in the law with a retroactive effect in favor of one who either by design or through fortuitous circumstances did not so plan his operations.

The bonded-period provisions as contained in H. R. 12298 would have a retroactive effect in that they would be applied to whisky produced as much as 8 years ago, at a time when no distiller planned, or could with good business judgment have planned, his marketing operations for a date 8 years in the future on any basis other than the law as it then existed.

We again urge you gentlemen to provide protection, for the industry as a whole, from the very real danger of any one company turning a temporary emergency situation into an immediate and tremendous marketing advantage over the rest of the industry. To that end, we urge (1) that as to existing stocks on hand, legislation be adopted to provide alternate relief whereby whisky can be either retained in bond beyond 8 years, but calling for a gage of the whisky at the end of 8 years, and the payment of tax at the time of withdrawal on the quantity remaining at 8 years or allowing that whisky to be mingled with younger whiskies with the provision that the entire mingled product will take the age of the younger whisky for force-out and labeling purposes, and (2) that as to future stocks only, the principle of unlimited bonding be adopted.

This type of settlement of this issue we believe to be practical and eminently fair.

The second item, which I will mention only briefly, relates to the conditions under which the loss allowance provisions of H. R. 12298 would be made available to us. Section 5008 (c) (4) of the bill makes allowance of refund or credit of tax in respect of bottling, rectification, and transportation losses dependent upon the institution by the Secretary of the Treasury of a return system for the payment of distilled spirits excise taxes. The only discernible reason for such a provision is to defer the time when such allowances will be made available by making them, like the return payment system, dependent upon administrative discretion.

It has long been recognized that it is highly inequitable to require a bottler of distilled spirits to pay the high Federal tax on spirits which are lost in normal manufacturing operations and thus not available for packaging for sale to the consumer. In view of the comparatively small amount of revenue involved, there seems no justification for writing into the law an authorization for the refund or credit of tax as to these losses and then taking it away, in effect, by tying such authorization into a wholly unrelated provision dependent upon administrative discretion for implementation.

You will recall that the Secretary of the Treasury was authorized, as of January 1, 1955, to institute a return system for the payment of distilled spirits excise taxes. The Secretary still has not exercised his discretion in this rgeard, almost 2 years after the return payment system was written into the law. We do not want to find ourselves in a similar situation with respect to the allowance of refund or credit of tax as to our processing and transportation losses.

We feel that these loss allowances are entirely fair and equitable, that we should not be burdened with the excessively high tax on spirits which never enter trade channels, and that we are entitled to refund

or credit of such tax effective at the same time the other provisions of chapter 51 as amended by H. R. 12298 are effective.

Since this bill recognizes the inequity of the present law with respect to these losses, we believe the bill should definitely provide for the refund or credit of tax, and not leave to the discretion of the Secretary of the Treasury the determination whether the industry will be relieved of the recognized inequities.

We, therefore, urge that section 5008 (c) (4) of the bill be stricken. This concludes my prepared statement. I should again like to express my appreciation for the opportunity to appear and discuss these problems, and for the patience with which you gentlemen have labored with them, and again I urge the speedy passage of the important revision program submitted by the Government and contained in H. R. 12298, with the exceptions I have just discussed.

Mr. FORAND. We thank you, Mr. Street, for your contribution. Are there any questions?

Mr. MASON. I want to say, Mr. Street, as one member of this group that is seriously interested in this proposition, that I am very glad that you gave us those two special paragraphs because they do, in my opinion, throw additional light upon this problem that we have been struggling with so long.

Mr. STREET. Mr. Mason, this is the fourth proposal which the institute has made with respect to the settlement of this problem in a desperate effort to obtain some sort of a settlement.

The only thing that we now ask is that Mr. Eberharter's bill not be made retroactive, in effect, so that some unconscionable advantages will be obtained by a few companies with respect to aged whiskies. Mr. KEOGH. And, Mr. Street, is that not more important in view of the fact that the present inventory situation of all of the companies in the industry resulted in the face of a full and clear knowledge of what existing law was at the time it was done?

Mr. STREET. It certainly is, Mr. Keogh. I would like to point out that in my statement there is a concrete demonstration of the inequities which would result. Schenley, which is the principal sponsor of unlimited bonding to be made retroactive in effect, has about 24 percent of the total whisky inventory in Kentucky.

On the other hand, it has more than 38 percent of whiskies over 6 years of age. You would contrast that with the position of my own company. We have about 7 percent of the total whisky holdings in Kentucky, but we have less than 212 percent of whiskies over 6 years of age.

So that this bill, if it is passed in its present form, would result in some serious inequities and distortions within our own industry.

Mr. KEOGH. Now, Mr. Chairman, in order that the record may be complete, I would like to read a brief excerpt from a release of the Honorable Aime J. Forand, chairman, Subcommittee on Excise Tax, Technical and Administrative

Mr. FORAND. Does that have to do with Mr. Street?

Mr. KEOGH. I do not know that any decision on that should be made until I read it.

Mr. FORAND. I think we can excuse Mr. Street.

Mr. KEOGH. It is dated July 18, on the introduction of the bill, H. R. 12298. [Reading:]

Nevertheless, I believe that an important function will be served by the introduction of this bill at this time. It is my hope that all taxpayers and taxpayer groups who are affected by the operation and effect of the Federal excise tax system will devote their full attention to the bill from the point of view of determining its technical adequacies and substantive sufficiency in carrying out the recommendations of the subcommittee and the Committee on Ways and Means.

It is also my hope that interested groups and persons will immediately begin to prepare overall studies of the excise-tax field as it affects them.

Mr. FORAND. That does not change the picture one iota. That is definitely what we asked for and I told Mr. Street that he was entiteld to present his views but I also wanted to be fair with him and tell him what the concensus of opinion of the committee had developed in the meantime.

Mr. KEOGH. I am not intending by reading that excerpt from your release, Mr. Chairman, to change any picture. I am simply making a

statement.

Mr. FORAND. The next witness is Mr. Harry L. Lourie.

Is Mr. Lourie here?

STATEMENT OF HARRY L. LOURIE, EXECUTIVE VICE PRESIDENT OF THE NATIONAL ASSOCIATION OF ALCOHOLIC BEVERAGE IMPORTERS, INC., WASHINGTON, D. C.

Mr. LOURIE. My name is Harry L. Lourie. I am executive vice president of the National Association of Alcoholic Beverage Importers, Inc., 700 National Press Building, Washington, D. C.

This association is a trade association whose members are responsible for importing into the United States between 80 and 85 percent of distilled spirits and wines so imported.

This association is unanimous in its support of the testimony of Mr. R. E. Joyce, spokesman for the Tax Council of the Alcoholic Beverage Industry, who, in addressing his testmiony to section 5001 (a) (1) of the Internal Revenue Code of 1954, asks for a reduction in the excise taxes on distilled spirits from $10.50 to $9 per gallon, wihch is merely a removal of a special wartime rate which Congress has provided shall be removed on April 1, 1957.

This association is unanimous in its support of the testimony to be offered in behalf of the Wine Conference of American in the request that the excise taxes on champagne and sparkling wines under section 5041 (b) (4) of the Internal Revenue Code of 1954, be reduced from $3.40 per wine gallon to $1 per wine gallon.

In addition, this association wishes to present to this committee a problem which is peculiar to the business of the importation of distilled spirits. This problem is created for the importers by reason of a phrase which appears in section 5001 (a) (1) of the Internal Revenue Code of 1954. This section is as follows:

There is hereby imposed on all distilled spirits in bond or produced in or imported into the United States an internal revenue tax at the rate of $10.50 on each proof gallon or wine gallon when below proof and a proportionate tax at a like rate on all fractional parts of such proof or wine gallon. On and after April 1, 1955, the rate of tax imposed by this paragraph shall be $9 in lieu of $10.50.

The language "or wine gallon when below proof," appearing in the first sentence of this section is the provision which creates a special

problem to this industry. This clause was first inserted into the internal revenue laws by the act of July 20, 1868 (ch. 186, sec. 1, volume 15 Stat. page 125). It was a technical provision which was inserted by Congress in order to prevent frauds which were being perpetrated upon the revenue of the United States Government. Prior to 1868, an investigation of the Committee on Retrenchment in the 2d session of the 40th Congress disclosed that domestic distillers had been defrauding the Government of taxes by entering warehouses where whisky was stored, withdrawing the whisky surreptitiously and substituting water.

The whisky which was thus surreptitiously withdrawn escaped the payment of taxes; the substitution of water in the barrels replaced the volume thus lost and made detection of the fraud less apparent, and, of course, reduced the proof of the whisky. The whisky remaining in the barrels was in most cases, therefore, below proof. Congress, in order to discourage this fraudulent practice, enacted the technical provision to which we have referred and thus made the whisky which was below proof subject to the same tax as if it were at proof.

This clause has remained in the internal revenue laws ever since 1868. It is no longer necessary for the protection of the revenue because the Internal Revenue Service has perfected a system of warehousing and supervision which makes it impossible for whisky to be withdrawn surreptitiously and water to be substituted. The internal revenue bonded warehouses are closely guarded; they are kept under lock and key by internal revenue agents, and no one may enter except under the supervision of such agent. In addition, very large surety bonds are required of all producers which will indemnify the Federal Government against all losses of taxes.

It is the practice of domestic distillers to withdraw whisky from bonded warehouses at proof or above and to reduce the proof subsequent to taxpayment. Therefore, so far as the domestic industry is concerned, the provision that the internal revenue tax should be paid on the wine gallon when below proof is entirely superfluous. The records of the Alcohol and Tobacco Tax Division, of the Internal Revenue Service, will confirm this.

This provision does, however, affect virtually all imported distilled spirits. The great majority of imported distilled spirits.are imported in bottles and at less than 100 proof. Consequently, due to this provision in the code, the full rate of internal revenue tax is paid on imported distilled spirits on the wine-gallon basis.

At the time that this provision was inserted in the internal revenue laws in 1868 and up until 1917, no internal revenue tax was collected on imported spirits. The only taxes which were collected on imported distilled spirits were customs duties. In 1917, under the War Revenue Act of 1917 (ch. 63, sec. 300, 40 Stat. 308), internal revenue taxes were added to the duties which were collected on imported spirits. Since that date imported distilled spirits have been subject to both customs duties and internal revenue taxes. Thus, imported distilled spirits were made subject to a technical provision in the internal revenue laws which was designed to prevent fraud by the domestic distilling industry, the necessity for which no longer exists.

At the present rate of tax of $10.50 per gallon, domestic distillers withdraw their spirits, pay $10.50 per proof gallon and then reduce the proof by the addition of water. For example, the popular brands of

whisky in the United States are usually bottled at 86 proof. The amount of tax actually collected on these whiskies by the United States Government is, therefore, 86 percent of $10.50 or $9.03. Most distilled spirits which are bottled prior to importation are 86 proof. Consequently, under this technical provision, the tax on such spirits is collected on the wine-gallon basis at the rate of $10.50 on each gallon. Therefore, it can be seen by this comparison that the actual amount of money collected by the United States Government on 86-proof domestic whisky is $9.03, whereas on imported whiskies at 86 proof, it is $10.50.

We do not contend that the language of this section of the Internal Revenue Code is a de jure discrimination against imported distilled spirits. It is not, because under the language of this section, it applies to both imported and domestic distilled spirits alike. However, it operates as a de facto discrimination against imported distilled spirits, which, as we have illustrated in the paragraph above, pay a greater internal revenue tax per gallon when imported at below 100 proof than do domestic distilled spirits which are bottled at a proof identical with the imported spirits. Our appeal, therefore, is based on equitable grounds to correct this de facto discrimination against imported distilled spirits. It is based on a policy which has been carefully established and followed by Congress to avoid scrupulously discrimination in internal revenue taxes.

This policy of Congress in seeking to avoid discrimination in internal revenue taxes was recognized by the court in San Juan Trading Co. v. Sancho (114 F. 2d 969, cert. den. 312 U. S. 702), wherein the court held that the internal revenue law of 1938 passed by the Legislature of Puerto Rico was a de facto discrimination, although there was no discrimination in the language thereof. The law was held invalid. We do not suggest that the Congress of the United States. may not enact a discriminatory internal revenue law. We simply emphasize that it has not been its policy to do so.

Whenever Congress has intended to subject imported commodities to greater taxes than domestic commodities, it has always done so through the enactment of customs duties. Customs duties now in effect on imported distilled spirits are as follows: On brandy, cordials, and liqueurs, $1.25 per gallon; on Irish and Scotch whisky, $1.42 per gallon; on Canadian and other whisky, $1.25 per gallon; on rum, $1.75 per gallon; on gin and other distilled spirits, $1.25 per gallon. Imported distilled spirits comprise no more than 11 to 12 percent of consumption of all distilled spirits in the United States. This is obviously no threat to the existence of the domestic distilled-spirits industry. Imported distilled spirits could never be a threat to the domestic distilled-spirits industry with the rates of customs duties which are now in effect. The largest imports of distilled spirits in the United States are Scotch whisky and Canadian whisky. The rate of duty on Scotch at the present time is $1.42 per gallon, and on Canadian whisky, $1.25 per gallon. In the testimony before the Committee on Ways and Means, on H. R. 1215, introduced by Congressman Saylor in the 1st session of the 83d Congress, the spokesman for a large group of American distillers stated that the cost of production and the carrying charges on bulk whiskies which would become 8 years old during 1953 and 1954 and which are the most valuable that have been