is suggested merely for the purpose of making it clear that capitalized improvements or betterments paid for by the operator-and approved by the Commission-should be included in the tax base of the ship for the purpose of determining loss or taxable gain in the event of a sale or total loss of the vessel.

Mr. HERTER. In the early part of this debenture provision on page 12, line 22, it reads, "and further secured by a preferred mortgage on the vessel and otherwise as the Commission may determine." I am trying to find out just what the "and otherwise" means.

Mr. PARMELEE. That is just the trouble. If it is "and otherwise" it is no longer a debenture.

Mr. HERTER. I did not notice any comment on that in your

statement.

Mr. PARMELEE. I struck it out.

Mr. HERTER. I thought possibly it might mean to secure a lien on other ships operated by the same line.

Mr. PARMELEE. That is very true.

VIII. The eighth and last amendment which we suggest is on page 15, lines 21 to 25. It would also clarify the language of one of the technical tax provisions of the bill. Our proposed revision has two purposes. First, to make it clear that except for capital gains, all other earnings such as interest or dividends on securities that may be on deposit in the special sinking fund, should be paid into the special sinking fund without payment of tax, and, second, to provide that the operator would have to pay only one tax on a capital gain in a situation where he paid off the debentures out of the proceeds of a sale or insured loss of the vessel and then had some of the proceeds left over. The portion of the proceeds remaining after payment of the debentures would belong to the operator but would be on deposit in the special sinking fund and would be subjected to a second tax when it was withdrawn from the fund unless the amendment proposed by us in the attached exhibit is made. Our suggested change of language would, we believe, eliminate this double taxation.

So much for the technical amendments to the bill.

In closing, I should like to make the following general suggestions and comments on the earnings-debentures plan:

In line with the recommendations that have been made with respect to purchases of ships under other sections of the bill, it is suggested that the interest rate on the notes secured by the first-preferred mortgage and on the earnings debentures should be fixed at 2% percent instead of 31⁄2 percent.

On the subject of taxes and tax exemption: The earnings-debentures plan is in no sense a tax-exemption statute. The private operator who buys a ship under its provisions will be required to pay taxes at the current rate on every dollar of profit that he retains. And he will be required to pay the usual tax on any capital gain that is realized through the sale or insured loss of his ship. The only sums that might be considered in the nature of "earnings" on which a tax will not be paid are the amounts that are received by the Government, through the Maritime Commission, in payment of the unpaid balance of the purchase price of the ship represented by the debenture obligation.

It has been suggested in some quarters that the debenture plan might prove to be difficult to administer. I do not think that this

criticism is well founded. Far more difficult administrative and fiscal machinery has been set up under the Merchant Marine Act of 1936 and this has proven no deterrent to the proper administration of that statute.

We have every confidence that the Maritime Commission with its background of experience and its record of successful administration of the 1936 act can and will fairly administer the earnings-debentures plan to the end that coastwise shipping may again make its proper contribution to the national economy and the national defense of our country.

EXHIBIT A.-Statistical data covering operations of principal break-bulk coastwise steamship lines during the year 1939

SEC. 7. In the case of the sale of a yessel under section 3 (a) or (b) to a purchaser for operation in the coastwise, intercoastal, or other domestic trade of the United States, the terms of sale may, under such regulations as the Commission shall prescribe, provide for payment of the sales price on terms not more favorable to the purchaser than the following: (1) a down payment in cash of 25 per centum; (2) deferred payments, at the rate of one-twentieth per annum, of not less than 25 per centum of such sales price, with interest on unpaid balance at 31⁄2 per centum per annum, secured by a first preferred mortgage on the vessel as the Commission may determine; and (3) the payment of not more than 50 per centum of the sales price in earnings debentures (I) [maturing not later than twenty years] payable as hereinafter provided over a period of not more than twenty years after the date thereof, bearing interest at 31⁄2 per centum per annum, and further secured by a preferred mortgage on the vessel and otherwise as the Commission may determine. Such debentures and any mortgage securing such debentures shall provide for the establishment of a special sinking fund to be administered in accordance with rules and regulations to be prescribed by the Commission, and shall be subject to such provision as the Commission may deem to be necessary for the protection of the Government, including provision for insurance and restrictive of the transfer of title to the vessel. Into this special sinking fund the purchaser shall deposit annually or at such lesser intervals as the Commission may require one-half of the total voyage profits derived from the vessel's operation as determined by the Commission in accordance with

rules and regulations prescribed by it, after deducting, from such voyage profits, (II) depreciation on a basis approved by the Commission and the following: (A) An allowance for overhead expense as agreed upon between the purchaser and the Commission which allowance shall be appropriate to the character of service in which the vessel operates (III) and shall be subject to redetermination by the Commission not more frequently than annually; [, shall be within the maximum and minimum limitations to be fixed by the Commission with respect to each type of operation and which limitations shall be published in the Federal Register; and such allowance shall within such maximum and minimum limitations be subject to redetermination by the Commission not more frequently than annually:] (B) The interest paid by the purchaser on the first preferred mortgage notes issued under (2) above; and (C) an amount equal to 10 per centum of the sum of the down payment and the deferred payments authorized under (1) and (2) above (IV) [.] and the cost of betterments and improvements allowed as such by the Commission. If with respect to any annual period the deductions authorized under (A), (B), and (C) hereof exceed the voyage profit for such period, an amount equal to such excess may with the approval of the Commission be withdrawn from the special sinking fund and paid into the general funds of the purchaser. There shall also be paid into the special sinking fund the proceeds of any sale of the vessel and the proceeds of all insurance and indemnities received by the purchaser on account of total loss of the vessel (V) [less such portion thereof as may be payable to the mortgagee under the first preferred mortgage on the vessel and less the amount of tax upon the capital gain if any resulting from such proceeds and indemnities.] after deducting from such proceeds the following: (A) The amount then remaining unpaid on the first preferred mortgage on the vessel; and (B) the purchaser's remaining capital investment in the vessel (represented by original down payment, the amount of the payments made on the first preferred mortgage and the cost of improvements and betterments allowed as such by the Commission, after giving effect to all accrued depreciation); and (C) the amount of the tax upon the capital gain, if any, resulting from the receipt of such proceeds and indemnities. (VI) [The Commission shall at all times have a prior lien upon moneys in the special sinking fund and obligated to be deposited therein for the satisfaction of the first preferred mortgage and debenture notes. The debentures shall contain provisions limiting the liability of the purchaser under the debentures to the collateral therefor except in the event of the occurrence of such acts of default as the Commission may determine shall subject the purchaser to personal liability pursuant to regulations published in the Federal Register and in effect at the time of the purchase of the vessel.] For the satisfaction of amounts due under the debentures, the Commission shall at all times have a prior lien upon moneys in the special sinking fund and obligated to be deposited therein. At the end of each ten-year period, or at such shorter intervals as may be agreed upon between the purchaser and the Commission, or in the event of the sale or the total loss of the vessel, the amount then remaining in the special sinking fund (including amounts obligated for deposit therein) or so much thereof as does not exceed the unpaid principal of the debentures and accrued interest thereon shall be paid to the Commission and applied to such debentures, and the balance, if any, may, with the permission of the Commission, or upon maturity (whether the same shall occur by reason of the sale or loss of the vessel or expiration of the stated period of the debentures) shall be paid into the general funds of the purchaser. With respect to any vessel purchased under the terms of this section, the sum of the down payment and the deferred payments authorized under (1) and (2) of this section and the (VII) cost of betterments and improvements allowed as such by the Commission shall constitute the basis for determining gain or loss (to which shall be added, however, in the event the vessel is sold or lost prior to payment in full of the debentures a sum equivalent to the amount of such unpaid debentures as are satisfied through the application thereto of the proceeds of such sale or loss) and without the foregoing addition for depreciation for the purposes of Federal income and excess-profits taxes (VIII) [.,and moneys withdrawn from the special sinking fund and paid into the general funds of the purchaser shall be taxable as if earned during the year of such withdrawal, but earnings deposited in the special sinking fund shall otherwise be exempt from all Federal taxes]. All earnings which are deposited in the special sinking fund, except earnings from capital gains, shall be exempt from all Federal taxes but earnings withdrawn from the special sinking fund and paid into the general funds of the purchaser shall be taxable as if earned during the period of such withdrawal. Earnings representing capital gains on which a capital gains tax has

been paid may be withdrawn from the special sinking fund and paid into the general funds of the purchaser with the permission of the Commission without further tax.

The CHAIRMAN. The committee stands adjourned until 3 o'clock. At that time Mr. Parmelee will return for questions by the committee. (Whereupon, at 12:20 p. m. the hearing was recessed until 3 p. m. of the same day.)

AFTERNOON SESSION

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE MERCHANT MARINE AND FISHERIES, Washington, D. C.

The committee met at 3 o'clock, Hon. Schuyler Otis Bland (chairman) presiding.

The CHAIRMAN. All right, gentlemen. Mr. Parmelee, will you return to the stand?

Is there any examination? Does anybody desire to ask any questions of Mr. Parmelee?

Mr. CANFIELD. Mr. Chairman, I would like to salute the witness in this way and pay him a compliment. I think he has offered some concrete suggestions, and that is what we are trying to get.

The CHAIRMAN. That is right. There may be some others who desire to question you. If anyone does, I will call you back. Mr. Saugstad, do you want to make a statement?

STATEMENT OF JESSE SAUGSTAD, CHIEF, DIVISION OF SHIPPING, DEPARTMENT OF STATE

Mr. SAUGSTAD. Mr. Chairman, I would like to make a statement for the record in regard to something that affects our procedure of the Department.

In response to your invitation to appear at these hearings, Acting Secretary Grew on February 10, addressed a letter to the chairman in which he covered three things. He first said that he would designate officers of the Department to attend and follow closely developments in connection with this bill. Accordingly, Assistant Secretary Clayton designated my associates, Mr. Henry L. Deimel, shipping adviser to the Shipping Division, and Mr. Walter A. Radius, Office of Transportation, and me to take part in these hearings.

The second point made by Mr. Grew was that the Department, in addition to certain comments which he expressed upon this bill in the sense of being gratified at the difference between this bill and some of the previous proposals, should prepare an additional report on this bill. That report, in the shape of a letter addressed to the chairman of the committee, was delivered to you yesterday, and appears today as Document No. 12.

The third point was that if the committee, after receiving this report, desired oral testimony on behalf of the Department of State, Acting Secretary Grew would nominate Assistant Secretary Clayton to appear here before the committee upon your request. Now, for the committee's information, Mr. Clayton is in Mexico City in attendance upon the Inter-American Conference on Problems of War and Peace. We do not expect him back to Washington before the end of next week.

In addition, I may say that during the past year, in response to requests from this and other sources in the Congress, we have written some letters and prepared some general reports on this question of policy in the disposal of surplus shipping. All those statements made by the Department are contained in Document 109, now before the committee, hence the Department's position has been printed and appears in two documents up to date before the committee up to this

moment.

The CHAIRMAN. That is committee Document No. 109 of the last Congress. That is a very important document.

Mr. SAUGSTAD. Everything the Department has said is contained in those two documents up to date, and it leads up to Mr. Clayton's testimony before the committee.

That is all I have, Mr. Chairman.

The CHAIRMAN. Thank you very much.

You gentlemen were not here when Mr. Parmelee presented himself for examination. Were there any further questions that you wanted to ask him?

(None.)

All right. Mr. Geary, appearing for the Shipowners Association of the Pacific Coast.

Mr. CANFIELD. Mr. Chairman, before you hear the next witness, may I ask, is the committee going to have testimony from the State. Department?

The CHAIRMAN. That has not been determined. We will hear it if any of the committee want to hear it. Mr. Clayton is not here now. He will have to appear later.

Mr. CANFIELD. I think the committee should have that testimony. The CHAIRMAN. All right, Mr. Geary.

STATEMENT OF JOSEPH J. GEARY, APPEARING FOR THE SHIPOWNERS ASSOCIATION OF THE PACIFIC COAST

Mr. GEARY. Mr. Chairman and gentlemen of the committee, my name is Joseph J. Geary. I am a lawyer from San Francisco, Calif., and I am appearing in this proceeding on behalf of the Shipowners Association of the Pacific Coast. I want first of all to apologize for my failure to be here this morning in response to your first call, because I had the necessity of telephoning to the Pacific coast.

The group which I represent consists of the following 19 ship

operators:

Oliver Olson & Co.

Hart Wood Lumber Co.
W. A. Chamberlin Co..

Phillips Steamship Co.
Freeman & Co.

Hammond Shipping Co.
James Griffiths & Sons.

West Coast Steamship Co.

J. H. Baxter & Co.

Coastwise Steamship & Barge Co.

Coastal Steamship Co.
Griffiths Steamship Co.
J. R. Hanify Co.

Kingsley Co. of California.
Owens Park Lumber Co.
Pope & Talbot, Inc.

J. Ramselius.

Shafer Bros. Steamship Lines.

E. K. Wood Lumber Co.

Mr. BRADLEY. May I ask whether those are all coastwise shipping firms?

Mr. GEARY. Those are all operators of ships on the Pacific coast, exclusively, with the exception of one, Pope & Talbot, Inc., which operates not only on the Pacific coast but also operates in the intercoastal trade.