Mr. JONES. Yes.

Mr. GIFFORD. That is the point I am trying to bring out: If the banks themselves would profit by this?

Mr. JONES. No.

Mr. GIFFORD. They would not?

Mr. JONES. No. The stockholders will, yes; the common-stock holders will profit by it, no doubt about it.

Mr. GIFFORD. That is a settled question?

Mr. JONES. Yes.

Mr. GOLDSBOROUGH. He profits by it because of your rates?
Mr. JONES. Yes.

Mr. GIFFORD. This exemption that you are asking for this morning-if it is granted, the stockholders of the bank would profit? Mr. JONES. Let us see who would profit.

Mr. BROWN of Michigan. I think there might be a bad situation until they straighten this out, but my point is that the common-stock holders would not stand for that situation, after it became common, because that tax is assessed against the stock; and the bank has heretofore paid it, but if it made any particular difference as to the incidence of the tax, I say the common-stock holders would protest against the bank paying that tax for the preferred-stock holders. Of course, this is an academic question

Mr. JONES. I think it would create many confusing situations; no doubt about it.

Mr. BROWN of Michigan. The common-stock holder would not continue to consent, as he has in the past, when we had only one class of stock and this question has not arisen. We have only one common stock in banks, generally. He would not continue to approve a situation where the tax on the preferred stock would be paid by the common-stock holders, as Mr. Gifford pointed out.

Mr. JONES. Another feature I would like to bring out about that is this: That in each instance where this preferred stock is owned by private individuals, the dividend rate is higher in that case, and it is perhaps 5 percent or 6 percent in some cases. So that on Governmentowned stock

Mr. HOLLISTER. Let me ask you one thing in that connection: All the preferred stock in that case is callable, is it not, by the bank? Mr. JONES. Yes.

Mr. HOLLISTER. Let us assume that it might be necessary-and I do not know that it is—in order to get around certain constitutional questions, to exempt entirely from taxation all preferred stock in national banks-that distinction between that held by the Reconstruction Finance Corporation and that held by individuals-it would be possible, would it not, for a national bank to call the preferred stock on the high dividend rate now held by individuals and reissue at a lower rate, which would be readily saleable, because of its nontaxability?

Mr. JONES. Yes; but I do not know whether you could deny the States the right to tax private property, individual property in their States.

Mr. HOLLISTER. I do not think there is any question with reference to the preferred stock of national banks, that they should be denied. We can say, without any doubt, that the preferred stock of all national banks shall be exempt from taxation, and that the individual

is the only person that can be taxed now. Because under section 5219, it states it may be taxed as similar stock in State banks. So I do not think there is much question that we could remove the preferred stock of national banks entirely from taxation. Of course, under this act, what we are doing is removing from taxation stock when it is held by the Reconstruction Finance Corporation. I merely wanted to raise that question, because it seems to me that, if we remove all taxation, it would be easy enough to call the high dividend rate of preferred stock held by individuals and reissue on a lower basis. Mr. JONES. That is a legal question.

Mr. FORD. Mr. Jones, is it not true that, if this decision stands and we cannot cure the situation by statute, you would have to raise the rate on that preferred stock of the banks?

Mr. JONES. We cannot raise it.

Mr. FORD. You lowered it, did you not?

Mr. JONES. We lowered it, but we cannot raise it. You see, the rate is fixed by the articles of association approved by the Comptroller of Currency. These banks have got their rights in the stock and there is no way that the R. F. C. can change it. We can lower it always. I think the rate is 4 percent or 5 percent, is it not, in our articles, and we reduced it to 4 percent by resolution of our board, but we cannot go back and raise it. For the first 5-year period it was one figure, and then we reduced it to 31⁄2 percent, in order to help recovery. Mr. WILLIAMS. Is that rate uniform?

Mr. JONES. It is uniform.

Mr. WILLIAMS. It has been lowered to 3%1⁄2 percent on all preferred stock held by the Reconstruction Finance Corporation throughout the country?

Mr. JONES. Yes.

Mr. HANCOCK. What about the preferred stock held by the State banks of the Federal Reserve banks?

Mr. JONES. Our rates are just the same. the same to all.

Our dividend rates are

Mr. WILLIAMS. To what extent do you hold this stock, in dollars? Mr. JONES. We have got, in the total preferred stock about $470,000,000.

Mr. WILLIAMS. Would that cover also the capital notes?

Mr. JONES. No; about $800,000,000.

Mr. WILLIAMS. Altogether?

Mr. JONES. Yes; a little over $800,000,000.

Mr. WILLIAMS. In preferred stock and capital?

Mr. JONES. Yes.

Mr. GIFFORD. Mr. Jones, have you the figures, for instance, in Massachusetts, or Michigan, or some of those States, how much they would lose or gain?

Mr. JONES. I do not know, but I think that Massachusetts must have about $10,000,000 in stock, and of course, to find that out, we would have to find out from each village or each town, each city, as to their tax rates, to compute that-their method of taxing the banks, you see.

Mr. GOLDSBOROUGH. Massachusetts does not appear to tax the bank stock.

Mr. JONES. They do not.

Mr. GIFFORD. The State taxes the bank stock.

Mr. GOLDSBOROGUH. The States which do not tax the bank stock include Massachusetts.

Mr. GIFFORD. I have seen the statement of Massachusetts, how we would profit greatly by this, and if I vote against it, they might say that I voted against the interests of my State.

Mr. ALLEY. Is not Massachusetts one of the nine States

Mr. JONES. They tax the income of the bank and not the shares. Mr. ALLEY. We would not have to pay it in Massachusetts; the bank pays it.

Mr. JONES. The bank pays it in Massachusetts.

Mr. ALLEY. It is not chargeable against the shareholder.

Mr. GIFFORD. That is the point I brought out at first.

Mr. JONES. In your case, the bank would pay it.

Mr. FORD. Mr. Chairman, might I ask another question?

Mr. GOLDSBOROUGH. Yes; Mr. Ford.

Mr. FORD. Mr. Jones, in loaning this money on notes and preferred stocks of banks, that would be just merely another form of security? Mr. JONES. Ánother form of preferred stock.

Mr. FORD. You made loans, for instance, to municipalities, and I recall one particular loan of $1,700,000 made to Los Angeles andMr. JONES. That was Chicago-go ahead.

Mr. FORD. No; Los Angeles. That loan was originally 5 percent for the first 5 years, and 6 percent for the second 5 years. Then you automatically cut that loan to 4 percent?

Mr. JONES. Yes.

Mr. FORD. Then why did our city vote bonds to pay that loan, because they were assured that you might go back to a 5-percent or 6-percent rate at any time. So if you could raise that rate

Mr. JONES. No; I would state that this way: Our rate then, as I recall it, was 5 percent for 5 years, and 6 percent thereafter, and they were income bonds.

Mr. FORD. No; it was on contract, it was on bonds at that time. Mr. JONES. Let me state the case, because I handled it: That was a 5-percent loan for 5 years, and 6 percent thereafter, revenue bonds, and we told them at the time, that any time they wanted to give us a tax bond, a straight obligation, we would give them a lower rate, and they voted these bonds at, I think, 4 percent, and we exchanged and took 4-percent bonds then, and we were able to sell that bond and get our money.

Mr. FORD. I have to take issue with that, because we sold those bonds on the market at 4 percent and got a premium of $29,000 on them, and then paid you your money in cash.

Mr. JONES. Yes.

Mr. FORD. But we had to sell the bonds in order to get this loan of 4 percent, because we did not know at what time you would rescind the 4-percent figure, although it was

Mr. JONES. No; they had a 5-year contract at 4 percent. They had a 5-year contract at 4 percent and

Mr. FORD. They had a contract first at 5 percent?

Mr. JONES. We reduced it for the first year to 4 percent, to all of them, everybody alike.

Mr. FORD. Yes, I understand

Mr. JONES. Now, in order to sell-they had sold the 4-percent bonds for 20 years, I think it is

Mr. FORD. 40 years.

Mr. JONES. We enabled them to do their financing.

Mr. FORD. I am just pointing-what I am getting at is, whether or not you have the power to go up or down on your rate.

Mr. JONES. By contract only, but when we make a contract, we can not reduce it-I mean when we make a rate, we can not raise it. We made it for 5 years, and that was the old rate. We could not reduce

the rate after 5 years. We think we reduced it for 5 years.

Mr. FORD. The bonds we sold, however, were not taxed bonds, they were straight revenue bonds.

Mr. JONES. They were revenue bonds?

Mr. FORD. Yes; straight revenue bonds, and we sold them on the market at 4 percent, with a premium of $229,000.

Mr. JONES. I thought they were tax bonds.

Mr. SISSON. When you made the rate of 3%1⁄2 percent on preferred stock, you contemplated it would not be subject to any local taxation? Mr. JONES. Yes.

Mr. SISSON. It was done for that purpose and now, because every dollar in the Reconstruction Finance Corporation is owned by the National Government, if the States tax it, they are really taxing the functions of the National Government?

Mr. JONES. The property of the National Government.

Mr. SISSON. And there would not be any reason to exempt this stock, except while it is in the hands of the Government? If a private person acquired it, there would not be any reason to exempt it? Mr. JONES. No.

Mr. SISSON. Their vested right would all have been in the lawful assessment that has already been made? Can we, if they have made an assessment that is lawfully made the question is, can we now make it unlawful?

Mr. JONES. We think Congress intended to make it tax-exempt, and so we are just asking that the privilege to tax it by the States be withdrawn, specifically to avoid any inequality between States or between banks.

Mr. CROSS. Unless the Supreme Court decides otherwise?

Mr. JONES. Yes.

Mr. CROSS. Would not that legalize this act?

Mr. JONES. I think it would.

Mr. BROWN of Michigan. And we are putting in some surplus language, which seems to me is or may be subject to unjust criticism. Mr. JONES. I think you have got the provision there, if part of it is held unconstitutional, the balance sticks.

Mr. BROWN of Michigan. I, myself, do not like to express myself through the approval of this bill as written, to the effect that I approve the attempt to defeat a tax already lawfully assessed. That is my feeling about it. I would like to hear your views.

Mr. HOLLISTER. The dollars and cents would make very little difference, would they not, Mr. Jones?

Mr. JONES. We could stand it 1 year.

Mr. HOLLISTER. The 1 year's assessment already made in Maryland would be equitable?

Mr. JONES. That would not break us.

Mr. HOLLISTER. It might amount to a few hundred dollars? Mr. JONES. Yes; or a few thousand dollars. But if it spreads all over the country what will happen, gentlemen, in my opinion, is,

that your debentures will also be taxed, they will start taxing those as capital, and then this thing of taxing all of it is reached. They are all looking for things to tax, and I think that, instead of our 3,200 banks being nontaxable, it will extend to all of them.

Mr. GOLDSBOROUGH. Of course, that is a constitutional question and one that we all recognize, but let us assume, if we want to make it retroactive, since the decision of the Supreme Court, would not all of the States tax against it, or would not all of them come in and make their assessments, when they have not previously done that?

Mr. BROWN of Michigan. Yes. And then it says, "or hereafter imposed, levied, or assessed." They could not now levy an assess

ment.

Mr. GOLDSBOROUGH. If it is a question of constitutional difficulty, I think they could just as readily as they could have last spring. I do not see any reason why they cannot, if they had the right to do it last spring and did not do it, they still can do it under this decision. Mr. JONES. They can go back and assess your property?

Mr. BROWN of Michigan. They could not do it in Michigan, if they did not get it on the rolls the first Monday of April.

Mr. JONES. They cannot do it anyway?

Mr. BROWN of Michigan. No; you cannot assess anything after the first Monday of April of each year. Now, if this is necessary in some of the other States, I have no objection.

Mr. JONES. I think, in those States, if you find some fellow did not render his property, that you can go back and tax it.

Mr. SISSON. How many States have actually made assessments? Mr. JONES. Just this one case.

Mr. SISSON. Is that the only actual assessment that has been made?

Mr. JONES. Yes; but they will all go back and do it, if this is going to be the law.

Mr. SISSON. None of the others have heretofore done it?

Mr. JONES. No; that is the only one. That is my understanding. Mr. WILLIAMS. There is a question in my mind that, if they can go back and make an assessment, if we make this legislation declaring such assessment is illegal

Mr. JONES. I do not think they can.

Mr. GOLDSBOROUGH. Suppose we do pass it, and let us suppose that, in the State of Maryland, the taxing commission has decided that the Reconstruction Finance Corporation did not permit this assessment and they did not make it. It certainly seems to me that, now that the Supreme Court says that they had the right to make it, they could go back and make it as if it had been made, as if they had made it at the time.

Mr. WILLIAMS. I rather think not, if we pass this legislation in the meantime.

Mr. HOLLISTER. It seems to me that "hereafter imposed, levied or assessed", would cover it, would cover any levy or assessment when it was made even for previous years; and if that is the only one that has been made to date, if we take out "hereafter", because of some worry about the retroaction of the tax exemption, it looks to me as if the Maryland assessment would be about the only thing the R. F. C. would be out.