alleged obligation. This conclusion necessarily disposed of the second question, but in view of the attention given to the section 511 found by the Comptroller General, some comment thereon may be in order.

As the Merchant Marine Act, 1936, was originally passed, it contained taxexemption provisions with respect to the proceeds of sale and indemnities for loss of subsidized vessels, where, as required by the statute, such sales and insurance proceeds were placed in a capital reserve fund. Unsubsidized vessel operator had no such privilege and could not secure any tax advantages except in the case of loss of the vessel under the very restricted provisions of section 112 (f) of the Internal Revenue Code. In 1939 a proposal was made to Congress whereby an operator having an old vessel could trade it in and turn it over to the Commission and receive a credit therefor against new construction undertaken either by the Commission or through a direct contract between the operator and a private shipyard. This proposal was made with the dual purpose of immobilizing the obsolete tonnage and encouraging new construction, particularly by the unsubsidized operators in the intercoastal trade. Since the transaction involved no cash receipts by the owner and since the existing provisions with regard to tax deferment seemed to be inapplicable, special provisions to effect tax deferment were inserted in the legislation, after consultation with the Treasury Department. For some time, at least, section 510 was not taken advantage of by the unsubsidized operators.

In 1940 proposals were made to Congress for the establishment of construction reserve funds in which would be placed the proceeds of sales and insurance and also operating earnings. Complete exemption from tax rather than tax deferment was asked for. These proposals of the ship operators were opposed in their then form, both by the Commission and by the Treasury Department. While the bill was under consideration by Congress, the Navy began to acquire a number of small craft, including fishing vessels. Since many of these vessels were heavily mortgaged, their taking by the Navy would leave, in many cases, an insufficient amount over the mortgage to make replacements after meeting the required tax payment. Accordingly, the owners of these small craft joined with the operators of large vessels, principally in the intercoastal trade, in asking for some measure of relief. Since it was important to encourage new construction of smaller craft as well as larger vessels, Congress requested that the Maritime Commission and the Treasury Department get together on a program whereby (a) while no tax exemption from earnings was to be granted, earnings deposited in the construction reserve fund would not be subject to the penalty tax under section 103 of the Internal Revenue Code relating to unreasonable accumulation of earnings, (b) proceeds of sales and insurance losses would be placed in a construction reserve fund and would be entitled to tax deferment in a manner similar to existing sections of the internal-revenue laws involving nonrecognition of gain in cases of exchanges or involuntary conversion and to section 510 but without imposing all of the restrictions thereof, and (c) the tax deferment was only obtainable if new vessels were, within a limited time, acquired out of moneys deposited in the construction reserve fund, thus making the construction of new vessels a condition to tax deferment. Section 511 was favorably reported by the House Committee on the Merchant Marine and Fisheries on the basis of these modified suggestions and became law on October 10, 1940.

I wish to point out in this connection that it is not discretionary with the Commission to withhold the benefits of section 511 to any operator who meets the requirements of the statute and the joint regulations of the Commission and the Commissioner of Internal Revenue, promulgated with the approval of the Secretary of the Treasury, nor do the statutory provisions justify inquiry by the Commission into the motives, real or conjectural, which lead any operator to avail himself of the statutory benefits granted by said section. The Commission does have some discretion with respect to the character of new construction, but if the new vessel is suitable as to type and size, it would be an abuse of its discretion to prohibit for nonstatutory reasons the use of section 511 funds to aid in its construction. In the Waterman case, the only problem was whether or not the operator, as a matter of law, had specifically agreed with the Commission not to use the proceeds of the sale of the five old vessels deposited under section 511 in order to carry out its obligations under the sales agreement. If such were the case, the Commission could properly have said that it would not permit such use of the section 511 funds, but, as stated above, the Commission did not consider that there was enforceable commitment on which to base a denial of

the use of the section 511 funds in connection with the four replacement vessels under the sales agreement.

That the right of the Commission to restrict the use of section 511 funds is dependent upon the existence of some collateral agreement is well illustrated by the situation which arose in the case of the Fairport and the Fairisle. These vessels, it will be remembered, were originally the subject of a private contract between Waterman and the Gulf Shipbuilding Corporation. When the Commission, in April 1942, agreed to take over these contracts for the purpose of selling the vessels under section 509, it imposed as a condition to this action that the down payment on these two vessels should be made out of Waterman's free funds. As to the remaining two vessels, the Commission made no specific requirement. But it does not follow from this that Waterman will necessarily obtain tax exemption through the use of section 511 funds. This question of tax deferment is a complicated one which is primarily within the jurisdiction of the Bureau of Internal Revenue and not of the Commission. The Commission, however, is taking steps to place all of the relevant facts before the Bureau of Internal Revenue in order fully to inform that agency in the matter.

In

This leaves open for discussion solely the question of what is the proper thing to do as to the five old vessels which were sold to Waterman in 1940 under conditions giving the Commission the right to requisition them at the sales price, plus improvements, less depreciation. As stated before, the consensus of opinion of the Commission in November 1940 was against the singling out of these vessels when there was no general requisitioning of the American merchant marine. April 1942 the War Shipping Administration requisitioned for use practically the entire dry cargo and tanker tonnage of the American merchant marine but did not generally requisition vessels of such classes for title. The powers of requisitioning vessels, either for use or title, are now vested in me as Administrator, War Shipping Administration, and the question of proper future action with respect to these five vessels has had careful study.

These five vessels have been requisitioned for use for some months and the War Shipping Administration is about to tender charters fixing the terms and conditions pertaining to such use. In order to protect the interests of the Government, there will be inserted in the charters as tendered a provision limiting the amount which the Government is required to pay, in the event of loss, to the amount for which they could have been requisitioned for title under the sales agreement. By adopting this procedure, any possible injustice to Waterman due to depriving them of the use of the vessels after the war is avoided, and, at the same time, the Government is not required to expend funds for their purchase, although it is protected as to the amount which it has to pay if the vessels are lost. One of the vessels has already been lost and the charter as tendered will contain the same provision as to payment for such loss. If the operator refuses to accept the charters as tendered, the War Shipping Administration will requisition the four remaining vessels for title and deny any claim by Waterman to obtain compensation for the lost vessel in excess of the price for which title could have been acquired under the sales agreement.

In the final portion of his report, the Comptroller General refers to the connection of the Commission's former General Counsel, Bon Geaslin, with the transactions mentioned in the report. He infers that such connection was improper, constituting a possible violation of the spirit, if not of the letter, of section 807 of the Merchant Marine Act, 1936, as amended. The Commission has adopted comprehensive regulations regarding admission to practice of agents and attorneys representing shipping interests, including provisions similar to those adopted by the Bureau of Internal Revenue prohibiting former employees from appearing before the Commission with respect to matters on which they formerly acted in an official capacity. Mr. Geaslin resigned as General Counsel on April 29, 1939, effective July 10, 1939, with the expiration of his accrued annual leave. At that time, Waterman had no business before the Commission. On December 29, 1939, he was admitted to practice before the Commission generally, and not in relation to then pending business of any operator. It was not until April 1940 that our records show he took any part in any of the matters relating to Waterman.

In conclusion, I wish to state that there is nothing in the whole transaction which, in my opinion, is contrary to the letter or the spirit of the statutes under which the Commission operates; that the decision to buy the five vessels from

Waterman, rather than to requisition the five vessels sold under the sales agreement, was proper under conditions existing at the time the decision was made; that the price paid for these vessels was fair and reasonable, and that the Government, in entering into this transaction, did not waive or limit its rights with respect to requisitioning thereafter the other five vessels at the prices specified in the sales agreement.

This letter has been considered by and is transmitted with the approval of the Commission.

Sincerely yours,

E. S. LAND, Chairman.

Mr. BARGER. I hesitate to try to cut this matter short by stating conclusions, but, if I may do so, subject to the committee disregarding it and calling me down for doing it, I would like to say this, that it seems to me that instead of the Commission living up to the terms of the June 8, 1940, contract and repossessing or retaking these vessels at the price therein fixed, and also failing to comply with section 902 of the act, that the Commission, as I construe Admiral Land's letter to Mr. Bland, simply adopted a policy of its own and did otherwise, and that it cost the Government more money for having done that. Mr. CULKIN. You find that section 902 does apply to this transaction as a matter of law?

Mr. BARGER. I would say it would, Mr. Congressman.

Mr. CULKIN. Somebody has quarreled with your office as to the interpretation that should be given section 902; is not that right? Mr. TULLOSS. Yes, sir.

The CHAIRMAN. Quarreled, you say?

Mr. CULKIN. Yes. That has since been printed?

Mr. TULLOSS. I understand it has been printed by this committee. The CHAIRMAN. It is a committee document.

Mr. CULKIN. I suggest that go into the record at this point.

The CHAIRMAN. Without objection it is so ordered.

(The document referred to and other pertinent related memoranda follow :)

[No. 2]

MEMORANDA ON VALUATION OF VESSELS REQUISITIONED UNDER SECTION 902 (A), MERCHANT MARINE ACT, 1936, AS AMENDED

WAR SHIPPING ADMINISTRATION,
Washington, December 17, 1942.

To the Owners of all Vessels Purchased, Chartered, or Requisitioned for use or title by the War Shipping Administration:

In view of recent developments with respect to the interpretation of section 902 of the Merchant Marine Act, 1936, as amended, we find it necessary to advise you of the following:

During the latter part of this year the Administrator learned for the first time that certain of the officials of the Office of the Comptroller General of the United States were of the opinion that under section 902 of the Merchant Marine Act, 1936, as amended, it was unlawful for the Administrator to pay for vessels requisitioned under section 902 of the act sums in excess of the values on these vessels as of the date of the President's proclamation of limited emergency dated September 8, 1939. Section 902 had been administered by the War Shipping Administrator and prior thereto by the United States Maritime Commission, in a manner that was inconsistent with such interpretation.

As soon as the views of the subordinate officials of the Comptroller General were made known to the Administrator, conferences were held with the Comptroller General, but no solution to the problem developed therefrom. The Comptroller General then offered to state his views upon receipt of a formal request for an

opinion which could be transmitted to Congress for such action as it deemed appropriate. Accordingly, the Administrator directed a request to the Comptroller General of the United States for formal opinion under date of November 24, 1942, on 15 specific questions, and on November 28 the Comptroller General replied on all points. A copy of his opinion is attached herewith.

You will note that in the opinion of the Comptroller General values of all vessels, including both large and small craft-freighters, passenger ships, tugs, barges, fishing vessels, and other watercraft-were, in effect, frozen by the President's proclamation of limited emergency on September 8, 1939, except for vessels built or rebuilt after that date, as to which the Comptroller apparently would allow payment of actual cost less depreciation, and that, in his opinion, the Administrator may not lawfully pay for use or title to vessels at higher rates or values than those prevailing on September 8, 1939. It will be noted that the 1939 values apply, notwithstanding the fact that the vessels were purchased after that date at substantially higher cost and even though replacement vessels cannot now be obtained at 1939 prices. Charter rates also would be reduced under this ruling to September 8, 1939, levels, except for additional allowances for increases in expenses since that time.

Immediately upon receipt of this opinion the Administrator ordered that payments for vessels purchased or requisitioned for the War Shipping Administration under section 902 of the Merchant Marine Act, 1936, as amended, be discontinued. Payments for vessels lost for marine or war casualties under charters made under this section were also stopped pending a clarification of the situation.

The Administrator promptly transmitted copies of the Comptroller General's opinion to the chairman of the Senate Committee on Commerce and the chairman of the House Merchant Marine and Fisheries Committee. There was at that time pending in the Senate Committee on Commerce legislation affecting the War Shipping Administration known as the omnibus bill and designated H. R. 7424. After considering the Comptroller's ruling, the Senate Committee on Commerce on December 4, 1942, reported out H. R. 7424 with an amendment to section 902 which would have the effect of eliminating the enhancement clause contained in the existing provision of law, thus confirming the Administrator's application of the law'. The reason for this action was explained in a report submitted on behalf of the committee (No. 1813, 77th Cong., 2d sess.), pertinent excerpts of which are attached herewith.

However, although the bill was placed on the Senate calendar, it did not come to a vote prior to adjournment of this Congress, leaving the entire question open for the next Congress. (See Congressional Record of December 15, 1942.) During the interim, unless the Administrator applies the statute in accordance with the Comptroller General's ruling, he will be in a position of administering the law in a manner inconsistent with the interpretation of the Government's accounting officers. Under the circumstances, the Administrator feels that it is incumbent upon him, in view of the large sums of money involved in this problem and the public interest relating thereto, to apply the Comptroller General's ruling and acocrdingly to take the following action :

I. With respect to payment for vessels purchased or lost.

(a) To withhold payments for all vessels previously requisitioned for title by the War Shipping Administration or purchased by the War Shipping Administration pursuant to the provisions of section 902 of the Merchant Marine Act, 1936, as amended, except in cases where the value of the vessel as determined by the Administrator does not exceed the value of the same vessel on September 8, 1939, or, with respect to vessels constructed or reconstructed subsequent to that date, where the value of the vessel is determined at an amount not in excess of actual construction or reconstruction cost less depreciation.

This means that with few exceptions (principally yachts which have been valued at 1939 values) payments will be withheld on all vessels heretofore taken for title, including freighters, tankers, passenger ships, tugs, barges, fishing vessels of all kinds, and all other watercraft, even though a determination of value has been reached and the owner has been notified thereof.

(b) To withhold all payments for total loss of vessels from marine or war risk assumed by the War Shipping Administration to the same extent as noted in paragraph (a). Claims for total loss of such vessels will be treated in the same manner as claims for vessels requisitioned for title by the War Shipping Administration.

(c) In cases where the application of the rules set forth in (a) and (b) result in hardship to any owner, the Administrator is prepared to determine the value of such vessel in accordance with the decision of the Comptroller General of the United States upon request for such determination from the owner, and to tender the amount so determined to the owner. The owner would then have the election of accepting the amount tendered in full settlement or of accepting 75 percent thereof and instituting suit in the appropriate court for just compensation under section 902.

II. With respect to vessels chartered by the War Shipping Administration.

(a) With respect to vessels chartered by the War Shipping Administration on time charter basis, for which charters have actually been executed, instructions have been issued that payments of charter hire should be limited to 75 percent of the amount stipulated in the charter. With respect to executed bareboat charters, payments for hire will be limited to 50 percent of the stipulated hire. This is a precautionary move and further analysis may demonstrate that in many, if not most, cases a substantial reduction in charter hire will not be required to comply with the Comptroller General's ruling. Payment and acceptance of the above amounts shall be without prejudice to the rights of the parties under the law and charter agreements.

Withholding charter hire in the amount above mentioned will apply to vessels of all types chartered to the War Shipping Administration, including freighters, tankers, passenger ships, barges, tugs, fishing vessels, and other craft.

(b) With respect to vessels chartered by the War Shipping Administration as to which charter parties have not actually been executed, the tender of charters will be withheld pending further analysis and determination as to the extent, if any, to which the existing charter rates must be reduced to comply with the Comptroller General's ruling. However, where the owners require immediate financial assistance, such owners will be tendered charters providing for charter hire at the rate of 75 percent of the existing rates in the case of time-chartered vessels and 50 percent in the case of bareboat chartered vessels, without any specified insurance values. The owners would then be in a position to accept 75 percent of the hire tendered, reserving their legal rights for later adjudication. In any case, where a time-chartered owner feels that the amount made available in this manner will not be sufficient to provide for the cost of operating such vessels, the Administrator, upon request, will give consideration to the desirability of converting the requisition from time form to bareboat form, as a result of which all operating costs would be assumed by the Administrator.

(c) Attention is directed to the fact that under the Comptroller General's ruling charter hire and compensation for vessels lost previously paid may have been in excess of the amount the owners were lawfully entitled to receive. Pending further direction from Congress no effort will be made for the time being to secure readjustment of such prior overpayments based on the Comptroller's ruling. However, all rights of the Government in this respect are reserved.

(d) Consideration is being given to the desirability of canceling all or certain classes of outstanding charters.

III. Foreign-flag vessels.

With respect to vessels under foreign flag, which the Administrator has no legal authority to requisition under section 902 of the Merchant Marine Act, 1936, as amended, or under Public Law 101, Seventy-seventh Congress, existing agreements and charters will be maintained in full force and effect.

It is hoped that the action of the Administrator as above outlined will not cause undue hardship or inconvenience to the owners and operators of vessels. The Administrator is most anxious that the problem of valuation should not impede the prosecution of the war and, accordingly, wishes to make certain that adequate funds for operating requirements will be available to owners whose vessels are being operated in the war effort. It is believed that the above arrangements will accomplish this objective without violating the rules laid down by the Comptroller General. Suggestions for further relief will be given prompt consideration. The Administrator will be prepared to confer with owner's representatives during the week of December 21 for this purpose. W. C. PEET, Jr., Secretary, War Shipping Administration.