TAXATION OF PREFERRED STOCK OF BANKS WHILE OWNED BY RECONSTRUCTION FINANCE CORPORATION FEBRUARY 12, 1936 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10:30 a. m., Hon. Alan Goldsborough (acting chairman) presiding. The committee had under consideration H. R. 11047, which is as follows: [H. R. 11047, 74th Cong., 2d sess.] A BILL Relating to taxation of shares of preferred stock, capital notes, and debentures of banks while owned by Reconstruction Finance Corporation and reaffirming their immunity Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 304 of the Act entitled "An Act to provide relief in the existing national emergency in banking, and for other purposes", approved March 9, 1933, as amended, be further amended by adding at the end thereof the following: "Notwithstanding any other provision of law or any privilege or consent of tax expressly or impliedly granted thereby, the shares of preferred stock of national banking associations, and the shares of preferred stock, capital notes, and debentures of State banks and trust companies, heretofore or hereafter acquired by Reconstruction Finance Corporation, and the dividends or interest derived therefrom by the Reconstruction Finance Corporation, shall not, so long as Reconstruction Finance Corporation shall continue to own the same, be subject to any taxation by the United States, by any Territory, dependency, or possession thereof, or the District of Columbia, or by any State, county, municipality, or local taxing authority, whether now, heretofore, or hereafter imposed, levied, or assessed, and whether for a past, present, or future taxing period." SEC. 2. If any provision, word, or phrase of this Act, or the application thereof to any condition or circumstance, is held invalid, the remainder of the Act, and the application of this Act to other conditions or circumstances, shall not be affected thereby. Mr. GOLDSBOROUGH. The committee will come to order. Gentlemen, you remember when the Reconstruction Finance Corporation Act was passed, and I think the purpose of the Congress was to exempt them from all sorts of taxation, directly or indirectly, and I think that the attorneys for the corporation felt that the act was sufficiently broad to cover the intent of Congress. The Supreme Court of Kentucky has agreed to it, but in a Maryland case, the State tax commission ruled that the State could tax the preferred stock of national banks owned by the Reconstruction Finance Corporation. That view was not concurred in by the Circuit Court of Baltimore County, but was concurred in by the Court of Appeals of Maryland, and finally by the Supreme Court of the United States. The bill before us undertakes to make it impossible for the States to tax the preferred stock of national banks, as long as that stock is owned by the Reconstruction Finance Corporation. As I under 1 stand, the issue is whether or not the Reconstruction Finance Corporation, organized as an emergency proposition, not a money-making proposition, owned and controlled by the Government, or all of the stock of which is owned by the Federal Government-in other words, by society should be an instrumentality whereby the States can obtain revenue. That, as I understand it, is the issue. Mr. Jones is here and also others, and we would like to hear from you, gentlemen. Mr. Jones, would you let us hear from you, please? STATEMENT OF JESSE H. JONES, CHAIRMAN, RECONSTRUCTION FINANCE CORPORATION Mr. JONES. Mr. Chairman, if I may, I will stand while discussing the subject with you. Mr. GOLDSBOROUGH. I might say that the Senate Committee on Banking and Currency has already favorably reported the bill. Mr. BROWN of Michigan. Just as written, Mr. Chairman? Mr. JONES. Gentlemen, as we interpret the Reconstruction Finance Corporation law, and as has been generally accepted, the preferred stock that we take in banks is not taxable, and there was a recent decision in Kentucky, and there have probably been other decisions in other States, likewise. The stock all belongs to the Federal Government. That is all we are interested in, because we are only asking that the stock be exempt, or be withdrawn from taxation, as long as it is owned by the Federal Government. Mr. GOLDSBOROUGH. All of the stock, all of the Reconstruction Finance Corporation stock, is owned by the Federal Government? Mr. JONES. Yes. Mr. GOLDSBOROUGH. Therefore, indirectly, the shares of stock which you own, the preferred shares of stock which you own, are owned by the Federal Government? Mr. JONES. That is right. Mr. SISSON. The Kentucky case was in the District Court of Kentucky, was it not? Mr. JONES. I think so; yes. Now, relying upon the law as written, because we thought the R. F. C. Act says that it is to be free from taxation, we made a very low rate, for 5 years, at 31⁄2 percent. It was started out at 6 percent, and a while after that we reduced it to 5, and reduced it to 4, and finally, in order to help recovery, we reduced it to 321⁄2 percent for 5 years. Mr. GOLDSBOROUGH. It has never been its purpose to make money, whatsoever? Mr. JONES. No; we do try to make enough on the peanuts to make up for what we lose on the bananas. Then, if we do that, we will be fortunate, of course, in handling so large an amount of money. Some localities, however, would tax this stock for more than 3%1⁄2 percent that we get. So we would get nothing whatever; and as Senator Adams said yesterday, in the Senate committee; we had gone into his county and saved his banks and we saved them in the interest of depositors and all of the people, and we have given them a 3%1⁄2 percent rate and the rate then was more than 5 percent. Some of them are taxing it, and I know that is true in localities, many localities, but there is no regularity about it, however. Some States do not tax national bank stock, at all. Mr. GOLDSBOROUGH. But in Maryland, where the rate would be 1.22 percent, you would still lose about Mr. JONES. We would lose money on it. Mr. GOLDSBOROUGH. 7.7 percent? Mr. JONES. Yes; the money supplied to us by the Treasury costs us 2% percent, so the tax is greater than the % of 1 percent spread. Mr. SISSON. It is not just the State tax that is levied on it, but all the political subdivisions? Mr. JONES. Yes; all the different districts and school districts and all the political subdivisions. Mr. SISSON. If the power to tax is the power to destroy, it might absolutely destroy the functions of the Corporation? Mr. JONES. We cannot require the banks to pay the tax because the banks, in practice, pay these taxes on their common capital stock for the stockholder, but this would be just that much more dividends that the stockholders would get. If a bank pays the tax on Government stock with limited dividends, he would simply render us a bill for it, and we will have to pay it; and if he pays it, he will simply take it out of the dividend checks. Mr. HOLLISTER. Of course, your ability to sell does not come into it, Mr. Jones, does it, because the tax exemption would be removed that way? Mr. JONES. Yes; but under this Supreme Court ruling, we cannot sell anyway, because people will not buy it. Mr. HOLLISTER. If this statute is enacted, and even then, if you sell to private individuals, some of this stock, it would be taxed? Mr. JONES. Yes. Mr. GOLDSBOROUGH. The proposed act specifically so states? Mr. HOLLISTER. And so the question of whether or not there would be a return to the private individual on purchasing does not come in; it is merely a question of what the Reconstruction Finance Corporation can do to protect its banks. Mr. BROWN of Michigan. What do you think, Mr. Jones, about line 9, on page 2, where you attempt to take away from a municipality the right, if it has heretofore exercised it, to assess this tax which has, in effect, been approved by the Supreme Court? that? Mr. JONES. Our counsel thinks that you can do it. Mr. CROSS. We can try. Can we do Mr. JONES. You withdraw the privilege, as I understand it. Mr. HOLLISTER. We do not want to try a lot of things that we have been unsuccessful in doing. Mr. SISSON. We provide how national banks shall be taxed, do we not? Mr. JONES. The States do that. Mr. SISSON. The States do that? Mr. BROWN of Michigan. If the right to assess exists, as it does, in some States, or in the State of Michigan, on the first Monday of April of 1935, and that tax is now collectible, it strikes me a little bit questionable whether we can or should disrupt the financial anticipations of municipalities by now taking away from them the right to collect the tax, which was legally assessable at the time it was assessed. It just strikes me that we are stepping off the end of the plank when we do that. I have no objection to your principle which is entirely right, but I just wondered if we were not disrupting things by using that word "heretofore." Mr. HOLLISTER. You are using it as to a retroactive exemption, as to the payment of a retroactive tax. Mr. BROWN of Michigan. It is a retroactive law. The latter part of section 1 is concerned, and it ought to be eliminated. Mr. SISSON. What is the amount of tax that has been paid heretofore? Mr. JONES. We have paid none because the law-nobody has assessed us heretofore. Mr. WILLIAMS. You say there have been no assessments? Mr. JONES. Up to now, up to this Supreme Court decision, as I understand it, no one has taxed this preferred stock. Am I right? Mr. WILLIAMS. There have been no assessments? Mr. JONES. No; so I understand. Mr. BROWN of Georgia. You say you have had none? Mr. JONES. We have had none up to now, except the one case in Maryland. Mr. WILLIAMS. They are going to collect that, anyway, are they not? Mr. JONES. We hope not. Mr. SISSON. Have there been any assessments? Mr. JONES. No assessments have been made. Mr. GOLDSBOROUGH. The budgets of those States would be disrupted? Mr. JONES. No; they would not. Mr. GOLDSBOROUGH. Because they actually had not tried, with the exception of Maryland, to make assessments? Mr. JONES. They have not included it in their revenues at all. We have gone into these communities and saved their banks for them and given them this low rate, assuming, as everybody else did, in view of this act created the Reconstruction Finance Corporation, that they would be exempt from taxation. Now, the Supreme Court came along and said that it is not exempt. Mr. GIFFORD. Now, Mr. Jones, this statement that you make, that you went into these communities to save their banks-as a matter of fact, you know that many places, many of the banks had preferred stock, and you saved the citizens, who are the ones who did do that. We saw a lot of corporations, including a large New York bank, that did not need to take any preferred stock, but they took it? Mr. JONES. Yes. Mr. GIFFORD. And some States say, "Well, why should this preferred stock be treated like an individual, because an individual would have paid it? It was taken for a cooperative idea, was it not?" Mr. JONES. May I reply to that? Mr. GIFFORD. I want you to. Mr. JONES. Out of 6,000 banks in which we have stock now, I think I could count on my fingers and toes the number that went in to cooperate. Mr. GIFFORD. Did that large New York bank take as high as $15,000,000? Mr. JONES. Yes; because they needed the capital, not to cooperate. Mr. GIFFORD. Now, they deny that they needed the capital? Mr. JONES. Perhaps so, but I could not go to the country and tell the truth about it. I had to talk about cooperation. I could not say that the banks are all borrowing because they needed it, because if I did that, you know what would happen. Mr. GIFFORD. If this bank has preferred stock, for instance, it is an admission on their part that they had better all join, even though they did not need to? Mr. JONES. They said that, but most of them, at that very time, needed capital, but they could not afford to admit it. They could not say, "We need this money, because our bank is in bad shape." Mr. GIFFORD. As a matter of fact, when a State taxes bank stock, does not the bank, itself, pay that bill? Mr. JONES. If a bank pays it for the account of its stockholders, it is not going to pay it for the account of the United States Govern ment. Mr. GIFFORD. If a bank pays it, in the first instance, for all of its stockholders, it is charged up against the usual expenses Mr. JONES. The usual expenses of the bank; yes. Mr. GIFFORD. And the dividends are afterwards paid to the stockholders? Mr. JONES. That is right. Mr. GIFFORD. It is quite beneficial to the bank, itself, if they cannot send the bill for the taxes on the preferred stock that you own—if the banks do not have to pay this tax, in the first instance? Mr. JONES. They do not have to pay it, at all. Mr. GIFFORD. I know; but if they were allowed to Mr. JONES. If you have got a bank and the Government has got a million dollars' worth of stock in your bank at 31⁄2 percent, and you have got another million dollars belonging to the stockholders, you pay them maybe 10 percent, maybe 8 percent or 7 percent or even 6 percent, but the Government only gets 31⁄2 percent. Mr. GIFFORD. I understand that; but my question is, the bank pays the whole bill as presented to it by the Bank CommissionMr. JONES. The Taxing Commission; yes. Mr. BROWN of Michigan. As a matter of fact, Mr. Gifford, is not the situation you speak of the result of the fact that we only had one class of stock in banks heretofore, and we did not have such a thing as preferred stock? Now, it would be my judgment that the common stock holders would protest of the bank paying the taxes that are really assessable to the preferred stockholders? Mr. JONES. The banker will not pay the tax, that is all. He will let us stockholders pay it. Mr. GOLDSBOROUGH. In Maryland the bank pays the tax and deducts it from the dividends. Mr. JONES. That is what they all do. Mr. GOLDSBOROUGH. In this case they would deduct it, of course, from the 3% percent? Mr. JONES. That is right. Mr. GOLDSBOROUGH. And then you would be losing 7.7 of 1 percent on your loans in Maryland? 51847-362 |