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$30,000,000 of the bonds, and I will have to take a look at this slip so that I don't make an error as to some minor 'detail.

Mr. BIDDLE. Does that complete the operating companies in this region?

Mr. WILLKIE. I should think so.

Mr. BIDDLE. I should think so too. By the way, Mr. Willkie, in coming before us, do you represent your security holders or represent the Commonwealth and Southern?

Mr. WILLKIE. Well, of course, I am here testifying as president of the Commonwealth and Southern Corporation. I assume that is the way I was asked to come.

Mr. BIDDLE. I would assume so too. In the negotiations that we are going to refer to presently, were you representing the security holders or the Commonwealth and Southern?

Mr. WILLKIE. Of course I don't know how to differentiate between that. As president of the Commonwealth and Southern Corporation I am trustee for all of its security holders.

Mr. BIDDLE. Are you trustee for the holders of the bonds of your operating companies?

Mr. WILLKIE. Certainly, and trustee for any property with which we have anything to do. And being in all these cases owners of substantial amounts of securities in addition to the natural corporate practice of officers owing an obligation to all security holders, I would say we were trustee for all of them.

Mr. BIDDLE. And represented them in your negotiations with the Tennessee Valley Authority, I don't mean legally, but their interests? Mr. WILLKIE. Yes. That varied some as to various points. we go along, I can point that out to you very clearly.

As

As to the Georgia Power Co. we own all of the common stock, we own 45,428 shares and a fraction of the 5 percent preferred stock, 7,856 shares of the 6 percent preferred stock, and $34,231,000 of the bonds. COMMONWEALTH AND SOUTHERN CORPORATION'S OPERATIONS IN THE TENNESSEE VALLEY

Mr. BIDDLE. Will you state to the committee where these operating companies operate in the Valley, so that the picture will be clear? Take first the Tennessee Electric Power Co.

Mr. WILLKIE. The Tennessee Electric Power Co., generally speaking, operates through central and southern Tennessee. Its two principal cities are Chattanooga and Nashville. It operates in a large number of rather small towns. The next largest one of them is a town of about nine or ten thousand.

Mr. BIDDLE. And the Alabama Power Co.?

Mr. WILLKIE. The Alabama Power Co. practically operates throughout the State of Alabama with the exception of the city of Birmingham. That is in general. There are some exceptions here and there.

Mr. BIDDLE. And the others?

Mr. WILLKIE. The Georgia Power Co. operates practically throughout the State of Georgia, except in the city of Savannah in the southern part, and here and there some isolated place.

The Mississippi Power Co. operates in the eastern part of the State of Mississippi.

Mr. BIDDLE. So that portion of the territory of the three latter companies in the northern part of Georgia and Mississippi and Alabama would be the portion of the territory in which the competition with T. V. A. would directly affect it, I presume?

Mr. WILLKIE. Yes; the effects of the T. V. A. affect the entire territory.

Mr. BIDDLE. I understand that.

Mr. WILLKIE. If you are talking merely about the watershed, why the watershed just includes a part of the northern part of Mississippi and the northern part of Alabama, and a little corner of Georgia. But the effects of the thing are felt throughout the area, and for miles beyond.

DEPRECIATION POLICY

Mr. BIDDLE. I am going to refer just a moment to your theory of depreciation if I may. You say on page 5 of your statement, "A differentiation which is standard practice among American corporations and duly recognized by the United States Treasury Department." That differentiation of course is the differentiation between depreciation taken on income tax returns and depreciation, actual depreciation according to the books of the company.

Mr. WILLKIE. Yes.

Mr. BIDDLE. Does the United States Government and the Treasury Department, where there is a sale of the depreciated property-of course every property is depreciated-take into effect in considering any profit on the sale, the depreciation actually taken and allowed by the bureau?

Mr. WILLKIE. Why, yes; the United States Treasury Department, as I understand it, Mr. Biddle, without being too technical about it-if you get too technical with me I will be lost, and will ask for an expert, call on an expert to answer.

Mr. BIDDLE. So would I, Mr. Willkie.

Mr. WILLKIE. The United States Treasury Department establishes an ultimate depreciation that you can take, whether it is taken in 1 year or 10 years.

Mr. BIDDLE. That is right.

Mr. WILLKIE. And if you sell a property for a greater amount than the accumulated amount of that depreciation deducted from the price, then you pay an income tax on that as I understand it.

Mr. BIDDLE. A profit.

Mr. WILLKIE. A profit.

Mr. BIDDLE. A profit income tax.

Mr. WILLKIE. A profit income tax.

Mr. BIDDLE. So that certainly the United States Government does very definitely take into consideration the allowed depreciation in the income tax, in figuring sales of a company's property, does it not? Mr. WILLKIE. Yes, but by the same token when you reach that maximum, not you, I will say the Treasury Department, if you don't take that amount in any one year, even though at the end of the period you are entitled to that amount, you lose it.

Mr. BIDDLE. A loss would be substantially true.

Mr. WILLKIE. Yes.

Mr. BIDDLE. So that you would have a loss or profit depending on the depreciation you took on your income tax, wouldn't you? Mr. WILLKIE. Just like the sale of any property.

Mr. BIDDLE. Do you think when you are negotiating for the sale of your property to the United States Government, which has allowed certain specific depreciation, that it is unfair even to consider that depreciation in determining-wait until I finish the question-in

determining what is the fair value of property sold to the Government, who had allowed you that very depreciation.

Mr. WILLKIE. Now, Mr. Biddle, if you were sitting as a valuation committee to determine that question, that, like in many condemnation cases that you have tried, and that I used to try when I was at the bar, we always came in and showed the tax return to try to beat the fellow down on his price. It never had any real effect.

For instance, just to give you an illustration, I bought a farm out in Indiana recently for $102 an acre. It was on the tax books at $65. You might as well argue it was worth $65 instead of $102-or for instance when you bought this Agricultural Chemical property and paid $450,000.

Representative WOLVERTON. They paid more than that.

Mr. WILLKIE. $650,000.

Mr. BIDDLE. You ought to have your figures more accurate.

Mr. WILLKIE. I knew you would correct me if I were not accurate. Mr. BIDDLE. The profit was $450,000.

Let's come back to the question again. You think therefore that the depreciation taken in your income tax return and allowed by the Government should not even be considered in trying to reach the fair value of a property which was being sold to the Government?

Mr. WILLKIE. I don't think the sale to the Government has the slightest thing to do with it. The income tax is an arbitrary thing. Let me give you an illustration, Mr. Biddle. You are a lawyer. I have no doubt that your library has depreciated down to nothing. Most lawyers' libraries have because the tax department allows a very large depreciation. Now, if one of these departments of Government came along and sought to take your library for nothing, I think you still would argue that had nothing to do with the value.

Mr. BIDDLE. I take it the answer is "no," that the depreciation has absolutely nothing to do with the value of the property sold to the Government?

Mr. WILLKIE. The depreciation required under income tax is fixed entirely by reason of arbitrary rules and regulations and it has no relationship to the sales value of a property.

Mr. BIDDLE. Doesn't it have to be supported by engineering data showing that it has actually depreciated?

Mr. WILLKIE. Oh, yes, yes; for instance in the case of the Tennessee Electric Power Co., in order to illustrate the point to you, the Tennessee Electric Power Co. always filed its tax returns until 1928 just as it made its reports to the Tennessee commission.

In 1928 when it was consolidated or there was a consolidation of ownership groups it learned that these other companies got the benefit of a higher depreciation charge. It also learned that that was the universal practice, and so it changed the method of filing its returns, and then it filed an application for a refund.

Now, understand none of this depreciation on tax returns that you are talking about has the Tennessee Electric Power Co. ever gotten. The Federal Government has never allowed it. It is wholly unallowed. Mr. BIDDLE. The Federal Government has allowed you some depreciation?

Mr. WILLKIE. Yes.

Mr. BIDDLE. On your income-tax return?

Mr. WILLKIE. Yes; but this excess amount is in dispute. We never got it.

Mr. BIDDLE. You mean it has allowed some and has not allowed the other?

Mr. WILLKIE. It has not allowed the differential you are talking about.

Mr. BIDDLE. I am not talking about any differential.

Mr. WILLKIE. I am talking about the differential between the retirement reserve account, which is the only part which is recouped by the investor, between that and the arbitrary amount claimed, but has never been allowed by the Treasury Department.

Mr. BIDDLE. I take it you would say your depreciation allowance in your income-tax returns had nothing to do with actual or real depreciation, would you?

Mr. WILLKIE. I would say what actually happens

Mr. BIDDLE. Just answer that first, has it anything to do with actual depreciation?

Mr. WILLKIE. It hasn't anything to do with depreciation except this, that you, as every other taxpayer does, you try to claim the maximum amount that you are permitted to claim under the incometax law in order to save all of the taxes you can. What you are talking with me about is whether or not we paid enough tax, you are not talking about the value of the property.

Mr. BIDDLE. I am not talking about that.
Mr. WILLKIE. That is the sole question.

Mr. BIDDLE. No; not at all.

Mr. WILLKIE. That is the purport.

Mr. BIDDLE. No; not a bit. What is your maintenance and reserve account, is that your depreciation account on your books? Mr. WILLKIE. Yes. We maintain a retirement, what is known as a retirement reserve account. We make an annual charge for retirement. Then there is a fund accumulated. We do that in exact accordance with the exact requirements of the State commissions, and that is included in the expenses, and such retirement reserve is the only part that the investor recovers.

Mr. BIDDLE. What is the size of your retirement reserve account? Mr. WILLKIE. As applicable to the electric property of the Tennessee Power Co.?

Mr. BIDDLE. I am talking about the Tennessee Electric Power Co. Mr. WILLKIE. It is about $4,000,000.

Mr. BIDDLE. It is about $4,000,000.

Mr. WILLKIE. That is by specific order of the Tennessee commission. Mr. BIDDLE. Do you keep any other depreciation reserve on your books except that maintenance and reserve account?

Mr. WILLKIE. None; except in connection with the tax return.
Mr. BIDDLE. That is the only account that reflects depreciation?
Mr. WILLKIE. Yes; that is the retirement reserve.

Mr. BIDDLE. Is it the only account that reflects depreciation?
Mr. WILLKIE. Yes.

Representative WOLVERTON. May I make an inquiry there to clear my mind, so that I can better understand the purport of these answers?

Is there a difference between the depreciation claimed in your income-tax return and what you have now termed the reserve account? Mr. WILLKIE. Yes; we have claimed depreciation up to the full maximum of the rule allowed by the Treasury Department as to all

other companies, because if we don't get that, then we pay a disproportionate amount of tax in comparison with other people.

Representative WOLVERTON. Is it necessary to inform the Treasury Department of the difference that exists between those two?

Mr. WILLKIE. Oh, they know all about it. As a matter of fact, on their schedules they specially provide here are the income tax returns, incidentally, I brought all of them along they specifically provide for a reconciliation of those two things. It is so recognized by them.

Representative WOLVERTON. Am I to take from that that the Treasury Department recognizes a difference between depreciation for tax purposes, income-tax purposes and depreciation we will say from a stockholder's standpoint?

Mr. WILLKIE. I cannot conceive how, otherwise they provide right on their returns that we file with them for a reconciliation of the two figures.

Mr. BIDDLE. There is no question about that.

Mr. WILLKIE. And we fully disclose to them both figures, as every other company in the United States does.

Mr. BIDDLE. There is no question about that, I think.

Representative WOLVERTON. So then the Treasury Department is in full possession of all the facts?

Mr. WILLKIE. Completely.

Representative WOLVERTON. They supply the form on which you are to inform them?

Mr. WILLKIE. Completely; that sets out this specifically, and shows the difference.

Representative WOLVERTON. That takes away the thought that there might be any disposition to take advantage of the Government? Mr. WILLKIE. Exactly so. And in all the reports of these operating companies since I have been president of the Commonwealth and Southern, that differential is shown in the reports, so that everybody knows it.

Mr. BIDDLE. Now, let's go back to this maintenance fund. How many years has that accumulated over, since 1928, since your consolidation?

Mr. WILLKIE. Well, 1922, I would say on this particular fund. Mr. BIDDLE. You have accumulated then, did you say, approximately $5,000,000?

Mr. WILLKIE. About $4,000,000. Let me say this

Mr. BIDDLE. $4,000,000?

Mr. WILLKIE. Yes; so far as applicable to the electric property. The Tennessee commission provided by order the amount of annual retirement that we could charge, and also fixed the maximum amount that the property as a whole could charge up in its retirement reserve account. You understand when we charge too high a retirement reserve or depreciation you are merely soaking the rate payer.

Mr. BIDDLE. It is like any other State requirement, they all have different requirements with respect to depreciation.

Mr. WILLKIE. Yes; but you understand if you charge too high a depreciation or retirement

Mr. BIDDLE. Certainly.

Mr. WILLKIE. On your books, the rate payer pays the retirement fund.

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