Senator CAREY. Does not the R. F. C. control the most of these banks?

Mr. JONES. They do not. You see, we have stock in-well, I don't know how many national banks, but something over 3,000. We have capital stock or capital notes and debentures in 6,000 national and State banks, which is almost half of the banks in the country. We have a voice in these banks but not control. If the States tax preferred stock, then they will probably tax capital notes and debentures.

Senator GLASS. Right there is a point of discrimination. No State bank is a governmental agency.

Mr. JONES. Well, there is a difference, but in both cases the exemption deals with assets of the Reconstruction Finance Corporation, a governmental agency. As a matter of fact, the Supreme Court decision deals only with national-bank stock and I am advised that State bank stock is included in the bill only to remove any possible doubt about the intention of Congress.

Senator GLASS. In other words, States may tax preferred stock of their own State banks but may not tax preferred stocks of national banks, is that the idea?

Senator ADAMS. That would not necessarily follow.

Senator BARKLEY. This follows as to all stocks.

Senator WAGNER. Whatever the equity is it is owned by an instrumentality of the Government. You cannot get away from that. You are taxing property of an instrumentality of government.

Senator COUZENS. Would you say that a delinquent farm owned by the Farm Loan Board is not subject to State taxation because it is owned by the Government?

Senator WAGNER. Well, that is different.

Senator GLASS. Would you say that a house owned by the Federal Housing Administration, which has been foreclosed, is not taxable by the State?

Senator WAGNER. We have given our consent to that. Senator BARKLEY. That is not the point at all. Of course in the case of the farm it is taxable, but the bond held by somebody who made a loan on that farm, is not taxable. It is the difference between taxing physical property and the stock of a corporation.

Senator COUZENS. Well, Mr. Chairman, let us finish this. Senator WAGNER (presiding). Is there anything else to be presented?

Mr. JONES. I should like to say one more thing about the banks paying the tax: Our returns are limited to 31⁄2 percent. The common stock of a bank may be getting as much as 10 percent, on the other hand. So that if the tax in our case were 2 percent, we would have a net return of 11⁄2 percent.

Senator COUZENS. That is not my contention. My contention is that banks that wish to follow the policy of paying the tax on their own stock, would mean that you would still get your return. Mr. JONES. But they do not do that.

Senator COUZENS. They could hardly have a different policy in your case. If they pay the tax for one stockholder why not pay it for another?

Mr. JONES. They could very properly quit paying the tax on any stock.

Senator COUZENS. Then the Government would have to pay it. Mr. JONES. Yes.

Senator COUZENS. But probably it won't do it, because the individual is much more influential I assume locally, and has much more stock in the form of common stock than in the case of the preferred stock.

Mr. JONES. But we have a total of $800,000,000 of this character of investments, not all in national banks.

Senator COUZENS. I do not see why banks should not pay the tax on that stock. They have done it in thousands of other cases, out of the earnings of the banks, and why they should not pay it in this case I cannot understand.

Mr. JONES. It would be a voluntary contribution if they did. The articles of association do not require it.

Senator ADAMS. No State could compel a national bank to pay a tax on its bank stock, because that would be a tax on the national bank, and the State cannot tax a national bank. It is permitted by statute at its discretion to pay the tax for the stockholder; but the tax is levied upon the property of the stockholder and not upon the property of the bank. In the community I illustrated awhile ago the tax rate is 5 percent, and if the Reconstruction Finance Corporation is to pay a 5 percent tax they will have to dig down into their surplus in order to pay it, because they only get a 31⁄2 percent dividend. Mr. JONES. Yes.

Senator COUZENS. I am not asking that that be done. I am merely suggesting that so long as a bank pays the tax for its stockholders, let them do it here.

Senator ADAMS. But they will not do it.

Senator BARKLEY. It comes out of the earnings of the bank for any stock they pay it on.

Senator COUZENS. Well, let them pay it.

Senator MCADOO. If they were to pay it out of earnings in some cases they might not be able to pay a dividend. We declared that mortgages issued on farms under the Farm Loan Act and which were hypothecated to Federal land banks, were not taxable. We do not say that as to property. That was a part of the problem of getting cheap money to the farmer. The same principle is involved here. Senator BARKLEY. The Home Owners' Loan Corporation did the same thing.

Senator McADOO. We have investments made by the Government in preferred stocks of these banks, and the Government gets a very low return, the dividend is very low on the preferred stock. Mr. JONES. It is 31⁄2 percent.

Senator MCADOO. Now we are also buying the debentures of some of these banks with government money. And we may very properly declare that these are instrumentalities of government and nontaxable.

Senator GLASS. They are not instrumentalities of government. Those are not debentures of the R. F. C., nor stock of the R. F. C. It is stock of the bank that has been purchased.

Senator MCADOO. We established the principle in the case of the Federal farm loan banks when we said that.

Senator GLASS. Property is taxable.

Senator McADOO. But debentures are not taxable.

Senator GLASS. But here they have gone out and bought preferred stock in banks.

Senator MCADOO. But we have the right to declare them nontaxable.

Senator WAGNER. May I make this one observation

Senator ADAMS (interposing). I think Senator McAdoo's argument is germane. If the Government buys a herd of cattle they are not taxable because Government property. If the Government buys anything and owns it, it is not taxable. If an instrumentality of the Government buys anything, it is not taxable. The Government has now purchased shares of stock in banks, and it seems to me without the consent of the Government you cannot tax property which belongs to the R. F. C. And the question here before the committee now is: Shall we withdraw this exemption, or rather as the Supreme Court has said, the Congress has authorized the taxation of this stock. Now we are seeking to place by this bill this preferred stock upon the basis of other Government-owned property, and therefore exempt it from taxation. The fact that it is owned by an instrumentality of government it seems to me makes immaterial the issuer of the stock. It is Government-owned property.

Senator WAGNER. I should like to go one step further if I may: I think that we, in passing this bill, would be conforming to the intent of the Congress. I think the words used in the original act showed our intention to be to exempt these shares from taxation.

Senator ADAMS. Banks all over the country were told that they were not taxable.

Senator WAGNER. I think the language was clear in expressing the nonconsent to be taxed.

Senator BARKLEY. Looking at it from the standpoint of morals, this stock was purchased not for the benefit of the R. F. C. but for the benefit of the banks. The banks were assisted in order that the public might be served. This did not create any new property. It is not like a foreign corporation going into a State and buying a lot of property, or investing in a lot of property, which creates new wealth. This simply was a rescuing by the R. F. C. of the banks for the benefit of the people.

Senator ADAMS. And it represents money which the R. F. C. put into the banks, and this stock really represents R. F. C. money.

Senator CAREY. It is a loan to them.

Senator BARKLEY. But it was not done for the benefit of the Government.

Senator WAGNER. It is provided here in the R. F. C. statute that the Corporation shall be exempt from all taxation. And I think that we, at the time, assumed that that would include shares of stock purchased by the R. F. C., but the Supreme Court of the United States says it does not. That is all there is to it, as I understand, Mr. Alley.

Mr. ALLEY. Yes, sir.

Senator MCADOO. At the time when this act was passed this preferred stock was not in contemplation. But inasmuch as the Government has made these investments and has spent this money, not for the banks but for the public in order to make the banks strong enough to give service for which they were created, I think the clear

inference is that such property should not be taxed, and I do not think it ought to be subjected to State taxation.

Senator WAGNER (presiding). All right, gentlemen, thank you very much.

(Thereupon Mr. Jones and Mr. Alley left the committee table.) Senator WAGNER (presiding). Members of the committee, shall we pass upon this question now? The chairman was quite anxious that we should go ahead with it.

Senator ADAMS. Mr. Chairman, I move that the bill be reported out favorably.

Senator WAGNER (presiding). Do you wish a roll call? (A pause, without response.) All in favor of reporting the bill favorably will say aye. (A chorus of ayes.) Those opposed will say no.

Senator GLASS. No.

Senator WAGNER (presiding). The noes are Glass, Couzens, and Townsend.

Senator GLASS. Why record me? That is another discrimination. Senator WAGNER (presiding). Well, Senator Glass, I did not think you were ashamed of your vote, and the other gentlemen, who are not now present in the room, wished to be recorded against the bill. Senator GLASS. All right, go ahead and record me if you want to. You were not taking a recorded vote.

Senator WAGNER. But the others wished to be recorded.
Senator GLASS. Then you will record me.

Senator WAGNER (presiding). If that is all, the committee will now stand adjourned subject to the call of the chair.

(Thereupon, at 11:55 a. m., Tuesday, Feb. 11, 1936, the committee adjourned.)

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