(The following statement was subsequently filed for the record:) FINANCIAL OPERATIONS OF MISSISSIPPI SHIPPING CO., INC. UNDER OPERATING DIFFERENTIAL SUBSIDY CONTRACT 1938 TO 1943, INCLUSIVE EXPLANATORY NOTES TO ATTACHED GRAPH -)" -)." It will be noted that Attention is invited to comparison of the "Annual net earnings with "Annual deposits in reserve funds (-.from year to year the reserves absorbed substantially all, and in some years, more than the net earnings from operation. This is due to the legal requirement that depreciation be deposited in the reserves in addition to contributions from net earnings. It should dispel any suspicion that this contractor has been dissipating its earnings to the detriment of its reserves for fulfilling its contract to replace the fleet. Attention is particularly invited to the "Cumulative deposits in Reserve Funds (.... .)." From the commencement of the contract to the end of 1942, these reserves amounted to approximately $9,500,000.00 and at the same date the "Cumulative withdrawals ( )" amounted to approximately $4,000,000.00. These two lines have been projected through 1943 to correspond to our estimated obligations for deposits and withdrawals during the current year. We wish to emphasize the fact that the reserves here graphically pictured do not include the Government's portion subject to recapture at the end of the 10year period. This recapturable amount, namely $1,728,337.00 (the total amount paid us in operating differential subsidy during the contract period), is deposited in a separate trust fund subject to withdrawal only on the orders of the Maritime Commission. The solid black line (represents the obligations entered into by this company with the Maritime Commission for the replacement of the old "Hog Island" fleet (now over 20 years old), with which the contract was commenced. It will be noted that at the end of 1940 this obligation amounted to slightly in excess of $10,000,000.00. This covered six 161⁄2-knot combination freight and passenger ships with which, when in commission, we obligated ourselves to make 52 round voyages annually between Gulf ports and ports on the east coast of South America from the Amazon in Brazil to the River Plate in Argentina. In 1941 the Maritime Commission requisitioned title and possession of two of the three new ships then in operation and the three then under construction. For these, they paid us actual cost less depreciation. At the end of 1941, except for the retention of one of the new ships (the Delbrasil), our replacement program had to be started all over again. In 1942, we contracted with the Maritime Commission for six C-2 freight ships bringing our obligation, at the end of that year to $9,000,000. In 1943 we have estimated the obligation to include three combination freight and passenger ships such as were previously built for us by the Maritime Commission, involving a total obligation for new tonnage to carry out our contract for 52 round voyages per year, approximating $17,500,000. It is doubtful if any of these ships can be built in 1943 but they will be required in order to equip the line to carry out the operating contract. Particular attention is called to the fact that the replacement program entered into in 1939 amounted to slightly in excess of $10,000,000 while the required replacement program, in 1943, will cost in excess of $17,000,000. The C-2 freight ship delivered us this week at San Francisco cost $1,750,000substantially what we paid for the Delbrasil, a fine freight and passenger ship, in 1939. The replacement of three of these combination ships in 1943 will cost not less than $2,750,000 each. GENERAL REMARKS In the face of this program, anything which involves the integrity of our reserves or the provisions of the Merchant Marine Act of 1936 for tax deferment on these reserves, threatens our whole replacement program. The greatly increased cost of ships; the prospect of new and intense competition in the post-war period; the uncertainty as to what Congress will do after the war with the enormous emergency tonnage under construction, are in themselves considerations calling for careful appraisal by this company in incurring these large obligations. In the face of all this, the possibility that the statutory provisions under which these obligations have been entered into may be revised to the contractor's detriment constitutes an added handicap which warrants any conservative operator in considering seriously whether he can successfully carry out existing obligations. The natural tendency is to postpone any extension of these obligations until the Congress has determined what disposition it will make of H. R. 134. NEW ORLEANS, LA., March 20, 1943. The CHAIRMAN. All right; is there anyone else who wants to be heard except the representative of the Treasury Department? I want to announce to the committee, and notices will be sent out, but in order that they may know now, I will state that on Monday next, at 10 o'clock, I am going to hold hearings on a bill that I introduced the day before yesterday, at the suggestion of Mr. Welch, of California, who is very much interested in it. We have no politics in this committee, and I asked him to introduce it, but he seemed to prefer that I introduce it. It has been prepared by Mr. Radner, of the War Shipping Administration, and it deals with certain conditions growing out of orders issued for changing the routes in the Pacific immediately after Pearl Harbor. It seems to have very much merit in it. A later date will be fixed for further hearings on the bill, but there are three gentlemen here from California, and they could be present on Monday to testify. With the transportation conditions as they are I desired to accord them every opportunity to appear. So we will take up those hearings on Monday at 10 o'clock. It is House Joint Resolution No. 92. Mr. Kirby. STATEMENT OF VANCE N. KIRBY, ATTORNEY FOR THE TAX LEGISLATIVE COUNSEL, TREASURY DEPARTMENT Mr. KIRBY. I would first like to express the apologies of Mr. Paul and Mr. Surrey for not being able to attend these hearings. As you know, they are pretty well tied up with the Ways and Means Committee at this time. I have just a short statement on behalf of the Treasury. The bill before the committee is the same as H. R. 7105, which was reported out of this committee last December. This bill would amend title VI of the Merchant Marine Act of 1936, which provides for subsidies to operators of vessels who comply with certain definite. requirements of the act. I shall limit my remarks to the tax provisions of the bill, in view of the fact that only these provisions fall within the province of the Treasury Department. The principal tax features of this amendment are three in number: 1. The suspension of the tax exemption of earnings deposited in the reserve funds after December 31, 1941, for the duration of the war. 2. The tax exemption of all capital gains. Under the present law the Treasury Department maintains that capital gains deposited in the funds are taxable; the subsidized operators dispute this. The most that can be said on this point is that the present statute is ambiguous. 3. The reduction in the tax basis of vessels purchased or constructed after December 31, 1941, to the extent that the expenditures consist of untaxed net income-including capital gains. The reduction is similar to that provided under section 511, relating to construction. reserves. 4. The clarification of certain sections of the present law to remove ambiguity and provide for greater certainty and ease in administration of the act. The Treasury was in agreement with the present version of this bill at the time it was reported out by this committee as H. R. 7105. However, it has been pointed out by the operators that they would not have entered into these subsidy agreements, and assumed the obligations imposed upon them by the act, if the tax-exemption feature with regard to earnings deposited in the reserve funds had been coupled with a corresponding reduction in the basis of vessels purchased with such earnings; they further state that such reduction of basis would be contrary to the spirit and purpose of the tax exemption accorded to such earnings under the present law. In view of these observations, the committee may come to the conclusion that the present tax exemption as to earnings should be continued without any reduction in basis. However, the Treasury believes that with respect to capital gains previously or subsequently deposited such reduction in basis should be retained in the present bill. These gains are not now exempt from tax under the present law, and the bill in effect gives a new exemption in this regard. Furthermore, section 511 of title V of the act, which is the most analogous provision, provides for such a reduction in basis. As to the tax exemption itself, the Treasury has cosistently taken the position that tax exemptions should be entirely removed from the law; they are in effect hidden subsidies, the value of which varies in direct proportion to the increase or decrease in the current tax rates. Furthermore, those persons who may need the subsidies most, those who have operating losses or very small earnings, receive little or no help; whereas those with large earnings receive large subsidies. However, the committee may feel it advisable to postpone until after the war the consideration of the tax-exemption problem as applied to post-war years. As suggested by Admiral Land at the hearings yesterday, the entire problem as to the permanent policy of the Government with regard to our merchant marine in post-war years may best be taken up and fully considered at that time. Therefore, the Treasury will not pursue this matter further until after the war. The Treasury staff would be glad to assist the committee in any way that it can in the drafting and revision of the tax provisions of this bill along the lines which the Committee deems advisable. Mr. PETERSON (presiding). Thank you very much. Do you have anything to add to that? Mr. KIRBY. No. Mr. PETERSON. Are there any questions? Thank you. Mr. Haddock. While we are waiting for Mr. Haddock, do you have anything to add to your testimony, Judge? Judge BURNS. No; I am going to submit a brief; thank you. Mr. PETERSON. Our friend from the Treasury Department did not make as long a statement as some of the others did, so we got through with him sooner than we expected. Mr. Haddock. STATEMENT OF HOYT S. HADDOCK, LEGISLATIVE REPRESENTATIVE OF THE CONGRESS OF INDUSTRIAL ORGANIZATIONS MARITIME COMMITTEE, WASHINGTON, D. C. Mr. HADDOCK. Mr. Chairman, my statement will be even shorter. My name is Hoyt S. Haddock. I represent the C. I. O. maritime committee. Our position is the same on this bill during this session of Congress as it was during the last session, Mr. Chairman. We are interested in seeing Congress do everything possible to make it possible to continue the construction of ships for our merchant marine after this war is over. Now, the only concern we have in any profits which may accrue to the steamship companies is to see if they are not put pack into building ships, which would otherwise require that the moneys come out of the Treasury; if that is not done, then they certainly should be taxed, and taxed to the limit, and that is our only concern in the situation; to see that the ship construction is continued, and that the profits of the companies are used for that purpose instead of them dipping into the Treasury to get subsidies where they are making other profits. Mr. PETERSON. Are there any questions? I will refer to your testimony which you gave before, which gives your views more in detail. Mr. HADDOCK. That is correct. Mr. PETERSON. Is there anyone else here who wishes to make a further statement or to amplify any statement they may have previously made? If not, we will stand in recess pursuant to the call of the Chair. Thank you very much. (Thereupon, at 10:55 a. m., the committee adjourned, subject to call of the Chair.) (The following briefs were presented for the record:) BRIEFS BRIEF OF UNITED STATES LINES Co., NEW YORK CITY Re H. R. 134. The Honorable SCHUYLER OTIS BLAND, MARCH 19, 1940. Chairman, Committee on the Merchant Marine and Fisheries, House of Representatives, Washington, D. C. DEAR JUDGE BLAND: The bulwark of the American merchant marine is the Merchant Marine Act, 1936, as amended. Because of this act the Maritime Commission was able to get a head start for its war shipbuilding program. Without it our shipbuilding would have had to start from scratch like a great many of the war industries. The regret is not that the Government has given the aid of subsidies and tax exemptions since 1936. The pity is that the act was not enacted years earlier, so that even greater progress toward the creation of a merchant marine could have been made by the time war came upon us. The backbone of the Merchant Marine Act, 1936, is the capital and special reserve funds of the shipowner. These funds accomplish two purposes: First, certain moneys must be placed in the capital reserve fund for the replacement of ships that are lost or worn out. And, second, by impounding all profits over 10 percent in the special reserve fund the making and dissipation of excess profits in any year are prevented and profits of good and lean years are averaged so that |