lation is not socially bad. Too many trusts have done too much good to say that that alone is sufficient to cause a charitable trust to be penalized.

So, we are, therefore, asking that the provision against accumulation be stricken.

It is interesting to note that the law as finally enacted goes further than either the House suggestion in 1950, or the Senate Finance Committee suggestion. The Senate Finance Committee in 1950 struck out altogether this provision, and in conference, as a compromise, the conference committee came up with this solution of taxing trusts which accumulate income unreasonably in amount or duration. And it does seem to be unduly harsh on trusts, which merely are accumulating.

Now, the trusts to which I am referring are only the most conservative type of trusts, with banks as trustees. They are not engaging in shenanigans. Most of them are trusts under wills of decedents long since deceased, who are not interested in jeopardizing the interests of charities.

I have here a long list of leading charitable organizations in Boston, the officers of which agree with the position which I have taken here today, and I should like to ask that it be inserted in the record, rather than read it.

The CHAIRMAN. It will be inserted.

Mr. BERGEN. I might point out it includes many hospitals and the United Community Services of Metropolitan Boston.

Again I wish to thank you, Senator, for permitting me to appear. The CHAIRMAN. We are glad to see you.

(The list referred to follows:)

LIST OF CHARITIES, OFFICERS OF WHICH AGREE WITH POSITION TAKEN BY KENNETH W. BERGEN REGARDING CHARITABLE TRUSTS

United Community Services of Metropolitan Boston

Massachusetts General Hospital

Massachusetts Memorial Hospitals

Boston Lying-In Hospital

Children's Medical Center

Robert Brigham Hospital

Industdial Home for Crippled Children

Family Service Association of Greater Boston

Massachusetts Charitable Fire Society

Massachusetts Eye and Ear Infirmary

Faulkner Hospital

Boston Home for Incurables

Franklin Technical Institute

Massachusetts Heart Association

Boston Heart Association

Boston Tuberculosis Association

Boston Symphony Orchestra

Free Hospital for Women

Family Welfare Society of Boston

Family Society of Cambridge

The CHAIRMAN. Mr. Denniston.

STATEMENT OF ROBERT DENNISTON, ATTORNEY,

MOBILE, ALA.

Mr. DENNISTON. My name is Robert Denniston. I am an attorney, representing myself, from Mobile, Ala.

I am interested personally in a banking company in Mexico. I wish to present a proposal concerning section 552 of H. R. 8300, which concerns the foreign personal holding company law. I have a written proposal to submit, and some verbal comments to add.

The CHAIRMAN. We will put that in the record. (The statement referred to follows:)

PROPOSED AMENDMENTS TO H. R. 8300, SECTION 552 AND SECTION 6035, FOREIGN PERSONAL HOLDING COMPANY LAW

1. Purpose

As they affect the subject here discussed, the provisions of H. R. 8300 are the same as those contained in the existing law. As written they discriminate severely against investment by United States citizens in legitimate foreign banking institutions, because no such bank is exempt from the Foreign Personal Holding Company tax. Only corporations under subchapter F (sec. 501 and following) are exempt, whereas in the case of domestic corporations there are five different provisions exempting banking and financial institutions. The first, section 542 (c) (2), exempting "banks" as defined in section 581, was in the original act first defining domestic personal holding companies. The other four exemptions were added later to protect legitimate installment finance and small loan companies which did not qualify as banks. Up to now apparently there has been no agitation to extend a similar protection to legitimate foreign financial institutions.

The present proposal is designed to remove this inequity in the law. A similar one was submitted to the Joint Committee and to the Bureau of Internal Revenue under date of January 2, 1954, by the writer, but was apparently received too late for consideration by the joint committee. So far as this writer knows it was never rejected or disapproved by the joint committee or by the Bureau of Internal Revenue and it is therefore being submitted to the Senate Committee on Finance for their consideration.

2. Proposal

Amend section 552 (b) of H. R. 8300 so as to read in its entirety as follows: "SEC. 552 (b). The term 'Foreign Personal Holding Company' does not include: (1) a corporation exempt from taxation under subchapter F (sec. 501 and following); (2) a banking or financial institution organized and doing business under the general laws of a foreign country applicable to such institutions, which is regularly engaged in, and a substantial part of the business of which consists of making loans and discounts or of mortgage credit or installment finance operations (whether or not such institution is authorized to receive deposits), and which is subject by such laws to supervision and examination by governmental authority of such foreign country having supervision over banking institutions."

Add a new subsection (b) (3) to sec. 6035, to read as follows:

"(b) (3). CLAIM OF EXEMPTION. Each United States shareholder of a foreign corporation which would otherwise qualify as a foreign personal holding company, but which is claimed to be exempt under the provisions of section 552 (b) (2), shall attach to and file with his income-tax return for each taxable year in which he has been such a shareholder for any part of such year, a return which shall show the name and address of such corporation, the citation to the law of the foreign country under which such foreign corporation is organized and operates, and the last annual financial statement of said foreign corporation as submitted to the governmental authority having supervision over it, in such form as the Secretary or his delegate may prescribe; such return need not be submitted if, within 60 days after the close of the last calendar year of which such taxable year forms a part, such foreign corporation makes a return submitting the same data together with the name and address of each United States shareholder for whom an exemption is claimed thereunder."

3. Discussion

The dis

The language proposed for section 552 (b) (2) is patterned after the definition of a bank under the domestic law in section 581, but it is somewhat broader to cover some legitimate financial institutions which are not banks. tinguishing feature of a bank in its narrower sense is that it is authorized to receive deposits. It will be recalled that in the domestic law four long and detailed exemptions were added to cover specific types of financial institutions, not banks of deposit, which had developed under State laws. To attempt such detailed definitions to fit the many financial institutions of foreign countries in Europe, Latin America, and elsewhere would be futile. Most foreign countries very strictly regulate, by statute and by governmental supervision, the organization and operation of the various classes of banking, financial and mortgage credit institutions, because money, credit and banks exert such a profound influence on the fiscal, economic and political well-being of the land. Therefore, in the definition here suggested, some financial institutions other than banks of deposit are exempted, but only those which are organized under the banking laws, which actually and regularly engage in such business and which are supervised and examined by a banking commission or similar body. The addition of subsection (b) (3) to section 6035 provides the Secretary with information necessary to establish legitimacy of the institution with respect to which the exemption is claimed. There is no such requirement with respect to exemptions under the domestic personal company law, so this provision should go a long way to protect against abuse.

4. Encouragement of American investment abroad

The Randall Commission Report of January 23, 1954, in its treatment of the subject of United States Taxation and Investment Abroad (pp. 22-26) and the Reed-Simpson Minority Report of January 25, 1954 (pp. 8-9) both treat kindly the encouragement of American investment abroad. The subject considered in the proposal here submitted was not specifically mentioned in those reports, but the spirit of both reports was certainly to remove discriminations against investment abroad as compared with investment in this country. To many people "investment abroad" means the establishment of factories and other plants in foreign countries or investment of funds by our citizens in agriculture, mining or industry of those countries. But to an internationally minded banker this means in banking institutions abroad, because that is the business he knows best. A banker with tremendous resources may well invest in or establish institutions involving so many people that the holding company question is no problem, but the smaller banker generally can find far fewer associates willing to risk an interest in foreign banking. Also, the additional hazards attendant to investing abroad make the voting control highly desirable, though of course not always essential, for the Americans who are involved.

5. Typical foreign banking law

To answer some questions regarding the opportunity for abuse under the proposed amendment, attention is respectfully invited to the provisions of the General Law of Banking (Credit) Institutions and Auxiliary Organizations of Mexico. Although the writer is not familiar with such laws in Europe or the East, it is believed that this law is typical of those found in other Latin American countries. The law in Venezuela, which the writer has also studied, is similar though briefer. Particular attention is invited to the following from the Mexican law:

(a) Title I, article 1, provides that the law shall govern the concerns whose purpose is to engage habitually in banking and credit operations, and that the Secretariat of Finance and Public Credit shall be competent authority for everything relating to banking institutions.

(b) Title I, article 2, provides that an authorization from the Federal Government shall be required to engage in banking and credit operations, and then it lists the separate categories of banking and credit operations as follows:

I. Banking deposit operations.

II. Savings deposit operations.

III. Financial operations.

IV. Mortgage credit operations.

V. Capitalization operations.

VI. Fiduciary operations.

VII. Home savings and loan operations.

Each category of the foregoing is then allocated by the Mexican banking law to a separate type of institution (except fiduciary functions, which may be performed by certain of the others), and a separate chapter of the law is devoted to each type of bank.

(c) Title I. article 5, prohibits the use of the words "bank", "financial" (this word is an attempt at a one-word translation; the Spanish word is “financiera”), etc. in the business name without express authorization in accordance with Article 2.

(d) Title II, chapter III, deals with financiers. Article 33, its companion article 17 relating to deposit banks, and like articles relating to other banks, establish many prohibitions which would render such institutions a poor means of attempting to circumvent the personal holding company laws. The most obvious prohibitions are those restricting the corporation from loans in excess of a very conservative figure to any one individual borrower and those limiting loans to directors and stockholders.

(e) Article 8, section VII, provides an example of the unintended inequity of the present United States law. That section contains a traditional banking requirement that "at least 10 percent of the profits must be set aside to form a capital reserve fund, until same amounts to paid-up capital." If the company were a foreign personal holding company this would automatically subject the American stockholders to the tax on retained earnings.

(f) Title IV, article 95, provides that all banking institutions must publish a monthly statement of their operations and an annual general balance sheet according to models approved by the National Banking Commission.

(g) Title V is devoted to inspection and vigilance, and sets up the functions of the National Banking Commission. The writer knows from experience that the examinations by this commission and reports required of every transaction, no matter how minute, are thorough and detailed to the extreme, and enforced with scrupulous honesty.

6. Case in point

The particular case which causes the writer to make the recommendation here submitted involves a banking institution in Mexico. The writer is personally interested in this institution as a stockholder. It is in the category described under the "General Law of Banking (Credit) Institutions and Auxiliary Organizations" as a financiera. Financieras fall midway in the scale of banking activities running from commercial banks for sight-deposit and short-term loan activities, to mortgage credit companies, for a long-term real estate loan activities. By article 26 of the general law of banking institutions they can perform most of the functions of commercial banks, except that their loans are the medium term variety and they cannot ordinarily accept sight deposits (which is further prohibited by art. 28, sec. II, of the law). Thus they lend from their capital and from credit they obtain from loans, rediscounts and bond issues. In the field in which they operate these institutions play a vital part in the development of industry, commerce and agriculture in Mexico.

The institution in which the writer is interested is a small one called the Financiera Colon, S. A. and is well known in banking circles in Mexico City, where it has been operating since 1946. Among the founders was the writer's father, who was also engaged in banking in Mobile, Ala., and who has since died. Its presidente or chairman, is Mexican, but its gerente or manager, is the writer's brother, an American citizen residing in Mexico. There are both Mexican and American sharehholders. Its capital funds are about 3,500,000 pesos (8.60 pesos to the United States dollar) and its resources are about 7,500,000 pesos. For some years it has paid most of its earnings out in dividends. Because of the substantial American interest in the ownership and the management, in addition to credit from Mexican banks, it has had a distinct advantage in being able to obtain good lines of credit for rediscount facilities from various banks in the United States--additional dollars which have been extensively utilized to help answer the ever-growing need for credit in the development of the Mexican economy. Its principal activity to date has been the financing of many imports from the United States to Mexico, of automobile and truck assembly plant production, of automotive and appliance sales of all sorts, including heavy agricultural machinery, buses and radios, and commodity loans.

For several years some of the American shareholders have had the opportunity to buy more stock from the Mexican shareholders or to enlarge the stock of the institution, and thereby to expand their investment in Mexico in a business which they know, but they have not been able to do so because of the penalty features of the foreign personal holding company law.

This is one small case only, and the only one known to the writer, but it is entirely possible throughout the world that investment of American capital of this particular type is likewise arrested or stagnated for the same reason. 7. General

It is not felt that any tax loss to our Government would result from the adoption of such an amendment, because the present law is so prohibitive that participation in such foreign personal holding companies has probably been avoided in the past so that no such tax would accrue in the first place. The writer will be very happy to submit such other data as the Committee on Finance might deem to be of value on this subject.

Respectfully submitted.

R. P. DENNISTON.

Mr. DENNISTON. The provisions of H. R. 8300 are similar in substance to the provisions of the previous law on this subject, and do not allow for any exemption under the foreign personal holding company law with respect to banking institutions.

Under the domestic personal holding company law, there are five different exemptions, with respect to banking institutions. The first exemption was put into the law when it was first written, and exempted banks of deposit. Subsequent to that time, under the domestic law, there were four exemptions added over a period of time, exempting certain types of installment finance institutions and savings and loan institutions organized under Federal or State laws.

I believe, without knowing, that the principal reason why there is no exemption under the foreign personal holding company law, with respect to banking institutions, is that no one has probably ever proposed it or asked that it be done. I would suppose, without knowing, that an additional reason would be that it could be thought that such an exemption would be subject to more abuse than one in the United States, where the taxing authorities are more familiar with the laws respecting banks.

I am personally familiar and interested in a banking situation in Mexico, and I would like to use this as an example, which I would feel has analogies in other countries. I don't know whether it has or not, but I would think so.

Under the banking laws of Mexico, the banks are divided into a number of different categories, such as banks of deposit, banks of the installment finance field, mortgage credit banks, savings banks, and so forth. They are all regulated by federal law, and they operate under a federal statute. There is a national banking commission which supervises and controls their activities. They have to submit detailed reports of their activities and of their financial statements to this banking authority. They have to receive permission from the banking authority before they can issue dividends, and so forth. The one that I am familiar with is known as the Financiera Colon, S. A., in Mexico City. It was founded some 10 to 12 years ago by some members of my family and about 40-odd other Americans living in the general region of Alabama, in Louisiana, Mississippi, and Florida, and also some Mexican people. This company operates under such a law, is carefully regulated by the Mexican authorities, and operates, we feel certain, a legitimate banking institution. It is of considerable benefit, I think, in a modest way, in financing the import of products from the United States to Mexico, including importation of many products to the assembly plants in Mexico, incidentally, by Americans who are working and employed in Mexico.