was begun) would be deductible.
Deduction would also be permitted for temporary living expenses in
the area of the new principal place of work prior to moving into new
permanent quarters.

Allowable temporary living expenses are limited

to meals and lodging for the employee and members of his household.
Other expenses, such as laundry, local transportation, etc., are not included.

The allowable expenses for meals and lodging are limited to

those incurred within the first 30 days following arrival in the area of
the new principal place of work.

In cases where the employee and all

the members of his household arrive on the same day, the day of arrival

XTV-7will be treated as the first day of the 30-day

l~itation

period.

In cases where the employee and/or members of his household arrive
on different days, the 30-day period will begin to run on the first
day on which an expense which is claimed as a deduction under this
provision is incurred.

As in the case of house-hunting expenses,

temporary living expenses are not deductible if related to seeking employment.
Thus, deductible temporary living expenses are limited to those incurred
after the taxpayer has secured employment.
Deduction would be allowed for expenses related to the sale of
the residence from which the taxpayer moves.

If the taxpayer does not

own the residence from which he moves, this provision also permits the
deduction of the cost of settling an unexpired lease.

This provision

would not permit the deduction of any realized capital loss on the sale
of a residence.

As under present law, such losses are not deductible,

even if the sale was occasioned by a change in job

locat~on.

The deduction is limited to certain expenses incurred in effecting
the sale, such as a commission paid to a real estate agent and
expenses.

advertisi~

Expenses incurred for physical improvements or repairs

intended to enhance salability by improving the condition or appearance
of the property are not included in the class of selling expense Which
are deductible under this provision.
Finally, the costs related to the purohase of a new residence at
the new principal place of business are deductible.

XIV

- 8 -

The four new categories of deductible expenses (i.e., house-hunting
trips, temporary living expenses and real estate costs) would be subject to an overall limitation of $2,500 of which expenses related to
house-hunting trips and temporary living expenses constitute in the
aggregate no more than $1,000.
The provision in present law, which delineates the extent to which
moving expenses of persons other than the taxpayer are deductible,
would be retained without change.

These individuals must have the

same former residence and the same new residence as the taxpayer
and must be a member of the taxpayer's household.
C.

Conditions for allowance of deduction.

Two conditions must be met in order to qualify for the moving
expense deduction.
law.

These two conditions are unchanged from present

However, a new provision would be added which creates exceptions

to one of the conditions in limited circumstances.
The so-called 20-mile test contained in present law would not be
changed.

This rule provides that the new place of work must be located

at least 20 miles farther from the old residence than was the former
place of work, or, if the taxpayer had no former place of work, then
at least 20 miles from his former residence.
The present law 39-week test would also be continued.

Under this

rule, a taxpayer must be employed full-time during at least 39 of the
52 weeks following his arrival at the new principal place of work in
order to qualify for the moving expense deduction.

However, a new

XIV ·9-

exception would be added under the proposal, providing for a waiver
of the 39-week test in cases where the taxpayer is unable to satisfy
that test as a result of death, disability, or an unexpected action
of his employer.

Thus, the 39-week test will not apply in cases in

which the taxpayer moves after having received a job commitment which
he could reasonably anticipate would be of sufficient duration to
satisfy the 39-week test, but is later unable to satisfy that test
as a result of death, disability, or a transfer by, or an involuntary
separation from the service of, the employer from whom he had the
premove commitment.
In order for the exception to apply in the case of a transfer,
such tranfer must have been at the instance of the employer, and not
at the employee's request.

In the case of separation from service,

such separation must have been brought about by the employer rather than
the employee (Le., only if the employee is "fired," not if he "resigns"
voluntarily).

Dismissal of an employee which results from deliberate

activity of the employee intended to provoke dismissal will not qualify
as "involuntary" separation from service.

Involuntary separation or

transfer will operate to waive the 39-week test only if such event
occurs while the taxpayer is in the employ of an employer from whom
he had an employment commitment before he moved.

Thus, for example, if

the taxpayer is transferred by employer A from New York to California
and after the transfer the taxpayer voluntarily leaves A to take a job
with employer B and is subsequently involuntarily dismissed by B, the
conditions are not met and the exception to the 39-week rule does not
operate.

YJ:V - 10 -

Technical provisions.

The present rules for application of the 39-week test in cases where
the test is not satisfied before the due date of the tax return would not
be changed except for very minor technical changes to conform to the
proposed new exception.

The authority specifically granted to the

Secretary or his delegate to prescribe regulations to carry out the
provisions of the moving expense deduction would be continued.

The

present rule providing that no deduction shall be permitted for expenses for which the taxpayer receives a reimbursement which he does
not include in gross income would be eliminated.

This provision is no

longer necessary since the proposal would require all moving expense
reimbursements to be included in gross income.

Double deduction.

Although selling expenses of the type allowed as deductions under
this proposal are not deductible under existing law, such expenses may
now be offset against the sales price of a residence for purposes of
computing the amount of gain, if any, which is reelized by a taxpayer
upon the sale or exchange of his residence.

If the deduction which

is allowed for selling expenses under this proposal is combined with
the present offset treatment which is applicable to such expenses,
the result, to the extent of the dollar limitation contained in the
proposal, is the allowance of a double deduction for the

selling

expenses whenever the sales price of the property exceeds the
adjusted basis of the property.

~-ll-

Similarly, under existing law expenses related to the purchase
of a new residence, while not deductible, are added to the basis of
the new residence whether or not the acquisition of such residence
qualifies for the nonrecognition provisions of section 1034.
The taxpayer, by increasing the basis of his new residence, decreases
the amount of gain, if any, which will be realized on the future sale
or· exchange of the new residence.

Thus, the combination of the decrease

in the gain realized and the allowance of the deduction for costs
related to the purchase of a new residence also results in a double
deduction with respect to such expenses.
In order to eliminate the possibility of such a double benefit
accruing to taxpayers it is proposed that section 1001 be amended
to

prov~de

that a taxpayer be required to include, as an &mount

realized, an amount equal to the deduction such taxpayer received
under the new section 217 related to the sale of the old house.
In addition, the new section 217 would

prov~de

that the basis of

the new residence may not be increased by expenses allowed under
that section, and section 1016 would be amended to provide that a
taxpayer would be required to reduce the basis of his new residence
by an amount which is equal to the amount of deduction he received
for expenses related to the purchase of the new residence.

XDl - 12 -

5. Effective Date.
The amendments made by the proposal will apply to taxable years
beginning after December 31, 196.9.

YY - 1
Technical Explanation
Subchapter S -- Small Business Corporations
1.

General
A.

Background.

A comprehensive revision of subchapter S of the Internal
Revenue Code (sections 1311-1318) is proposed to ~ke it easier
and simpler to comply with and to eliminate unintended hardship and
benefits.
In general, the Internal Revenue Code treats a corporation as
an entity separate and apart from its shareholders.

Thus, income

earned by the corporation is taxed to it and distributions are taxed
to shareholders.

Under subchapter S, however, certain qualifying

domestic corporations can elect not to pay the regular corporate income
tax and instead to have the income or loss of the corporation taxed
directly to shareholders.

This results, in a general way, in a

pattern of taxation similar to that of partnerships and is made
available to small corporations with a simple structure that is
essentially similar to most partnerships.

For larger, more compli-

cated corporations, the ordinary pattern of taxation is considered
more appropriate.

However, because of the hybrid nature of the subchap-

ter S entity -- not quite a corporation and not quite a partnership --

2 -

the governing rules have been complex and frequently misunderstood
in ways which lead to unintended hardships.

On the other hand,

certain taxpayers have made use of these provisions to obtain tax
benefits which are inconsistent with the partnership nature of the
entity for tax purposes.
B.

Proposal.

The proposal would alleviate these problems.

The aim has been

to simplify the provisions of subchapter S, in part by incorporating
some of the rules applicable to partnerships.

In so doing, unneces-

sary restrictions which have been barriers to those who are aware of
them and traps for those who are not would be eliminated.

At the

same time, the unwarranted advantages of subchapter S as compared to
the partnership form would be denied.
2.

Eligibility to use Subchapter S
A series of tests have been developed to limit the use of sub-

chapter S to the small business essentially equivalent to a partnership and to mitigate administrative problems in taxation of income.
The proposed rules closely follow present law with several liberalizations to deal with specific problems which have developed.

The following

conditions, which must be satisfied for the entire period the election

xv -

3 -

is in effect, would be imposed as prerequisites to being considered
a

small busine ss corporation".
A.

Number of Shareholders.

Under existing law a corporation must have ten or fewer share ...
holders.

This is a more administrable test of size than a standard

based upon total assets or gross receipts which are subject to frequent
fluctuation.
To permit som= flexibility when in the course of operations it
becomes necessary to increase the number of shareholders (e.g., to
issue stock to key employee s), an increase to no more than 15 shareholders would not be disqualifying if it occurs:
(i)

after the corporation has been an electing

corporation for five consecutive te.xable years, or
(ii) as a result of a transfer of stock by bequest or
inheritance prior to the passage of the five-year period.
Under present law, stock owned by a husband and wife which is
community property or which is held as joint tenants, tenants by the
entirety or tenants in common, is considered to be owned by one shareholder.

This has caused a problem in cases where one spouse dies

and his interest goes to the estate.

Under the proposal the death

-4-

of either or both of the husband and wife in these circumstances
would not change the number of shareholders as long as the stock
is held by the esta.te of the decea.sed spouse and the survivor or
the e sta.te s of both in the same proport ion as held by the husband
and wife before death.
B.

Affilia.ted Group.

Under the proposal, as well as present law, an electing corporation cannot be a nember of an "affiliated group" of corporations,
i.e., it can not own

80 percent or more of the stock of another corpo-

ration unless such other corporation has not begun business and has
not had any gross incone (taxable incozre under present law).
This requires an essentially simple structure but permits the
organization of wholly inactive subsidiaries, perhaps to reserve a
corporate name in another jurisdiction.
C.

Rights and Interests of Stockholders.

The outstanding shares of the corporation must be identical as
to the rights and interests which they convey in the profits and assets
of the corporation, whether such rights and interests are created by
the corporate charter or by separate agreezrent.

However, unlike

present law, differences in voting rights would be permitted.

rv - 5 This provision to allow only "one class of stock" is consistent
with the intent to limit subchapter S to simple corporations" mitigates
against income shifting among family groups and avoids the accounting
problems of allocating income when the stockholders have varying rights.
The major difficulty under current law is the possible loss of
qualification when a purported debt interest is determined to represent
an e qui ty inve stme~t for tax purpose s.

The -re gulations originally

provided that if an instrument purporting to b.e a debt obligation
were actually stock, it would be considered a second class of stock.
This was later changed to provide the current rule that if the purported debt obligations are owned in the same proportion as the nominal
stock, they will not be considered a second class of stock.

However,

the danger of disqualificaticn remains when the "debtfl interest is
not proportional.

This risk would be eliminated under the proposal.

Under the proposal the existence of any interest not designated
as stock, which has neither voting rights nor rights to distributions
beyond a fixed annual interest rate and a fixed amount upon redemption
or payment, will not cause the corporation to be disqualified even
if the interest is determined to be equity capital.

-6-

The holders of such interests, although shareholders for certain
treat~nt

purposes, including except as indicated below the

of dis-

tributions, would not be considered shareholders for purposes of the
special rules under subchapter S (e.g., they would not be oounted in
#

determining the number of shareholders nor would they have to consent
to an election).

Further, all "interest" distributions with respect

to such "Obligations" would be taxed as ordinary income whether or
not there were earnings and profits.
D.

Nature of Shareholders.

As under present law, all shareholders would have to be individuals,
other than non-resident aliens, or estates.

Individuals would have

to have outright ownership; life tenancy for example would not be
sUfficient.

However, two libersJ..izing changes would be made.

Stock owned by a trust would, 1n two circumstances, be considered
as owned by the holders of the beneficial interests.
(i)

If under se ctions

671 through 677 of the Code

all inoon:e of the trust, including capital gains, is
taxed to the grantor of the trust because of the
control he has maintained over the trust, the grantor
would be treated as the shareholder-.

- 7 -

(ii) Stock owned by a voting trust would be considered
to be owned by those persons who would be entitled to
receive the stock on termination of the voting trust.
A voting trust would be defined as a written agreement whi ch confers on the trustee the right to vote,
requires all distributions with respect to the stock
of the corporation to be paid to or on behalf of the
beneficial owners and requires title and possession
of the stock to be delivered to such beneficial
owners on termination.

The agreement or state law

must provide for termination of the trust on or
before a specified day.
Furthermore, transitory ownership by a person or persons for
a period of sixty consecutive days or less during an election year
(including ownership prior to an election made within the first
month of the year) would not be disqualifying if no distributions
were made to ineligible shareholders.

If these conditions are not met

by virtue of a distribution or ownership for 61 days, the corporation

would be disqualified as of the day the ineligible person became a
shareholder rather than the day of the disqualifying event.

If the

8 -

condi tions are met then for purpose of allocating income and loss,
the stock. owned by the ineligible shareholder would be deemed to be
owned by the person to whom it is transferred.
E•

Source of Income.

The provision of present law that a small business corporation
may not derive more than

80 percent of its gross receipts from sources

outside the United States would be retained.
However, the requirezoont that a
have more than 20

~rcent

~mall

business company may not

of its gross income in the form of passive

inve stnent income would be eliminated.
F.

Te.xa.ble Year.

Under present law a significant deferral of tax can result if a
fiscal year is selected for the corporation which differs from the
taxable year of the shareholders

A one -year deferral of taxation

on eleven months of income can be obtained by selecting a fiscal
year ending January 31.

In the latter case, income earned by the

corporation between February 1 and December 31, 1968, for example,
will be taxed to shareholders on a calendar year as 1969 income if
it is not distributed in 1968 since the corporation's year in which
such income is earned ends during the shareholder's taxable year

-9 -

comprising the calendar year 1969.

This result can not ordinarily

be accomplished by the use of a partnership since unless there is
a business purpose for a different year I a partnership's taxable
year must conform to the taxable year of 1ts principal. partners.
Accordingly, under the proposal the taxable year of an electing
corporation subject to transitional rules would be required to be
one of the following:
(i)

The calendar year.

(ii) The taxable year of all shareholders owning more
than 10

~rcent

of the shares of the corporation's

stock.
(iii) Any year for which it has a business purpo~
shown to the satisfaction of the Secretary of the
Treasury or his delegate.
If a corporation makes an effective election under subchapter S,
its first electing year would end on the following December 31
unless the corporation establishes a business purpose for another
taxable yea:r or all 10 percent shareholders have a taxable year other
than the calendar yea:r and the corporation chooses to end its taxable
yea:r on the last day of such year.

y:y

- 10 -

An existing electing corporation on the date of
would be permitted

to retain its existing taxable year only so

long as persons owning 50 percent of the outstanding stock of the
corporation on the date of enactment continue to own at least 50
percent of the outstanding stock for an uninterrupted period continuing through the first day of the taxable year.

For this pur-

pose, the percentage owned by any shareholder shall be taken into
account only to the extent it does not exceed the percentage
owned on the date of enactment.
ation which has

adopt~d

Furthermore, an electing corpor-

a year other than a calendar year because of

a valid business purpose or because it. conforms to the taxable year
to its 10 percent shareholders count not maintain such year
for a period during which the subchapter S election were in effect
unless the conditions which permitted such fiscal year were satisfied on the first day of such period.

If any of the conditions

allowing a fiscal year were not satisfied on such first day, the
corporation would be automatically changed to a calendar year unless it satisfied" the conditions for another fiscal year.
A subchapter S

corporation could, at any time, change to the

calendar year or to the taxable year of all shareholders owning
more than 10 percent of the corporation's shares without consent.

xv
3.

11 -

Election
A.

Time for Election.

An election to be taxed under subchapter S may be made for e:ny

taxable year at any time during the first month of such year or at
any time during the pre cecUng taxable year.

For a new corporation the

first month of its taxable year does not begin until it has smreholders,
acquires assets or begins doing business, whichever is first to occur.
Unless an election is terminated, it continues in effect and need
not be rene-we d annually.
The proposa.l would continue present law except that the rules
would be liberalized to permit an earlier election.

Thus, if a

corporation on a calendar year decides in June of 1969 that it would
like to elect subchapter S for 1970 it could do so immediately and
need not make a note to do so in December, 1969, or January, 1970,
as required under present law.
B.

Consent.

As under present law, a consent to the election must be filed by
all persons who are shareholders on the first day of the taxable

year for which the election is effective unless the election is made
after such first day (Le., within the first mnth of the taxable year).

12 -

In the latter ca.se, persons who are shareholders on the day of the
election must consent and for the purpose of allocating income and
loss, such persons would be deemed to be shareholders since the first
day of the taxable year.

Thus, persons who were shareholders during the year but who
disposed of their shares prior to the election would not be charged
~ith

subchapter S income or allowed a deduction for losses.

This

represents a change from present law under which losses can be
allocated to such persons.

The change is needed since incoue, as

hereafter expla.ined, would be allocated on a. daily basis in accordance
wi th the present procedure for allocating losses.

Incozm;!, unlike

losses, should not be allocated to non-consenting shareholders.

Election following Termination.

If an election is effective for any tine or is terminated retroactively during the first year in which it was to take effect then,
as under present law, following the termination of such election a new
election can not be made by the corporation (or its successor) for
any year prior to its fifth taxable year beginning after the taxable
year during which the termination is effective unless the Secretary

or his delegate consents to such new election.

13 -

This rule has caused some difficulty in cases of inadvertent
termination because frequently the fact of termination is not discovered until it is too late to apply for consent to make a new
election for a period in which the corporation qualified and thought
it was an electing corporation.
Therefore, under the proposal, if an election is terminated
because a corporation ceased to be a small business corporation
(e.g., it had 11 shareholders, a trust as a shareholder for 61 days,
it owned 100 percent of the stock of another corporation, etc.) and
if the corporation qualified for a later year, filing a timely
return as a subchapter S corporation for such later year would be
deemed to be a. binding request for consent to a new election for
such year.

In determining whether consent will be granted, the fact

that a. termination was inadvertent would be taken into accounto

Termination of an Election
Under present law termination of an election is 08nerally retro-

active to the first day of the taxable year even if it is cauBE7d by
an event occurring at the end of the year.

This has led to hardship

in some cases and opportunity for manipulation in others.

Therefore,

under the proposal a termination would generally take effect on the

xv day of the triggering event.

14 -

This rule could enable te.xpayers to

cut short an electing year prior to the realization of income in order
to pass losses through to shareholders.

Therefore, in order to limit

the opportunity for such manipulation, an election for less than an
entire taxable year would not be permitted and terminations during
such first year will take effect retroactively.
An election could be terminated by reason of the failure to
qualify as a small business corporation or by a revocation.
A.

Failure to Qualify as a Sm&ll Busine ss Corporation.

The election would not be effective for any time in which the
corporation failed to meet the six conditions for a small business
corporation set forth above.

The election would terminate on the date

in which the corporation ceased to be a small business corporation
unless this occurred during the first year of the election, or
because the corporation had more than 80 percent of its gross receipts
from foreign sources (which must be determined on the basis of a
full taxable year).

In these two cases, the election would

te~nate

as of the first day of the taxable year.
B.

Revocation.

The election could be revoked by the consent of all shareholders
or by a new eligible shareholder who has not consented to the election

- 15 -

and who is a shareholder during a period following the time of such
election and for which the election is effective.

To terminate an

election a new shareholder would be required to file a revocation of
the election within 60 days after he becomes a shareholder or, if
the shareholder is an estate, within

60 days after the executor or

administrator qualifies or 60 days after the end of the corporationts
taxable year, whichever is earlier.
This procedure differs from present law under which the election
terminates unless there is affirmative consent by new shareholders.
The necessity of furnishing such consent has in some cases been overlooked and has caused serious hardship when new shareholders who,
though wishing to continue the election, failed to consent within
the required time and the procedure for granting an extension could
not be satisfied.

Therefore, it seems better to put an affirmative

burden on a shareholder wishing to terminate.
A revocation during the first year of the election takes effect
on the first day of such year.

A revocation by a new shareholder

would take effect on the day he becomes a shareholder.

However, if

the revoking shareholder acquires the stock from an ineligible shareholder!!

An ineligible shareholder would have no power to revoke an electiono

- 16 -

who did not cause the election to be terminated because he held the
stock less than 60 days and did not receive a distribution, then the
termination would take effect on the date the ineligible shareholder
aCQuired his stock.

This rule is needed because the shareholder who

follows an ineligible shareholder would pick up income allocable to
the ineligible shareholder's shares for the latter's period of ownership.
A revocation by consent of all shareholders would take effect
on the day of filing with the Internal Revenue Service unless a
different date is specified.

Any later date in the

sa~

taxable year

could be specified and if the revocation is filed within the first
month of the taxable year, the first day of such year could also be
specified.

Effect of Election by Small Business Corporations
If a valid election is made, the corporation, with two exceptions,

will not be subject to corporate income tax and the income and loss
will be passed through to the shareholders.

Furthermore, special

rules will be in effect for determining the earnings and profits of
the corporation,

the taxation of distributions to shareholders as

well as the basis of their shares.

Although this pattern continues

existing la.w, sub stantia.l change s have been made in the applicable
rules.

These are hereafter explained.

rv
A.

- 17 -

Corporation.

A tax would be imposed on the corporation in the following two
situations:
(i) The tax under present section 1378 on capUal
gain~which

is imposed in order to limit the use of

subchapter S on a temporary basis to realize capital
gains and pass the proceeds through to shareholders
with only one tax, would continue.

(ii) The tax imposed under section 47 in the case of
an early disposition of property on which an investment credit was claimed would be imposed with respect
to property purchased by the corporation during the
period prior to the election.
This latter rule is a change from present law.

In the case

of an acquisition during election years, the investment credit is
made available to those persons who are shareholders on the last day
of the year and these persons would be responsible for any recapture.
This rule is unchanged.

However, where the investment credit was

claimed by the corporation prior to the election, under present law
the shareholders cannot be charged with recapture income and neither

- 18 -

can the corporation when a disposition occurs during the period the
election is in effect.

Thus, under current law an election under

subchapter S is treated as a disposition unless the shareholders and
the corporation agree to be jointly and severally liable for the tax
that would be incurred if there is a future disposition by the electing
corporation.

Under the proposal the tax would be imposed on the sub-

chapter S corporation and the rule that an election is a disposition
in the absence of an agreement, as referred to above, would be
eliminated.

The new rule would apply to dispositions in· an electing

year beginning after the date of enactment except where the subchapter
S election in a prior year was treated as a disposition.
B.

Shareholders.

(1)

In general.

New rules are proposed for the tamtion of

income and the allowance of losses incurred by subchapter S corporations,
including such matters as allocation of items among the shareholders,
time for inclusion, basis adjustn:ents and determination of corporate
earnings and profits.
Present law is unsatisfactory both because it is extremely complex
and because planning of corporate distributions has an unnecessary effect
on t&x treatn:ent of the shareholders.

The partnership rules have, on

- 19 -

the other hand, le d to le ss diffi cultie s • Therefore, the general
rule s for taxation of partners and partnerships would be applied to
subchapter S corporations.

However, the partnership provisions would

not be carried over intact to subchapter S.

There are two principal

reasons for this result:
(i)

Subchapter S can be elected by existing corpora-

tions wit? accumulated earnings and profits.

Such

corporations cannot become partnerships without
liquidating and paying a capital gains tax.

impose such a tax as a prere qui si te to an election
is inconsistent with the intent to make subchapter
S more readily available.

On the other hand, allowing

future distributions to be made without regard to
such earnings is inappropriate.

~reover,

an avenue

for tax avoidance would be opened if a corporation
could have its accumulated earnings taxed at capital
gains rates by electing under subchapter S and then,
after the earnings are distributed, resume regular
corporate status perh.ps by failing to qualify as a
small business corporation.

J:V

(ii)

- 20 -

A partnership, to a large extent, is considered

an aggregate of individual interests and not a separate
entity.

Complex rules have been developed to carry

out this concept (e.g., basis adjustments on transfer
of interests, treatment of gain on sale of a partnership interest as ordinary income to the extent allocable
to certain items, separate allocation of items of
income and deductions, including items related to
contributed property).

These rules may not cause great

difficulty for simple partnerships, but the potential
for complexity exists and it is advisable to avoid it.
Moreover, the entity approach seems more appropriate
for a subchapter S corporation both because of the legal
attributes attached to corporations under State law
and because their status as electing corporations is
easily ended and therefore may not be permanent.
(2)

Taxation of income and loss to shareholders.
(a)

Allocable Amount.

Each shareholder would be required

to include in his gross income or would be allowed (subject to certain
limitations) a deduction for his portion of the subchapter S income
or loss attributable to each share of stock owned by him during the
taxable year.

- 21 -

Each shareholder's portion of income or loss would be
computed by determining the daily income or loss (the total amount
di vided by the number of days in the year) and allocating it on a
pro rata basis to the stock outstanding on each such

day.gj

This is the present rule for allocating losses of a subchapter S corporation.

It also tends to be the method of allocating

partnership income and loss although the partners may allocate income
on any othe r reasonable basi s if there is no tax avoidance moti ve •
The current scheme of taxation of income of subchapter S corporations
retains the regular corporate rules and thus the allocation of income
depends upon the nature and

timi~g

of distributions.

This results

in a potential shifting of income either intentionally as a planning
devise or inadvertently.
Thus, under present law if there are no distributions, the
taxable income for the year is taxed (as a constructive dividend) to
those persons who are shareholders on the last day of the year regardless
of how long they held their stock.
year

e~ual

If money distributions during the

or exceed the taxable income, then the taxable income for

the year is in effect taxed as ordinary dividends to the shareholders

As proviqed under present law income may be reallocated among
shareholders who are members of the same family if this is necessary
in order to reflect the value of services rendered.

xv
who receive the dividends.

22 -

If DIOney distributions are less than

the taxable income, the remainder is taxed to those persons who are
shareholders on the last day of the taxable year.
Property distributions during the year do not affect the
amount of undistributed income potentially taxable to shareholders
on the last day of the year.

But, since current earnings and profits

are allocated between property distributions and the constructive
distribution, unless there are sufficient accumulated earnings and
profi ts, the constructive dividend will not equa.l the full taxable
income.

The property distributions would account for at least the

difference, however.

These rules are needlessly complex and confusing

and under the proposal the amount of current income taxed to each
shareholder would not be affected by distributions during the year.
(b)

Computation of subchapter S incoD2.

Subchapter S

income would be defined to mean taxable income determined in the
same manner as a regular corporation with the following adjustments
( items iii and v repre sent a change fran current law):
(i)

Net operating loss carryovers would not be

allowed.

(ii) Dividend received deductions would be disaliowed.

- 23 -

(iii) A capital loss carryover would be allowed only
for capital losses incurred by a corporation, which is
an electing corporation on the date of enactment, in
taxable years for which the present subchapter S
rules are applicable.

This represents a change from

present rules, under which such carryovers are generally
allowed, because as hereafter explained a capital loss
pass through would be permitted.
(iv) A deduction would be allowed for any capital
gains tax paid pursuant to section 1378,

(v)

Subchapter S income allocable to the nominal

shareholders would be reduced but not below zero by
payments made with respect to "obligations" determined to be equity capital (and which did not cause
loss of qualification) if-(a)

Payments are not pro rata to the share-

holders (pro rata distributions would generally be
treated in the same manner as distributions with
respect to nominal stock),

xv
(b)

24 -

There is a fixed and non-contingent

obligation to pay "interest" &IlIlually, not
dependent upon profits,
(c)

Distribution is made within 2-1/2 months

of the close of the corporation's taxable year, and
(d)

The p~nt is reasonable in relation to

the inve stnent •
(c)

When included.

(i)

In aeneral.

As indicated above, subchapter S

shareholders at present are taxed on income when it
is distributed which can lead to bunching of two years'
income in one.

For example, assure an electing cor-

poration had $10,000 of income for both the taxable
year ended June,

1967, and the year ended June, 1968,

and distributed $10,000 in November, 1967.

The 1967

income was not distributed and will be taxed as a
di vidend on June 30, 1967.

The $10,000 distributed

in November, 1967, although considered & distribution
of income for the year ended June, 1968, is taxable
when distributed in 1967.

As a result, the

x:v

- 25 -

E$hareholders would include $20 ,000 or 2 years' income
in their income tax returns for 1967.
has been alleviated under a

1966

This problem

amendment which

treats distributions within the first 2-1/2 months
after the end of a taxable year as distributions
of the undistributed taxable income for the prior
ye8.l'.

However, a doubling up still occurs in this

case sin,ce the November distribution was IIl8.de after
the 2-1/2 month period ended.
On'the other hand, in the absence of a transfer
of interests, a partnp.r's share of income and losses
is included in his tax return for his year during
which the partnership year ends.

In the MOve

example, as applied to a partnership, the partners
would be taxed on $10,000 of income in 1967 and
$10,000 in 1968, which seems to be a more logical
result.
Therefore, the adoption of the partnership
rule which is now applied to the losses of subchapter S corporations is proposed.

- 26 -

(i1) Termination of election in middle of taxable year.
If a subchapter S election is terminated in the middle
of a taxable year, the short period would be treated
as a taxable year ending on the date of termination
for the purpose of determining income and loss and
the time of inclusion on the shareholder's return.
The corporation's income or loss for its entire
taxable year would be allocated between subchapter S
income for the electing period and corporate taxable
income for the balance of the year on a daily basis
unless the corporation elects to compute its actual
income for the period in the sa:ae manner as it
would in the case of a full taxable year.
corporation would not be

re~uired

The

to annualize

income for either the electing period or the balance
of the year.
(iii) Transfer of shares.

If a share-of stock is dis-

posed of during a taxable year by sale,

li~uidation,

gift, or inheritance, the income or loss allocable
to the transferred share would be included on the

- 27 -

return of the transferor for the year which includes
the day of transfer.

This is the partnership rule in

the event of a complete termination of a partner's
interest by sale or liquidation and the current subchapter S rule for losses allocable to a deceased
shareholder.
ship

This is also the result under the partner-

prov~sions

if the tranfer of interests causes

a termination of the ,partnership's taxable year.
However, the successor of a deceased partner
picks up the income or loss for a year which has not
terminated at the time of death including the portion
applicable to the period the decedent was alive.
Further, a donor of an interest, or an individual
who sells part of his interest,

~though

he includes

his allocable' portion of the income or loss applicable
to the transferred interest, does not do so until
the partnershiF year ends.
The suggested rule seems most logical,particularly
since it makes income inclusion and the adjustment of
basis coincide.

It would also avoid the complexity

caused by the diversity of the current partnership
provisions.

- 28 Upon the transfer of a share, the allocable
portio~

If the subchapter S income would be deter-

lliined on the basis of the entire year's income unless
the corporation and the transferor elect to determine
the actual income or loss derived by the corporati 0~:
up to the date of transfer, as if this period Wt:re
an entire taxable year.

Allocation on the basi s

of actual income would be permitted only in the
event of death or a transfer which results in a
complete termination of interest in the corporation
within the meaning of section 3J2 (b)(3).

(Family

attribution, section 318 (a)(l), would not apply if
immediately after the transfer the former shareholder
has no interest in the corporation

(in~luding

intereGt as officer, director, or employee) otner
than an interest as a creditor without regard to
whether there is a reacquisition within the 10year period.)
If this exact method is utilized to det8rrnine
income, the section 13'(8 tax wou1d be

,~omput,ed 1'e,'

x:-r

- 29 -

each separate period except that if a greater tax
would be due on the basis of an entire year the
latter amount would be payable.
(d)

Nature of income and loss.

Income or loss of a

subchapter S corporation would be considered attributable to a
trade or business carried on by the shareholder.
with current law with respect to losses.

This is in accord

Income is currently con-

sidered a dividend.
As under pre sent law, sub chapter S income would not be

subject to tax under the self-employment tax or affect the recipient's
right ·to Social Security benefits.

However, if the corporation

lalls to pay an adequate salary to an employee who owns more than 10
percent of its shares of stock (directly or by family attribution
under section 318 (a) (1)), the Commissioner would be authorized to
treat all or a part of the shareholder's portion of subchapter S
income as salary for Social Security tax purposes.

This would

eliminate the present practice of designating all profits as dividends rather than salary in order to avoid SociE:.l Security taxes
or the restrictions on Social Security benefits while continuing
to work .•

x:v-

30 -

Items of incone and loss would not retain their sepu-ate
character in the shareholder's hands as under the partnership rules,
but as under current law capital gains would be passed through to
the extent of subchapter S income.

In addition, each shareholder

would be allowed to take account of his pro rata share of the
corporation's long-term and short-term capital loss in excess of
capital gains earned by the corporation.
Capital gains treatm:nt would be denied to shareholders
owning more than 10 percent of the shares of the corporation's
stock at any tim: during the year, with respect to their allocable
share of income from the disposition of property which would not
have been treated as a capital asset in their hands.
(3)

Distributions.
(a)

No accumulated earnings.

Distributions by a corpora-

tion which had always been an electing corporation under the new rulesl'
or which at the time of its election under the new rules had no
accumulated earnings and profits would, under the proposal,

ne~r

considered to be dividends while the election remains in effect.

be
All

such distributions would be treated as a return of capital, i.e., they

j] As hereafter explained, under present rules a corporation could
under certain circumstances accumulate earnings and profits in electing
years.

xV'

- 31 -

would first reduce the basis of the shareholder's stock and if they
exceed such basis they would be treated as capital gains.

The

shB.reholder's basis for this purpose would be determined as of the
last day of the taxable year in which the distribution is made or
the day the stock is disposed of if earlier.

All distributions

would be taxed as if received on such day regardless of their nature
or the actual time of re ceipt.
(b)

Earnings and profits in electing years.

This result

follows under the proposal because, unlike the situation under
present law a sub"chapter S corporation would not increase accumulated
earnings and profits during election years.~

It WOuld, however,

keep account of earnings and profits in a special account known as
subchapte"r Searnings and profits.

In general, subchapter S earnings

and profits would e9.ual the total. earnings and profits for all years
that the current election has been in effect minus the sum of-(i)

The deficit in earnings and profits for each such

year to the extent that the deficit in any year did

n~t

exceed the amount of the corporation's subchapter S

Under present law the accumulated e~rnings and profits of a
sub chapter S corporation is not increased by undistributed income taxed
to shareholders nor is it reduced by the amount of an operating loss
which is passed through. However, it would be increased by items not
taken into account in computing income and loss but which affect earnings
and profits, e.g., tax exempt interest or the excess of percentage
over cost depletion.

- 32 -

earnings and profits as of the beginning of the year
in which the deficit occurred (i.e., subchapter S
earnings and profits would not be reduced below zero),
and
(ii) All distributions of money treated as distributions of subchapter S earnings and profits.
However, a pro rata portion of subchapter S earnings and profits would
be eliminated in the event of transfer of a share of stock to the
corporation in a transaction which is treated as a distribution in
exchange for stock.
The corporation's subchapter S earnings and profits account
at the beginning of the first taxable year under the proposal would
be the total amount of the previously taxed incoIIE accounts of all
shareholders under present law at the end of the preceding tax8ble
year (including such amounts as would be taxed to the shareholders
during their taxable year which may not yet have ended).
(c)

CorP9rations with accumulated earnings.

If a cor-

poration has accumulated earnings and profits, distributions would
be taxed in the following manner.

Money distributions to the extent

of subchapter S earnings and profits as of the end of the year in

33 -

which the distribution takes place would not be considered dividendso 2/
Money distributions in excess of such amount and all property distributions would be dividends to the extent of the accumulated earnings
and profits at the end of the year in which the distribution takes
place.

Accumulated earnings and profits would be reduced by any

deficit for the year in excess of subchapter S earnings and profits
at the beginning of the year and this adjustment would be made before
the tax effect of any distribution is determined.

Accumulated earnings

would also be reduced by any distribution therefrom.
A special rule would be provided for money distributions within
the first 2-1/2 months of a taxable year following a year for which
an election was not in effect.

The purpose of this rule is to remove

an unintended benefit which may exist under present law.

Today if

a corporation elects subchapter S, and makes a distribution within
the first 2-1/2 months of the year, it is claimed that the corporation
may obtain a double benefit from this distribution--i.e., it may
reduce its accumulated earnings tax base for the prior year without
incurring any additional tax on its shareholders.

The proposal

would make clear that a distribution in these circumstances is a dividend.

In order to prevent tax avoidance by tax free money distributions
to high-bracket shareholders and taxable property distributions (or
no distributions) to low-bracket shareholders, money distributions
for this purpose means only pro rata distributions.

xv -

34 -

Except for this special rule, distributions up to the
amount of income§/earned during subchapter S years, including the
year of distribution, could be distributed even where there were
accumulated earnings without fear of ordinary incone treatment
(and ordinarilr the shareholders would have sufficient basis to
avoid capital gains taxation).

This is not necessarily true today.

For example, under present law if a corporation I s first
electing year ended on June ~, 1967, and it had $20,000 of income
for such year and $5,000 for the year ended June 30, 1968, a distribution in November of 1967 in excess of $5,000 will be a dividend
if there were accumulated earnings.
Although the shareholders in this case will pick up
$20 ,000 of income for the year ended June, 1967, they will not do
so until December 31, 1967, and therefore they are not credited
wi th previously taxed income (PrI) until such tine.

Thus, although

over the two-year period the corporation earned $25,000, if $25,000
were distributed in November, 1967, the shareholders could, if there
were sufficient ac::!umulated earnings. include $45,000 in their
gross income for the two-year period.
~

Since su~chapter S earnings and profits are based on earnings
and profits rather than taxable income this would not be the case
where deductions which are not allowable in computing incone reduce
earnings and profits below taxable incone.

xv.

- 35 -

Since PTI cannot be transferred upon the transfer of
shares, if there is a new shareholder in the

corpor~tion

a similar

result can occur under present law even if distributions are more
carefully timed.
(d)

Distributions after termination.

Another problem

concerns distributions follOwing the termination of an election,
particularly when the shareholders are unaware that termination is
impending.

Under current law distributions of previously taxed

income must be made while the corporation's election is .in effect.
Once the election terminates, all PTI accounts are lost and the
regular corporate rules apply.

It is proposed to allow aale-year

period following termination during which distributions would be
treated as' distributions of subchapter S earnings and profits to
the extent thereof.

A l2)-day period would also be allowed follOwing

a determination that an earlier inadvertent termination took place.
-

Such distributions could be made in money or in the obligations of
the corporation and could be made to any shareholder, even though
such person was not a shareholder of tte corporation while the
election was in effect and even if the shareholder is a person who
would be an ineligible shareholder in a subchapter S corporation.

- 36 -

Although the concept of subchapter S earnings and profits is of
no importance to a corporation without pre-election accumulated
ear.nings and profits while its election remains in effect, the
amount remaining undistributed at the time of termination must
be known in order to determine the tax effect of post-election
distributions.
(e)

RepayIOOnt of distributions.

The subchapter S

election of a corporation may have terminated without its share·
holders being aware of the termination.

These shareholders may

have caused the c.orporation to make distributions to them in the
belief that these distributions would be subject to only one tax.
If, ho-wever, the Commissioner subsequently determines that the
corporation I s ele etion did in fact terminate for a year during
which such distributions were made, the distribution may be treated
as dividends taxable in full to the shareholder's and the corporation would be separately taxable on its income.
Under the proposal, a refund would be allowed for the tax
payable by a

sha~holder

with respect to distributions made in the

bona fide, but erroneous, belief that an election was in effect at
the time of the distribution.

In order to obtain the refund,

- J'T -

repayment of the distribution would be required to be made to the
corporation within 120 days after the time the Commissioner's
determination became final.

The refund would be payable as of the

year of repayment to the corporation and no interest would be paid
for prior years.
Repayments would be deemed to be repayments of the latest
distribution first and the tax attributable thereto would be determined by computing the decrease in the tax which would result for
the taxable years during which the distributions involved were
actually made if the amount of repaid distributions had not been
distributed in such taxable years.

Corporate earnings and profits

would be increased as of the time of the original distribution by
the amount deemed to be a repayment of a distribution out of ear rungs
and profits.

Provision would be made for waiver of the statute

of limitations and appropriate consents from the corporation and
all shareholders affected.
If the shareholder so elects, he could repay the amount
of a distribution net of any tax attributable thereto and the
refund of tax would be allowed to the corporation.

xv-

- 38 -

An estate could obtain a refund for repayment of dis-

tributions made to a deceased shareholder, but to the extent that
any repayment obligation is deductible as a claim against the
estate, it would have to be offset by the amount of tax refundable.
(4)

Basis.

A shareholder's basis for his interest in an electing corporation would be adjusted on the last day of the taxable year or with
respect to an interest disposed of during the year on the day of
disposition by increasing such basis by the shareholder's portion
of subchapter S earnings and profits or decreasing such basis, but
not below zero, by the shareholder's portion of the deficit for the
year.

Earnings and profits or deficit would be allocated to share-

holders in the same manner as income and loss as described above.
Any portion of a deficit which is applied to reduce accumulated
earnin~s

and profits would not be allocated to shareholders to

reduce basis.

Unlike present law, basis reduction on account of

distributions would not be applied until after the above adjustments are made.
A basis

dec~ase

would first reduce the shareholder's basis

for each share of stock by the amount of deficit allocable thereto;
s~condly,

if his basis for such stock is exhausted, but he still

XV'

39 -

has basis for other shares of stock owned by him at any time during
the taxable year, the basis of other shares would be reduced pro
rata; and finally, if his basis for all of his stock in the corporation is exhausted, his basis for debt in the corporation would
be reduced.

These rules follow present law.

A basis increase would generally be applied to the share
of stock to which the earnings and profits are allocable.

However"

if the basis of debt in the corporation held by the shareholder at
the end of the taxable year has at any time been reduced as provided
in the preceding paragraph and the shareholder's basis for such debt
reflects the reduction, the increase in basis would first apply to
the basis of such debt to the extent of the reduction.

This is a

new rule and would mitigate against the recognition of ordinary
income on the disposition of debt which would be required under the
proposal as

hereafte~

explained.

to the basis for stock.

Any remaining increase would apply

The amount would be allocated among shares

of stock in proportion to the shareholder's portion of earnings
and profits attributable to each such share.
Adjusting basis by items which are not included in determining
taxable income or loss would represent a departure from current
law and follows the partnership rules.

It would enable a corporation

xv
to pass throue)1 tax exempt

- 40 -

inc~

to shareholders.

For example,

if the only item of income accrued by a sub chapter S corporation
were $1,000 of tax exempt interest, the shareoo1der's basis would
be increased by $1,000 and a distribution WJuld be applied against
such basis.

Under toda,y's law basis is not increased, the corpora-

tion has $1,000 of earnings and profits and the distribution of
tax exempt intere st is a d1 vi de nd •

(5) Limitation on allowance of losses.
(a)

In general.

As under present law, the shareholder's

deduction of his portion of the corporation's loss would be limited
by the sum of the adjusted basis for his stock. owned at e;ny time
during the year and the adjusted basis of any indebtedness of the
corporation to such shareholder.

The basis of indebtedness 'Would

be determined at the close of the taxable year or on the last day
on which the taxpayer was a. shareoolder.
In either case, the basis would be determined before

reduction for the current year's deficit.
of the fact that the deficit "I'D83 include

Further, to take account
SODE

positive items, for

the purpose of computing the allowable loss a shareholder's basis
would be increased by the

~unt,

if any, by which the shareholder's

Klr

- 41 -

portion of the loss exceeds his portion of the subchapter S deficit
for the year.I! For example, assume a corporation has tax exempt

i~come of $100 and an operating loss of $200. The deficit will be
$100 and since the loss exceeds the deficit, basis will be increased
by $100 before applying the loss limitations.

If there were no deficit

for the year the entire amount of the loss would always be allowable.
If a port'ion of a loss were disallowed, it would reduce
pro rata the amount of ordinary loss and short-term and long-term
capital loss which would otherwise be allowable.

In determining

the timing of inclusion of such loss in the event of a transfer of
a portion of a shareholder's interest during the taxable year, the
portion allowed would be allocated to shares in the ratio that the
shareholder's loss (long-term capital, short-term capital, or
ordinary as the case may be) allocable to each share bears to the
shareholder's total loss.
A shareholder's portion of the corporation's loss not
allowed as a deduction in a taxable year of such shareholder because
of the limitation described above would be allowed as a deduction

Under the proposaJ, basis would not be increased by subchapter S
income in order to allow capital loss (or in certain unusual circumstances an o~dinary loss) to the extent that there are non-deductible
items in excess of tax exempt income. This is an unlikely concurrence
of components and it would not justify the complexity necessary to
alter the result.

TV·

42 -

in any succeeding taxable yee:r of such shareholder.

This represents

a liberalization of current law and is in accordance with the partner
ship provisions.

The non-deduct1ble pe:rt of such loss would not be

transferable but might be deducted only by the

shareholder in a

subsequent year.
If the corporation's election remains in effect, the

carryover loss would be deductible during the shareholder's t8X8.ble
year during which the electing year ends, to the extent that Buch
shareholder's basis for stock or debt, after giving effect to a.ll
transactions in such electing year, is increased above zero at the
end of such taxable year of the corporation or at the date of disposition of his interest if earlier.

If any part of the shareholder I

loss has not been allowed as a deduction at the time the corporation'
election terminates, it would be allowed as a deduction when and to
the extent that the basi s of such shareholder's stock or debt 1s
increased above zero wi thin the 12 calendar months ilJJlrediately
follOWing the date of termination.

Any deduction so allowed would

result in a corresponding reduction in basis.
One further departure from pre sent law and the partnership
provisions should be noted.

The suggested procedure adjusts basis

(and also subchapter S and aCCllD)1l]ated earnings) by the amount of

xv-

- 43 -

any loss and determines the tax effect of a;ny loss before giving
effect to distributions during the year.

Thus, if a partner's

basis is $100 and he receives a $100 distribution in a year in
which his share of the partnership's loss is $100, the distribution
is applied against basis and the loss is disallowed. Under the
proposal in the case of an electing

c~rporation,

allowed and the distribution could be a dividend.

the loss would be
The suggested

rule appears simpler and more logical in that it is consistent with
the treatn:ent gi. ven to income both under the proposal and in the
case of partnerships.
(b)

Treatment of loss if corporation has accumulated

earnings and profits.

If a corporation has ac cumulate d earnings and

profi ts, the treatment of losses can become more complicated.

This

si tuation arises if there is a deficit for the year in excess of the
subchapter S earnings and profits at the beginning of the year.
As indicated above, such excess would reduce accumulated' earnings and
profits to the extent thereof.

Since the loss is deemed to be out

of a pre-subchapter S accumulation of earnings, it should not be
allowed to the shareholders.

This procedure also tends to produce

consistent results regardless of the timing of income, loss and

xv
distributions.

- 44 -

The loss allowed to shareholders in these c1rcum-

stances would be the loss for the year less that portion of the
deficit applied to accumulated earnings and profits which consists
of an allowable loss.

The loss is not simply disa.llowed to the

extent of the reduction in accumulated earnings, however, because
such reduction could in part be the result of items which are not
deductible in computing either an ordinary or capital loss.

general, it is proposed that such items (Le., non-d.eductible items
in e xce ss of tax e x.empt incolJE) be applied age.1nst earnings and
profi ts first.

Thus, the loss would be disallowed to the extent

that the deficit applied to accumulated earnings and profits exceeds
the amount, if any, by which the deficit exceeds the loss.

This

approach will accomplish the desired result, except in the unusual
case referred to above where there is a combination of subchapter
,

S income, capital loss and non-deductible items.
Any loss disallowance would be applied pro rata to reduce
the allowable ordinary,

long~term

capital

los~

and short-term

capital loss otherwise available.

Special Rules
The following rules

a~e

proposed to eliminate unwarranted

advantages now available by using subchapter S.

- 45 -

Recapture on Disposition of Debt.

If the basis of debt in a corporation has after the effective
date of the proposal been reduced by reason of a deficit in subchapter S earnings and profits and if the basis of the debt in the
hands of the holder (who may be a transferee) reflects all or part
of such reduction, then gain on sale, redemption or other disposition of the debt which would otherwise result in capital gain and
which does not result in a complete termination of interest in the
corporation would be treated as gain from the sale or exchange of
an asset which is not a capital asset to the extent of the lesser
of:
(i)

The amount of the reduction reflected in the

shareholder1s basis for debt, or
(ii)

The earnings and profits of the corporation

at the time of the redemption or sale.
This rule prevents the possibility of converting income into
capital gain by holding a portion of a subchapter S interest in the
form of debt, reducing the basis of such debt by subchapter S
losses and then after the election is terminated redeeming the debt
at a time when a partial stock redemption would be treated as a
dividend.

46 -

As indicated above, the occasions when this situation would
otherwise arise is reduced by a new rule which would require the
basis of debt to be restored in the event of subsequent subchapter
S earnings.
B.
The

Certain Employee Benefits.
in utilizing subchapter S instead of a partner-

advanta~

ship for the purpose of granting tax favored employee benefits to
the owners of the business would be reduced in two areas:
(i)

Pensions.

The amount b:r which the swn deduc-

tible by an electing corporation on account of a contribution to a qualified employee benefit plan on
behalf of an employee, who owns at any tinE during the
taxable year more than 10 percent of the shares of the
corporation's stoCk, including ownership by attribution
under section 318 (a)(l), exceeds either 10 percent
of the employee I s "earned income" from the corporation
or $2,500, whichever is less, would be included in the
emplo~e

s gross income as compensation.

Unless a profit-sharing plan has both a definite
contribution formula and a provision that forfeitures
will be applied to reduce contributions, any contribution

XV"

- 47 -

reallocated to such shareholders in a subsequent
year, whether or not an election is in effect in
such year, would be treated as if contributed on
behalf of such shareholder in the year deducted for
the purpose of applying the above lind ts, except that
any income resulting would be taxable in the year of
reallocation.

(This applies to the amount originally

contributed which is forfeited, or the amount reallocated, whichever is less.)
Amounts included in the employee's income under
this provision would be treated as contributions
by the employer in determining whether the plan meets
. the. requirements of se ction 401 relating to qualification.

"Earned income" would mean the amount of the

salary paid by the corporation to the employee plus
any corporate income which may be allocated to the
employee by the Commissioner to reflect reasonable
compensation for services rendered.
In the case of a profit-sharing plan, carryforwards under the second sentence of section 404
(a) ("3) (credit carryovers) would not be permitted from
an electing year to a non-electing year or vice versa.

48 -

An ordinary loss would be allowed in determining adjusted gross

inCODe

to the extent any

&IOOunts included in gross incoroo under this provision
exceed.:; amounts actuBlly distr1b\lted under the plan.
(11) Food and lodging.

The exclusion provided by

section 119 would not apply to the value of food
and lodging provided by the corporation to employees who own oore than 10 'percent of the shares
of the corporation t s stock.

XVI

- 1

Technical Explanation
Deposits in U. S. Banks
1.

Income Tax Treatment
A.

Present Law

Existing section 861(a) (1) provides generally that
interest paid by a resident of the united States, corporate
or otherwise, is income from sources within the United States.
Subparagraph (A) of section 861(a} (1) provides that interest
on amounts described in section 861(c} is not U.s. source
income and, therefore, not subject to the Federal income
tax if it is received by a nonresident alien individual or
a foreign corporation and is not effectively connected with
the conduct of a trade or business within the united States.
The amounts described in section 861(c} are:

(a) deposits

with persons carrying on the banking business;

(b) deposits

or withdrawable accounts with savings and loan or similar
associations; and (c) amounts held by an insurance company
under an agreement to pay interest thereon.

The final

sentence of section 861(c) provides that effective with
respect to amounts paid or credited after December 31, 1972,
section 861(c) and subparagraph (A) of section 861(a) (1)
shall cease to apply and, accordingly, such amounts would
be subject thereafter to Federal income tax.

- 2 -

The Proposal

Under the proposal, section 86l(c) would be revised
by striking out the final sentence thereof.

The effect

of this amendment would be to continue the existing treatment of interest received by nonresident alien individuals
and foreign corporations from deposits, accounts, and
amounts described in section 861(c) as foreign source
income beyond the cut-off date of December 31, 1972.
Related conforming amendments would strike out the
"after December 31, 1972" language in the parenthetical
material contained

subparagraphs (C) and (D) of section

861(a) (1) relating to interest paid by domestic commercial
banking. branches of foreign corporations.

The effect of

these amendments would be to consider income received by
nonresident alien individuals and foreign corporations
from domestic commercial banking branches of foreign
corporations as subject to Federal income tax if such
interest is effectively connected with the conduct of a
trade or business by the recipient within the U. S.
interest received

If the

not so effectively connected it would

be considered, under subparagraph (A) of section 861(a) (1),
as income not from sources within the United States.

These

conforming amendments would apply with respect to amounts
paid or credited after the effective date of the act.

)0fI

3 -

Estate Tax Treatment
A.

Present Law

Existing section 2105(b) (1) provides that, for
purposes of Federal estate tax, amounts described in section
861(c) -- as enumerated in paragraph 1. A. above -- shall
not be deemed property within the U.S. if any interest
thereon, were such interest received by the decedent at
the time of his death, would be treated by reason of
section 861(a) (1) (A) as income from sources without the
United States.

Accordingly, such amounts would not be

includible in the gross estates of nonresidents not
citizens of the United States dying before January 1, 1973.
Since, .under existing law, section 861(c) and 861 (a) (1) (A)
cease to apply after December 31, 1972, such amounts would
be includible in the gross estate of such decedents dying
after December 31, 1972.

Under section 2104(c), deposits

with a domestic commercial banking branch of a foreign
corporation would also be included in the gross estate of
a decedent dying after December 31, 1972 who was a nonresident not a U.S. citizen.
B.

The Proposal

The automatic consequence of the proposal under
paragraph 1. B. above, continuing the income tax exemption
on U.S. bank deposits beyond the December 31, 1972, cut-off

XVI'

4 -

date, would be to similarly continue the existing estate
tax treatment beyond such date.
A related amendment would delete the introductory
language in the second sentence of section 2l04(c), so
that sentence would provide that deposits with a domestic
commercial banking branch of a foreign corporation shall
be deemed property within the united States.

The effect

of this change would be to include such deposits in the
gross estate of a nonresident alien decedent.

Section

2l05(b) (l) would operate to provide an exception in cases
where the interest thereon was not effectively connected
with the conduct of a trade or business in the united States.
Such an amendment is necessary to conform the treatment
of deposits in domestic branches, of foreign banks with
those in u.S. banks.

This amendment would be

effective

with respect to decedents dying after the effective date
of the act.

TREASURY
DEPARTMENT
e
,

WASHINGTON. D.C.
FOR IMMEDIATE RELEASE

April 23, 1969

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
~ 2,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing May 1, 1969,
in the amount of
~2,701,238,000,
as follows:
91-day bills (to maturity date) to be issued May 1, 1969,
in the amount of $1,600,000,000,
or thereabouts, representing an
additional amount of bills dated July 31, 1968,
and to
mature July 31, 1969,
originally issued in the amount of
~1,OOO,963,000 (additional amounts of $501,533,000, $1,103,254,000,
md $200,365,000 were issued October 31, 1968, January 30, 1969, and
March 3, 1969, respectively), the additional and original bills to be
freely interchangeable.
182-day bills, for $1,100,000,000,
dated May 1, 1969,
and to mature

or thereabouts, to be
October 30, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
Mturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
$5,000, $10,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
Eastern Daylight Saving
time,
Monday, April 28, 1969.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
rlth not more than three de~imals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
fO~arded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application the refor.
up to the closing hour·, one-thirty p.m.,

Banking institutions generally may submit tenders for account of
CUstomers provided the names of the customers are set forth in such
tenders. Others than banking. institutions will not be permitted to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from
K-68

Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price
range of accepted bids. Those submitting tenders will be advised
of the acceptance or rejection thereof. The Sec~tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on May 1, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing
May 1, 1969.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0bO~ranch.

TREASURY DEPARTMENT
WASHINGTON, D.C.
April 23, 1969
FOR IMMEDIATE RELEASE

RESPONSE TO QUERIES CONCERNING TREASURY'S EXPANDED EFFORTS
AGAINST ORGANIZED CRIME:

The Treasury Department is making a major effort in
support of the Administration's drive against organized
crime as set down in the President's message to Congress
today.
The Treasury will participate on a full partnership
basis with the Department of Justice and other federal
departments and agencies, the Department said today in
response to queries.
The complete resources of the Treasury Department -including each of its investigative and enforcement arms -- will
be used as needed in pressing the war on crime. Treasury agents
of the Revenue Service, the Secret Service and the Bureau of
Customs will continue to work and cooperate with other agencies
in the detection of wrong-doing and the development of evidence
leading to the prosecution of law violations.
The Treasury Department, the second largest law enforcement department in the Federal Government will provide a major
part of the manpower in the expanded effort against organized
crime. Of the $25 million in additional appropriations in the
Administration request of $61 million for organized crime
efforts, Treasury is requesting an increase of $9.4 million and
680 more agents and supporting forces over that requested in the
previous Administration's budget.
Of the nearly $61 million
being requested this year for the onslaught against organized
crime, Treasury efforts will require $18,500,000.
The new request, with the Johnson Administration request
In parentheses, is as follows:
Customs, $900,000 ($400,000); Secret Service $800,000
($300,000), Internal R~venue Service, $16,800,000 ($8,400,000).

(OVER)

- 2 -

Since January 20, the status of Treasury's law
enforcement effort has been upgraded in general by putting
it under the direct supervision of an Assistant Secretary -Eugene T. R9ssides.
He is in the process of enlarging and
reorganizing his staff and upgrading Treasury's law enforcement in keeping with Treasury's expanded efforts. The General
Counsel's office for the first time in its history has hired
an attorney with a background in criminal law in order to
better support Treasury's law enforcement efforts.
Treasury, in cooperation with the Justice Department,
will write legislation amending wagering tax laws which
should give the IRS greater enforcement power to collect
federal revenue due on gambling income. As a result of these
efforts, it is estimated that millions of dollars in uncollected
wagering taxes can come into the Federal Treasury.

TREASURY DEPARTMENT
=

~---

WASHINGTON. D.C.
roo RELEASE 6: 30 P.M.,
~sday,

April 24, 1969.
RESULTS OF TREASURY'S MONTHLY BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
Dills, one series to be an additional issue of the bills dated January 31, 1969, and

the other series to be dated April 30, 1969, which were offered on April 17, 1969, were
opened at the Federal Reserve Banks today. Tenders were invited for $500,000,000, or
t~reabouts, of 276-day bills and for $1,000,000,000, or thereabouts, of 365-day bills.
~e details of the two series are as follows:
MGE OF ACCEPTED
:OMPETITIVE BIDS:

High

Low
Average

365-day Treasury bills
maturing April 30, 1970
Approx. Equi v •
Price
Annual Rate
94.018
5.90Cij
93.936
5.981~
93.987
5.931i );/

276-day Treasury bills
maturing January 31, 1970
Approx. Equiv.
Price
Annual Rate
-";;'9'5:::':.';':'4-3-a-1
5. 944J
95.393 6.009~
95.418

5.977i

Excepting 1 tender of $910,000
82~ of the amount of 276-day bills bid for at the .low price was accepted
97~ of the amount of 365-day bills bid for at the low price was accepted

IDTAL 'lENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRIC'lB:

District
Boston
New York
Philadelphia
Cleveland
Richmond

ApE lied For
275,000
$
1,227,896,000
5,737,000
541,000
426,000
14,735,000
Atlanta
63,209,000
Chicago
9,419,000
St. Louis
10,300,000
Minneapolis
990,000
Kansas City
11,210,000
Dallas
82,881,000
San Francisco
IDTALS

$1,427,669,000

~Includes $13,039,000

Applied For

Acce12ted
$
275,000:
407,396,000:
737,000:
541,000:
426,000:
9,785,000:
18,209,000:
7,419,000:
10,300,000:
990,000:
3,210,000:
40 z 881,000:
$

500,169,000

£/

2,445,000

AcceEted

2,445,000

1,585,863,000
12,373,000
7,135,000
1,753,000
19,651,000
88,357,000
13,872,000
10,605,000
6,459,000
11,880,000
116,745,000

856,563,000
2,373,000
2,135,000
1,753,000
10,851,000
44,357,000
7,872,000
10,605,000
6,459,000
3,880,000
50,740,000

$1,877,138,000

$1,000,033,000 ~/

noncompetitive tenders accepted at the average price of95.418
$39,631,000 noncompetitive tenders accepted at the average price of 93.987
1/ These rates are on a bank discount basis. The equivalent c()Upon issue yields are
. 6.28i for the 276-day bills, and 6.3~ for the 365-d~ bills.

yIncludes

TREASURY DEPARTMENT
,
WASHINGTON, D.C.

April 25,1969
FOR RELEASE A.M. NEWSPAPERS
SATURDAY, APRIL 26, 1969
TREASURY RELAXES LICENSING REGULATIONS
ON GOLD COIN IMPORTS
The Treasury Department announced today a reV1S10n
of gold coin import regulations to permit imports of gold
coins minted prior to 1934 without lthcense.
Relaxation of the licensing requirement is effective
today and was made to remove an inconsistency in
regulations on imported pre-1934 gold coins, which
generally had to have licenses, and those regularly traded
within the United States.
Gold coins minted during or after 1934, however, may
be imported only with a license from the Director, Office of
Domestic Gold and Silver Operations, Treasury Department,
Washington, D. C. Such licenses are issued only for rare
and unusual coins of recognized special value to collectors.
Importation of gold coins minted in 1960 or afterwards still
will not be licensed.
Before this change in the regulations, all coins made
prior to April 5, 1933 could be freely bought, sold, and held
within the United States. However, only rare and unusual gold
coins could be imported and then only pursuant to a specific
license. Under this standard, certain coins minted before
1934 did not qualify for import even though they were freely
traded in the domestic market. With the change in the
Regulations any gold coin may be imported which can now be
legally traded within the United States.

K-70

(OVER)

- 2 The amendments will sLTIplify existing restrictions on
numismatists while continuing to serve the basic purpose
of the Gold Regulations. The current licensing policy will
be retained for coins minted after January 1, 1934.
Gold coins may still be detained at Customs stations
for examination as to their authenticity. Counterfeit
coins may not be imported and are subject to seizure.
Restrikes, that is modern reproductions of gold coins bearing
a much earlier date, will also not qualify for importation.
Therefore, travelers and coin collectors should be
especially careful that the coins they purchase abroad are
genu1ne.

000

TREASURY DEPARTMENT
WASHINGTON. D.C.

April 25, 1969
FOR

I~~EDIATE

RELEASE

SECRETARY KENNEDY AND CHANCELLOR JENKINS
TO HOLD INFORMAL DISCUSSIONS ON ECONOMIC MATTERS
British Chancellor of the Exchequer Roy Jenkins will
arrive in Washington Sunday on one of his periodic visits
to the United States.
His visit, announced previously by the Treasury Department
and the British Embassy, will provide an opportunity for
Mr. Jenkins to meet members of ~he Administration.
Since his arrival time coincides with the weekend,
Treasury Secretary David M. Kennedy has invited Chancellor
Jenkins for dinner and to spend the evening at Camp David.
Treasury and the British Embassy said their informal discussions
are expected to cover economic matters of mutual inter2st to
the two nations.
Mr. Jenkins will be accompanied by Sir Douglas Allen,
permanent Secretary of thA Treasury. Mr. Jenkins last visited
the United States in October of last year.

000

TREASURY DEPARTMENT
•

WASHINGTON, D.C.
April 28, 1969
FOR IMMEDIATE RELEASE

JOINT U.S.-U.K. STATEMENT FOLLOWING MEETING
BETWEEN TREASURY SECRETARY DAVID KENNEDY AND
CHANCELLOR OF THE EXCHEQUER ROY Ho JENKINS
Secretary of the Treasury David Kennedy met with the
Chancellor of the Exchequer Mr. Roy H. Jenkins at Camp David today.
It was the first occasion on which Mro Kennedy and

Mr. Jenkins had talked since the former assumed office.

The
Chancellor's visit to the United States was arranged several
weeks ago to enable him to meet members of the new U.SQ
Administration. He and the Secretary took the opportunity to
review several ~atters of mutual interest. They discussed
economic and financial developments within their two countries,
and the prosress being made toward their respective
objectives
0

They also exchanged views on some aspects of the
International Mone tary Sy stem, inc luding international c r:~d i t
conditions and the prospective entry into force of the
Special Drawing Rights in the IMF.
They agreed to consult together as appropriate in the
future c

000

K-71

TREASURY DEPARTMENT

; 5=

WASHINGTON. D.C.

RESULTS OF TREASURY'S WEElQ,Y BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
.ills, one series t~ be an additional issue of the bills dated J'.lly 31, 1968, and the
~ther series to be dated J.tiy 1, 1969, which were offered on April 23, 1969, were
~ned at the Federal Reserve Banks today.
Tenders were invited for $1,600,000,000,
rr thereabouts, of 91-day bills and for $1,100,000,000, or thereabouts, ;)f 182-day
lills. '!he details of the two series are as follows:
MGE OF ACCEPTED
~OMPETITIVE BIOS:

High

Low
Average

91-day Treasury bills
maturing July 31, 1969
Approx. Equiv.
Price
Annual Rate
98.473
6.041~
98.468
6.061~
98.4 70
6.053~

182-day Treasury bills
maturing october 30, 1969
Approx. Equiv.
Annual Rate
Price

96.952

96.940
96.945

6.029i
6.053~

5.043~

a/ Excepting

one tender of $5,000
8~ of the amount of 91-day bills bid for at the low price was accepted
94~ of thp. amount of 182-day bills bid for at the low price was accepted
'ruTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

District
Boston
New

Y:Jrl~

Philade 1phia
Cleveland
Richm:Jud
Atlanta

Chica.go
St. Louis
Minneapolis
Kansas City
~Uas

San Francisco

IDTALS

ApElied For

AcceEted
AEElied For
$ 28,216,000 $ 17,161,000
1,200,008,000
2,246,668,000
21,251,000
37,356,000
33,186,000
38,078,000
18,060,000
19,660,000
34,586,000
50,906,000
123,803,000
238,253,000
40,229,000
61,070,000
20,916,000
28,131,000
27,485,000
31,994,000
16,708,000
27,508,000
48,148,000
154,138,000
$2,961,978,000

$1,601,5~1,000

AcceEted

3,236,000 $

3,235,000

1,690,396,000
19,805,000
33,054,000
11,117,000
31,635,000
183,303,000
33,815,000
18,033,000
14,420,000
19,069,000
132,980,000

811,661,000
9,805,00C)
22,079,000
6,617,000
16,279,000
129,003,000
18,815,000
9,373,000
13,143,000
9,069,000
51,165 z 000

$2,190,863,000

$1,100,244,000 ::../

Vmcludes $363,383,000 noncompetitive tenders accepted at the average price of 98.470
/Includes $152,548,000 noncompetitive tenders accepted at the average price of 96.94:5
I~ese rates are on a bank discount basis. Tbe equivalent coupon issue yields are
6.23% for the 91-day bills, and 6.32c.' for the 182-day bills.

TREASURY DEPARTMENT
WASHINGTON. D.C.

April 29, 1969
FOR IMMEDIATE RELEASE
STATEMENT BY TREASURY GENERAL COUNSEL
ON CONFLICT OF INTEREST ALLEGATIONS
Paul W. Eggers, General Counsel of the U.S. Treasury, today
sent the following statement and letter to Wright Patman, Chairman
of the House Banking and Currency Committee, regarding allegations
of conflict of interest involving Treasury Secretary David M.
Kennedy:
On Thursday, April 24, 1969, I attended the hearing
on one-bank
holding companies and heard Representative
Wright Patman make representations against the Secretary
as to conflict of interest in connection with his~ock
in the Continental Bank and Conil1 Corporation. Subsequent to that meeting, I requested the Secretary to
permit me to make an independent investigation in this
matter. This I have done and I find the following facts
to exist:
(1) According to the stock records of the
Continental Illinois National Bank and Trust Company
of Chicago, neither Mr. Kennedy nor Mrs. Kennedy owns
any stock in their own name.
(2) I questioned Mr. Kennedy and he stated that
neither he nor his wife owns any equitable interest in
any stock other than the equitable interest they own
in the stock transferred to the Old Colony Trust
Company, Boston, Massachusetts, under a trust created
by Mr. & Mrs. Kennedy.
(3) Mr. Kennedy stated that he had no knowledge
from the trustee and no communication with the trustee
as to the status of the stock transferred in trust.

K-72

- 2 -

(4) According to the Bank records, there are 7,846
shares of Conill Corporation stock in the name of Old
Colony Trust Company, Boston, Massachusetts.
(5) On April 1, 1969, according to a plan of reorganization, shareholders of the Bank exchanged shares
of Bank stock for Conill Corporation on a share-forshare basis.
(6) Upon retirement, Mr. Kennedy had a right to
receive his interest in the profit-sharing plan of the
Bank, partly in cash and partly in kind. He could have
elected to take 3800 shares of Bank stock under the plan.
However, he elected to take his distribution entirely in
cash.
(7) Mr. Kennedy owned a stock option for the
purchase of 30,855 shares of Continental IllinoiS National
Bank and Trust Company of Chicago stock. the tax Ipw
would require Mr. Kennedy to hold this stock for a period
of six months after purchase in order to realiz~ long-term
capital gain on the sale. There were no restrictions under
the terms of the option or under the law to prevent the
sale of the stock prior to the termination of the six
months. The result of making the sale prior to the expiration of the six months resulted in a short-term
capital gain instead of a long-term capital gain and the
gain on such sale would be taxed at ordinary income tax
rates.
(8) Mr. Kennedy exercised the option and within a
few days thereafter sold all the shares so acquire~.
From my discussions with the people who handled th:s sale,
I determined that this was an arms-length transactlon.
Mr. Kennedy has completely divested himself of any interest
whatsoever in this stock.
(9) On January 10, 1969, the Board of Directors of
Continental Illinois National Bank and Trust Company of
Chicago awarded a separation allowance to Mr. Kennedy in
the amount of $200,000, this amount being equal to oneyear's salary. The separation compensation is payable

- 3 in five annual installments, the first installment becoming
due and payable after Mr. Kennedy leaves office. This contractual right was fixed and certain on January 10, 1969,
and no action Mr. Kennedy would take while in office can
alter this amount. Full disclosure of this contractual
agreement was made to the Senate Finance Committee.
Based on these facts in my investigation, as General
Counsel of the Treasury I have issued an opinion to
Mr. Kennedy that no conflict of interest exists. The
stock acquired under the stock option was immediately
sold and this was in accordance with the arrangements
made by Mr. Kennedy with the ,)enate Committee on Finance.
The only stock owned by Hr. & Mrs. Kennedy was transferred
in trust, and this was done in accordance with Mr. Kennedy's
arrangements with the Senate Finance Committee.

Attachment

000

THE GENERAL COUNSEL OF THE TREASURY

•

""';'

WASH INGTON, D,C, 20220

,:.,
'.'

Ap r i 1 29, 1969

My dear Mr. Chairman:
During the course of the hearings on H. R. 6778,
you have made charges of conflict of interest against
Secretary Kennedy. I have made a thorough investigation
of these charges and I find that they are erroneous
both as to the facts alleged and as to the
conclusions drawn o
The fact is that neither Secretary Kennedy nor
Mrs. Kennedy is a stockholder of record of any stock
either in Continental Illinois Bank and Trust Company,
or in Coni11 Corporation. Neither has any beneficial
interest in stock of either corporation except stock
which was placed in trust prior to Secretary Kennedy
taking office in full accord with the agreement and
understanding which he had with the Senate Committee
on Finance.
I am enclosing a copy of a press release which I
have issued this afternoon on this subject. It is
requested that this letter and the press release be made
a part of the Record of the hearings on H. R. 6778.
Sincerely yours,

/s/ Paul Wo Eggers
Paul W. Eggers
The Honorable
Wright Patman, Chairman
Banking and Currency Committee
House of Representatives
Washington, D. C. 20515
Enclosure

TREASURY DEPARTMENT
WASHINGTON. D.C.

April 29, 1969
FOR IMMEDIATE RELEASE
U.S. AND JAPAN MUST WORK FOR FREER TRADE ,
SECRETARY KENNEDY TELLS JAPANESE MISSION
The United States and Japan must work together to insure
freer trade between the two nations, Treasury Secretary
David M. Kennedy told a group of leading Japanese businessmen
today.
The businessmen are members of an economic mission to the
Southern United States led by Masao Anzai, president of Showa Denko
chemical company. They met at Treasury with Secretary Kennedy.
Also participating in the meeting were Treasury's Assistant
Secretary for International Affairs, John R. Petty, the
Japanese Ambassador to the United States, Takeso Shimoda, and
the Financial Minister of the Embassy, Haruo Nakajima.
"Although some pressures for trade barriers have arisen in
the United States, President Nixon feels strongly -- and I do -that freer trade is in the best interests of the United States
and all nations," Mr. Kennedy told the group.
Mr. Kennedy also praised the economic progress of Japan
and the support it is giving to developing nations, including
assistance provided through the Asian Development Bank. He
commended Japan for using its growing economic strength
"to take a position of greater responsibility in international
markets and the world system," and expressed confidence that it
will continue to do so in the future.
The economic mission is the third such group the Japanese
Government has sponsored to visit specific geographic areas of
the United States. Since coming to this country April 8, the
members have visited major Southern cities, exchanging views with
business and other leaders and discussing expansion of
U.S.-Japan trade.

K-73

(MORE)

- 2 Mission members who took part in today's meeting, in
addition to Mr. Anzai, were Iwao Iwanaga, President, Mitsui
Petrochemical Industries; Toyosaburo Taniguchi, Chairman,
Toyobo Company; Koji Shindo, Chairman, Mitsui O.S.K. Lines;
Somei Iwata, President, Noritake Company; Hosai Hyuga,
President, Sumitomo Metal Industries, and Yutaka Egashira,
President, Chisso Corporation.

000

TREASURY DEPARTMENT
$

WASHINGTON, D.C.
Ap r i 1 30, 1969

FOR UIMED lATE RELEASE

REVISION OF ESTATE TAX TREATY BETWEEN
THE UNITED STATES AND FRANCE TO BE DISCUSSED
The Treasury Department announced today that discussions
will be held between representatives of the United States and
Franc~ beginning June 2 in Paris to revise the estate tax
conv(,[ltion between the two countries. Consideration will also
be given to 2nlarging the scope of the existing convention to
incllldt' gift tdxes.
Ml)clification of the convention will be considered in
lii~t of the Foreign Investors Tax Act of 1966, which
substdl)tially reduced UeS. taxes on citizens of foreign
countries wit~ assets in the United States, and of the draft
model estate tax convention developed by the Fiscal Committee
of the Organization for Economic Cooperation and Development
(OECD),.
("'ritten commt"nts and suggestions in connection with the
forthcuning discussions with France should be submitted by
May 27, 1969 to Edwin S. Cohen, Assistant Secretary of the
Treasury, Department of the Treasury, Washington, D.C. 20220.
Persons interested in an estate and gift tax convention
may consult existing U,S0 treaties, such as those with
Canada, Italy or Japan, which have been published by the
Department of State in the series called "U.S. Treaties and
Othr_'l' International Agreements"
They may also wish to
consult the OECD report published in 1966 and entitled
"Draft Double Taxation Convention on Estates and
lnh2ritances" •
0

000

K-74

TREASURY DEPARTMENT
WASHINGTON, D.C.
April 30,1969

FOR IMMEDIATE RELEASE
LIMITS ON INDIRECT OWNERSHIP OF GOLD BY AMERICANS
POINTED OUT BY TREASURY
The Tr2asury has been informed that a mutual fund has
been formed in Europe for the purpose of investing in gold
bullion~

Treasury officials, in response to inquiries, pointed out
that the Department's Gold Regulations apply not only to direct
ownership of gold but also to the acquisition of indirect
interests in gold.. Thus it is illegal for Americans to
acquire or hold securities issued by any company, including
a mutual fund, that holds gold as a substantial part of its
assets and as a store of value, rather than for specific
and customary industrial, professional or artistic use.
This prohibition is applicable to United States citizens
wherever re~id~lt, non-citizens resident in the United
States, and to United States companies.
It also s:lould be noted that any share contracts
denominated in gold, or in an a~ount of dollars measured in
terms of gold, or convertible into gold, have been declared
by Con~rps~ to be against public policy and are not enforceable
li1 U.S. courts.
Investments in companies which hold gold for specific and
customary industrial, professional or artistic use -- such as
a dental supply house or a gold mining company -- are not
prohibited under the Department regulations.

000

K-75

FOR IMtv[EU 1;\T£ RELEASE

WASHINGTON, D.C.
Ap r i 1 30, 1969

TREASURY'S WEEKLY BILL OFFERING
Tlfe Treasury Depat"tment, by
fur two series of Treasury bills
~3,OUC,OOO,OOO, or thereabouts,
Treasury bills maturing
May 8,
~3, DC 2,023,000,
as follows:

this public notice, invites tende rs
to the aggregate amount of
for cash and in exchange for
1969,
in the amount of

91-day bills (to maturity date) to be issued May 8, 1969,
~ the amount of $ 1,700,000,000, or thereabouts, representing an
~ditional amount of bills dated February 6 , 1969 ,
and to
mature Augus l 7, 1969,
originally issued in the amount of
~1,lCO,L~83,OOO,
the additional and original bills to be
freely interchangeable.
182-day bills, for $1,300,000,000,
dated
May 8, 1969,
and to mature

or thereabouts, to be
November 6, 1969.

The bills of both series will be issued on a discount basis under
competitive and noncompetive bidding as hereinafter provided, and at
maturity their face amount will be payable without interest. They
will be issued in bearer form only, and in denominations of $1,000,
~5,OOO, $10,000, $50,000, $100~000, $500,000 and $1,000,000
(maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Mondd)', Hay 5, 1969.
Tenders will not be
~ceived at the Treasury Department, Washington.
Each tender must
be for an even multiple of $1,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may not
be used. It is urged that tenders be made on the printed forms and
forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application the refor.
Banking institutions generally may submit tenders for account of
Customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
rubmit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from

K-76

- t. -

responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
rimount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announci
ment will be made by the Treasury Department of the amount and price
range of accepted bids. Those sUbmitting tenders will be advised
of the acceptance or rejection thereof. The Sec~tary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on May 8, 1969, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing May 8, 19690
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 060~ranch.

TREASURY DEPARTMEf\lT
@&fi3-'

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tiUt.&1II6

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WASHINGTON, D.C.
April 30, 1969
TREASURY AN]\TOUNCES $6.8 BILLION REFUNDING OF MAY 15 MID J1JHE 15 MATURITIES

The Treasury today armounced th3.t it is offering holders of the 5-5/8%
Trea.sury Notes of Series B-1969, maturing Ma.y 15, 1969, and the 2-1/2% Treasury
Bonds of 1964-69, rna turing June 15, 1969, the right to exchange their holdings
for a. l5-month note or a. 7 -yea.r note.
The notes being offered are:
6-3/8% Trea.sury Notes of Series D-1970, dated May 15, 1969, due
August 15, 1970, at 99.95 to yield about 6.42%, and
6-1/2% Trea.sury Notes of Series B-1976, dated May 15, 1969, due
May 15, 1976, at par.
In the case of excha.nges of the 5-5/8% notes subscribers for the 15-month
notes 'frill receive a cash payment on account of the difference betvreen the par value
of the maturing notes and the issue price of the new notes.
In the case of exchanges of the 2-1/2% bonds interest vrill be adjusted as
of June 15, 1969. The payments due to and from subscribers and the net amounts
pa.yab1e to subscribers a.re as fo11mvs (per $1,000 face value):

NEI-T NOTES
DUe 8/15/70
Due 5/15/76

Paya.ble to Subscriber Account
of Issue Price of
Ne'fr Notes
$ 0.50

---~-------------

_- -

Accrued Interest Pa.ya.ble
By Subscriber
To Subscriber
m1 2-1/2% Bonds on Ne~iT Notes
(5-15-69
(12-15-68
to 6-15-69)
to 6-15-69)
$ 5.45925
$ 12.50
5.47554
12.50

Net Amount
to be
pa.id
to
Subscriber
7.54075.
7.02446.

-.-~-

The public holds about $5.9 billion of the securities eligible for excha.nge,
and about $0.9 billion is held by Federal Reserve a.nd Goverrrrnent accounts.
Cash subscriptions for the new notes I'Till not be received.
The books 'trill be open for three days only, on Ha.y 5 through Nay 7, for the
receipt of subscriptions. Subscriptions addressed to a Federal Reserve Bank or
Branch, or to the Office of the Treasurer of the United States, and placed in the
ma.il before midnight I,la.y 7, -dill be considered as ti.'nely. The pa.yment a.nd deliver]
date for the n::Jtes ,'rill be May I5, 1969. The r:.otes ~'lill be ma.de 2.va.i1able iy:
registe!'ed as ";fell ~s be2.l'er fo!'!r_. All sU0scri108rs recpesting regi8tered ~·I:::d-.p~
will be required to furnish a.ppropriate identifying ::unibers a.s required on tax
returns and other docl.1In.ents submitted to the Interm.l Re-/enue Service.

K-77

- 2 -

Coupons
detached and
will be paid
on April 15,
1969, on the

dated May 15, 1969, on the notes maturing on "that date should be
cashed when due. The May 15, 1969, interest due on registered notes
by issue of interest checks in regular course to holders of record
1969, the date the transfer books closed. Coupons da.ted June 15,
bonds due on that date must be attached.

Interest on the notes due August 15, 1970, will be payable on August 15, 1969,
and February 15 and August 15, 1970. Interest on the notes due May 15, 1976, will
be payable on November 15, 1969, and thereafter on May 15 a.nd November 15 until
maturity.

Estimated Olmership of the May end June 1969 Maturities
as of March 31, 1969

(In millions of dollars)
May 15

June 15

5-5/&/0

2-1/~

Total

Note

Bond

Commercial banks .••••.•••.••••••••

2,033

1,363

3,396

Mutual savings banks •••••••..••••.

103

16
56

Fire, casualty and marine .•.•..•

4
19

Total, insurance companies .••

Savings and loan associations •••••

186

251

Corpor!3.t/ions ............................... .

496

575

State and local governments •••••••

408

471

All other private investors •.•••..

973

1,037

Total, privately held ••.•••••..

3,734

2,144

5,928

Federal Res~rve Banks snd
Government Accounts •••••••••••••

493

397

Total outstanding •••..••••••••••.•

4,277

2,541

Insurance companies:
Li fe ..... ".................................... .

Office of the Secretary of the Treasury
Office of Debt Analysis

6,818
April 30, 1969

Fede:.ra1 Income 'TclX Treatn.lE:1Jt of Exch'::1nge
of 2-1/2% Treasury Bonds of June 15, 1969, for
6-3/8% Treasury Notes of Al.1g11St 15, ]970, or
6-1/2% Treasury Notes of May 15, 1976

The Internal Revenue Service released on April 30,
1969, a Revenue Ruling . ."hich 'will be published in Internal
Revenue Bulletin No. 1969-21, dated May 26, 1969, dealing
wi.th the determination of amount of and recognition of
gain or loss in an exchange of Treasury securities.
That Ruling ,\qould apply to exchanges of 2-1/2% bonds
of June 15,1969, for 6·-3/8% notes of August 15,1970, or
6-1/2% notes of May 15, 1976, under the current offering,
as follmvs:
1. The effective date of exchange \\li11 be the date
on which the holder of the outstanding bonds submits his
subscription.
An investo,r's taxable gain or loss will be
determined by comparing his basis'in the bonds surrendered
with the amount of money received ($0.50 per $1,000 in the
case of an exchange for the 1970 notes and nothing in the
case of an exchange for the 1976 notes), plus the fair market
value of the new notes, 't'lhich is equal to the mean of the bid
and asked prices for those notes on the date on \vhich he submit~
his subscription.
2.

3. An investor will take the fair market value of the
new notes on the date on which he submits hi.s subscription
as his basis in those notes.

4. An investor will include the six months' interest
payment on the bonds ($12.50 per $1,000) in his gross income.
The one month's i.nterest on the notes ($5.45925 pe"r $1,000 in
the case of the 6-3/8% notes and $5.47554 per $1,000 in the
case of the 6-1/2% notes) will be treated as a capital investment and upon receipt of the first interest ?2~lent (August 15,
1969, in the case of the 1970 notes and Novemb2!.'" 15, 1969, i.n
the case of the 1976 notes) he 1;<Ji11 deduct th:H 2.'il:':J'llnL: as a

tf~D
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~@O@®@@

Bn~or:nQ~ rk~t7en~o [k:rvB~O
W(mSGu~UU@1S®[jiJg [Q)@ ~@~~LB
Tel. (202) WO 4-4021

lor Relc~se: Immediate
.pril 30, 1969

IR-975

The U. S. Internal Revenue Service today announced that the following
Revenue Ruling will be published in Internal Revenue Bulletin No. 1969-21,
dated May 26, 1969.
SECTION lOOl.--DETERMINATION OF AMOUNT OF AND
RECOGNITION OF GAIN OR LOSS
26 CFR 1.1001-1: Computation of
gain or loss.
(Also Section 1012; 1.1012-lJ

Rev. Rul. 69-263

On October 1, 196_, the Secretary of the Treasury, pursuant to the
authority of the Second Liberty Bond Act, as amended, offered Treasury notes
dated October 15, 196_, at 99.85 percent of their face value in a taxable
exchange for Treasury Bonds maturing November 15, 196_, in amounts of $1,000
or multiples thereof. In connection with the exchange, cash of $1.50 per note
was given to the holders of the Treasury Bonds. The books were open for purposes of this exchange only on October 3, 196_, and payment for the notes
subscribed had to be made on or before October 15, 196. In addition to the
$1.50 per note, interest on the bonds and notes was adjusted so that investors
received a full six months' interest payment on the bonds less one month's
interest on the notes. During the time that the books were open the notes
were traded on a when-issued basis. On October 3, 196_, the bid and the asked
prices for the notes were 100.02 and 100.04 respectively (decimals in prices
are thirty-seconds),
On the basis of the foregoing it is held that:
(1) For Federal income tax purposes the effective date of the exchange
of the outstanding bonds for notes is October 3, 196_, the date on which the
holder submitted his subscription.
(2) Pursuant to the provisions of section 1001 of the Internal Revenue
Code of 1954, investors' taxable gain or loss will be determined by comparing
their basis in the bonds surrendered with the amount of money received, plus
the fair market value of the notes ($1,000.9375 per note, which is equal to
the mean of the bid and the asked prices for the notes on October 3, 196_).
(3) Investors will take the fair market value of the notes on October 3,
196_, as their basis in such notes under section 1012 of the Code.
(4) Investors will include the six months' interest payment on the bonds in
their gross income. The one month's interest on the notes will be treated as a
capital investment and upon receipt of the first interest payment thereafter
investors will deduct such amount as a recovery of capital and report the balance
as interest income. See L. A. Thompson Scenic RailHay Co. v. Commissioner, 9
B. ,T. A. 1203 (1928).

=If

Treas.
HJ
10
.A13P4
v.164

U.S. Treasury Dept.
Press Releases

Treas.
HJ

10
.A13P4

u.s.

Treasury Dept.

AUTHOR

Press Releases
TIT~£

v 164
DATE
UWlED

I.. .....

BORROWER'S NAIIE

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PHONE
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Full text of Press Releases of the United States Department of the Treasury : Volume 164

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