Mr. WILLKIE. Thank you very much for bearing with me while I finished my statement.

(Whereupon the hearing recessed at 12:05 o'clock, to reconvene again at 1:30 o'clock.)

AFTERNOON SESSION, WEDNESDAY, NOVEMBER 23, 1938

Whereupon, the hearing was resumed, pursuant to recess, at 1:30

p. m.

Acting Chairman SCHWARTZ. You may proceed.

TESTIMONY OF WENDELL L. WILLKIE Resumed

Mr. WILLKIE. I have a little supplemental statement I would like to make, if I may.

There has been so much in the public press arising out of the order authorizing this committee to examine income-tax returns that I think an explanatory statement at this time will be helpful to your committee.

I do not know whether you gentlemen are conscious of the fact that for the last 2 months investigators for this committee have been in touch with us requesting various data. Upon their first appearance at our office I offered to submit my personal income-tax returns, bank accounts, and other financial records for inspection by your committee. I also told these investigators, as I have told Mr. Biddle, that there is no information of any kind in regard to our affairs that this committee desires that it cannot have.

On November 1, long prior to the issuance of the Presidential order, Mr. Biddle wrote me a letter, copy of which I am submitting herewith, asking that we bring with us to this hearing income-tax returns for the years 1925 to 1937, inclusive.

Acting Chairman SCHWARTZ. Is that company returns or your individual returns?

Mr. WILLKIE. The company returns.

It never occurred to us not to bring them or any of the other data requested. Let me say to you now that in the course of your proceedings, if there is any detailed data requested by this committee, if you give us ample time, it will be furnished you in any manner you desire.

Nearly 3 years ago I asked the nationally known auditing firm of Arthur Andersen & Co. to make for me a study regarding variations between taxable income as reported on corporate income-tax returns and the corporate income as reported in financial statements to stockholders and others, including the question of depreciation.

The study is dated January 25, 1936, and I offer it for the record. It shows that depreciation for income-tax purposes and for corporate purposes are quite different things; and that

there is probably not a single corporation of any consequence which reports for income-tax purposes the same net income that it shows on its books and in its financial report to stockholders.

This difference is recognized by the United States Treasury Department and by court decisions and is made necessary by reason of the arbitrary provisions and frequent changes of the Federal tax laws-there having been 14 different Federal income corporate tax laws in the last 25 In addition, the published reports to stockholders and others

of the Commonwealth and Southern Corporation and its subsidiaries have shown the existence of such difference.

you wish.

of it.

Now, coming specifically to the question that your committee desires to inquire about, namely, the income-tax returns of Tennessee Electric Power Co. for the years 1925 to 1937, inclusive, and particularly with respect to depreciation. I want to make it very clear that there is no phase of this income-tax matter that we shall not be more than happy for this committee to go into if it deems it a part of its proper function. I should point out, by way of qualification, that income-tax and depreciation questions are highly technical, and with all my other duties I make not the slightest pretense of being an expert in the technical details of the utility business. If you want to know from me anything about the policy or corporate results of our companies I shall be glad to testify concerning it. If you want to go into the details of income-tax returns and the like, I shall ask to be excused. We have here a man who is an expert on the matters covered by these tax returns. You may examine him as fully as you wish, and as long as Incidentally, he was the man largely responsible for the preparation There is nothing new about this matter concerning depreciation in the tax returns of the Tennessee Electric Power Co. The representatives of the T. V. A. examined these returns over 6 months ago through the courtesy of the Secretary of the Treasury. As a matter of fact, the Tennessee Co. originally, and up to the year 1928, did not claim a deduction for depreciation in excess of that reflected on its books of account in accordance with the order of the Tennessee Railroad and Public Utilities Commission. It was only after it learned of the general practice of other companies and the universal custom of taking depreciation as allowed by the Treasury Department that it filed petitions for refund covering these years, based upon further depreciation claimed in accordance with these regulations. From this time on it claimed such depreciation in its annual income-tax returns. The taxes assessable for all of these years has not yet been arrived at by the Government nor has the depreciation claimed been allowed. When the amount of depreciation is finally determined by the Internal Revenue Bureau to be allowed as a deduction against taxable income of the Tennessee Co., the only result will be that taxes are not paid on income to that extent.

The only depreciation that the investor in the Tennessee Co. has recovered is that allowed by the State commission, which is the amount shown on the company's books. By order of the commission the company is limited in its accumulations in depreciation reserve to a maximum of 6 percent.

Now, gentlemen, as I said, about the tax matter, the questions that your counsel has asked us to come prepared on are quite extensive, and they cover a wide variety of subjects, a good many of them having to do with valuation. For instance, as one, a description

Mr. BIDDLE. Wait a minute, Mr. Willkie; I will ask the questions. for the information that I want in due course.

Mr. WILLKIE. Yes. But I did want to make a statement. Mr. BIDDLE. Wait just a moment. When you finish your statement to the committee-we have not interrupted you then I think it would be proper for me to ask questions for the information that I want. You will, of course, have any assistance of your auditors or experts in

answering any questions that I ask. They won't be complicated questions. They will be extremely simple.

Mr. WILLKIE. Of course I

Mr. BIDDLE. I think we can pass the information that I asked for until I ask for it.

Mr. WILLKIE. Of course it goes to the question of this valuation. Mr. BIDDLE. We have not raised that yet, and when we raise itMr. WILLKIE. I assumed you were speaking for the committee in asking for this information.

Mr. BIDDLE. I was. And when we raise that question you can give any information you desire.

Mr. WILLKIE. As you desire.

Mr. BIDDLE. Have you finished your statement to the committee? Mr. WILLKIE. I have.

SECURITY OWNERSHIP IN THE COMMONWEALTH AND SOUTHERN

CORPORATION

Mr. BIDDLE. Mr. Willkie, first I want to ask you some general questions about the Commonwealth and Southern Corporation system. There are two Commonwealth and Southern Corporations, are there not?

Mr. WILLKIE. Yes; it is the Commonwealth and Southern Corporation of Delaware and the Commonwealth and Southern Corporation of New York.

Mr. BIDDLE. And the Delaware corporation is the holding company which owns the stock of certain subsidiary operating companies, is it not?

Mr. WILLKIE. The Commonwealth and Southern Corporation owns the stock of the

Mr. BIDDLE. The Delaware corporation?

Mr. WILLKIE (Continuing). Yes; owns the stock of the operating companies; and in addition, securities, senior securities, bonds, and preferred stock of those companies.

Mr. BIDDLE. And the New York company is the management company, is it not?

Mr. WILLKIE. No, sir; the New York company

Mr. BIDDLE (interrupting). What is the New York company? Mr. WILLKIE. The New York company is a mutual service company, the stock of which is owned by the operating companies. Mr. BIDDLE. So that, in that way, would it be unfair to say that the holding company owns and controls the service company?

Mr. WILLKIE. That would be distinctly unfair to say unless you drew the differentiation that it is a mutual service company of the Commonwealth and Southern Corporation, the stock of which is owned by the operating companies in proportion as their gross bears to the total gross of all. It is that type of service company that received the particular commendation of the Federal Power Commission several years ago. Mr. BIDDLE. I am not critical of it.

Mr. WILLKIE. I know, but I want to say this, which was specifically provided for in the act regulating holding companies.

Mr. BIDDLE. The fact is that the Delaware corporation owns the stock of the operating companies?

Mr. WILLKIE. That is correct.

Mr. BIDDLE. And the operating companies own the stock of the New York corporation?

Mr. WILLKIE. That is correct.

Mr. BIDDLE. How much common stock has Commonwealth and Southern?

Mr. WILLKIE. You mean the number of shares or the stated value? Mr. BIDDLE. I am speaking now only of the Delaware or holding

company.

Mr. WILLKIE. It has a stated value of $165,000,000 of common stock, as I recall, approximately.

Mr. BIDDLE. How many shares?

Mr. WILLKIE. Thirty-three million shares.

Mr. BIDDLE. What is the largest stockholder of the Commonwealth and Southern?

Mr. WILLKIE. I would say the American Super Power Corporation. Mr. BIDDLE. And what percentage of its stock does that company hold?

Mr. WILLKIE. Nine percent plus.

Mr. BIDDLE. Who owns that corporation?

Mr. WILLKIE. I should think that corporation is owned by some fifty or seventy-five or one hundred thousand people.

Mr. BIDDLE. Its stock is very generally scattered?

Mr. WILLKIE. I think fairly widely held. I have never looked over their corporate books.

Mr. BIDDLE. What is the next largest stockholder of the Commonwealth and Southern?

Mr. WILLKIE. I should think the United Corporation.

Mr. BIDDLE. Who owns United Corporation-owns the majority of its stock?

Mr. WILLKIE. Oh, I would say, I don't know, fifty or sixty or seventy-five, maybe a hundred, thousand.

Mr. BIDDLE. They own the majority of its stock?

Mr. WILLKIE. I would say that is true. I would say nobody has a very substantial holding.

Mr. BIDDLE. Does the Commonwealth and Southern, and I am always referring to the Delaware corporation unless otherwise indicated, have preferred stock as well?

Mr. WILLKIE. Yes.

Mr. BIDDLE. How much?

Mr. WILLKIE. $150,000,000.

Mr. BIDDLE. Is that par value?

Mr. WILLKIE. That is par value.
Mr. BIDDLE. Hundred dollars?

Mr. WILLKIE. $100.

Mr. BIDDLE. That is pretty generally scattered, is it not?

Mr. WILLKIE. Yes, and I am guessing now, I would say 25,000 or

30,000 people.

Mr. BIDDLE. C. & S. has no bonds, has it?

Mr. WILLKIE. Debentures.

Mr. BIDDLE. How many debentures does it have?

Mr. WILLKIE. Approximately now $50,000,000.

Mr. BIDDLE. $50,000,000?

Mr. WILLKIE. Yes.

Mr. BIDDLE. Is that now a description of the capital structure of C. & S.?

Mr. WILLKIE. It is.

Mr. BIDDLE. Now, C. & the Tennessee Valley area.

S. owns certain operating companies in
Will you briefly state what they are?

Mr. WILLKIE. The Commonwealth and Southern Corporation owns 99% percent plus of the common stock of the Tennessee Electric Power Co. It is likewise the largest bondholder of the Tennessee Electric Power Co., owning as I now recall approximately $7,000,000 of the bonds.

Mr. BIDDLE. Out of how many bonds?

Mr. WILLKIE. Out of about $49,000,000, as I recall.

Mr. BIDDLE. Does it also own preferred stock of the Tennessee Electric Power Co.?

Mr. WILLKIE. It owns about three quarters of a million dollars of the preferred stock.

Mr. BIDDLE. Out of how much preferred stock?

Mr. WILLKIE. About $24,000,000, as I recall.

Mr. BIDDLE. Does it own any common stock of the T. E. P. Co.? Mr. WILLKIE. It owns all of the common stock except approximately half of 1 percent.

Mr. BIDDLE. So much for the T. E. P. Co. What is the next operating company.

Mr. WILLKIE. The Alabama Power Co. The Commonwealth and Southern Corporation owns all of the common stock of the Alabama Power Co., and just let me refer to this memorandum as to the exact amount of their holdings.

We own 340 shares of the 5 percent preferred stock, 5,281 shares of the 6 percent preferred stock, and 5,680 shares of the 7 percent preferred stock.

Mr. BIDDLE. Does it own any bonds of the Alabama Power Co.?
Mr. WILLKIE. It does not.

Mr. BIDDLE. Are there any bonds of the Alabama Power Co.?
Mr. WILLKIE. Oh, yes, about $100,000,000, as I recall.

Mr. BIDDLE. C. & S. owns none?

Mr. WILLKIE. C. & S. owns none.

Mr. BIDDLE. All right. Now, that is the second operating company in the valley. What is the third operating company?

Mr. WILLKIE. I assume you would count Mississippi in the valley? Mr. BIDDLE. Well, yes.

Mr. WILLKIE. We own all of the common stock of the Mississippi Power Co. and 474 shares of the 6 percent preferred stock and 264 shares of the 7 percent preferred stock and $3,129,500 of the bondswe own $3,129,585 of the bonds.

Mr. BIDDLE. Out of how many bonds?

Mr. WILLKIE. My recollection is $12,000,000, is that not correct? The figure is $10,700,000.

Mr. BIDDLE. What is the fourth operating company in the Valley? Mr. WILLKIE. I don't know what you would just count "in the Valley." Do you count Georgia in the Valley?

Mr. BIDDLE. We are considering your relations throughout the T. V. A. area, and I was thinking more of those companies which had had relations with the T. V. A., your operating companies.

Mr. WILLKIE. Georgia has had very slight relations with it. It is just a question as to whether you want the information as to Georgia. Mr. BIDDLE. We might as well have it. That is the Georgia Power Co.

Mr. WILLKIE. That is the Georgia Power Co. We own all of the common stock of the Georgia Power Co., something around