as it may be necessary at any time to have the hearings in executive session, where the public interest will be best served by so doing, that course will be followed. I do not know in the remaining days of Congress that there is sufficient time, and I seriously doubt that there is, to conclude a report on these hearings on these reports of the General Accounting Office, but at least we will have the evidence before us. Pursuing the same policy which was pursued in the Tampa hearing, opportunity will be first given to the Maritime Commission to be heard. I did not in the other hearing, and I do not know that it is necessary now to swear the witnesses. It may be that I will later come to that, but I am not doing it now. Admiral Land. (House Document No. 840, containing the letter of transmittal and the report of the Comptroller General dated August 8, 1942, together with Admiral Land's letter dated October 15, 1942, are as follows:) [H. Doc. 840, 77th Cong., 2d sess.] LETTER FROM THE COMPTROLLER GENERAL OF THE UNITED STATES TRANSMITTING A REPORT OF INVESTIGATION BY REPRESENTATIVES OF THE COMPTROLLER GENERAL'S OFFICE OF THE CONTRACTS AND OTHER RECORDS OF THE UNITED STATES MARITIME COMMISSION. GENERAL ACCOUNTING OFFICE, OFFICE OF COMPTROLLER GENERAL OF THE UNITED STATES, The SPEAKER, HOUSE OF REPRESENTATIVES. Sincerely yours, LINDSAY C. WARREN, Comptroller General of the United States. GENERAL ACCOUNTING OFFICE, OFFICE OF COMPTROLLER GENERAL OF THE UNITED STATES, Washington, August 8, 1942. REFORT OF THE SALE BY THE UNITED STATES MARITIME COMMISSION TO WATERMAN STEAMSHIP CORPORATION OF FIVE OBSOLETE VESSELS FROM THE COMMISSION'S LAID-UP FLEET, WITH OPTION TO REPURCHASE SAID VESSELS, AND THE SUBSEQUENT PURCHASE FROM SAID CORPORATION OF FIVE OTHER SIMILAR AND OLDER VESSELS AT GREATLY ENHANCED PRICES, INSTEAD OF EXERCISING SAID OPTION. Examination by representatives of the General Accounting Office of the records of the United States Maritime Commission brings out certain matters which are required to be reported to the Congress under the provisions of section 312 of the Budget and Accounting Act, 1921 (42 Stat. 26), and which involve apparent irregularities, summarized as follows: (1) On June 8, 1940, the United States Maritime Commission (hereinafter called the "Commission") made and entered into an agreement in writing with the Waterman Steamship Corporation, of Mobile, Ala. (hereinafter called the "corporation"), by which the Commission sold to the corporation five obsolete vessels from the Commission's laid-up fleet at and for the aggregate price of $596,000 (or an average price of $13.76 per dead-weight ton), with the right, at the Commission's option, to repurchase said vessels at such price, plus improvements made thereon by the corporation, less depreciation, as hereinafter shown. (2) In connection with, and as part of the consideration for, the sale of June 8, 1940, the corporation obligated itself to construct, or cause to be constructed, four new vessels to be added to the American merchant fleet, and thereafter, by an agreement dated on or about November 6, 1940, the corporation undertook the construction of four new vessels by and through its wholly owned subsidiary, the Gulf Shipbuilding Corporation, such construction to be entirely at the corporation's expense and without aid by the Commission under the Merchant Marine Act, 1936, as amended. (3) In late 1941 and early 1912 the Commission purchased from the corporation five other and older vessels at and for prices aggregating $3,374,700 (or an average of $75 a dead-weight ton), instead of exercising said option to repurchase the vessels sold under the agreement of June 8, 1940, and paid said aggregate price to the corporation. (4) In purchasing the five vessels from the corporation as aforesaid, instead of exercising the option to repurchase the vessels sold under the written agreement of June 8, 1940, the Commission laid out and expended the sum of $1,995,502.68 more than it should and would have expended had it exercised said option, without regard to reasonable depreciation of the vessels sold under said written agreement, as will more fully and clearly hereinafter appear. (5) The purchase of said vessels by the Commission from the corporation was consummated and the full purchase price of $3,374,700 was paid directly to the corporation, after it, on October 25, 1941, had applied in writing to the Commission under section 510, Merchant Marine Act, 1936, as amended, to trade in certain obsolete vessels (including some of those purchased from the corporation as aforesaid), and for a credit of the value thereof to be applied against the promised construction of eight new vessels to be added to the American merchant fleet, which application was never acted upon by the Commission. (6) The five obsolete vessels were purchased by the Commission from the corporation as aforesaid without the formality of a written agreement stating the terms and conditions of the sale, and the transaction was closed by the execution, delivery, and recording of bills of sale for the vessels, each of which instruments recited only a nominal consideration of $10. (7) After said five vessels had been purchased from the corporation as aforesaid (following said application under sec. 510, Merchant Marine Act, 1936, as amended, which was not acted upon by the Commission), and after the purchase price thereof had been paid to the corporation, the corporation attempted to establish a construction reserve fund under the provisions of section 511, Merchant Marine Act, 1936, as amended, in such manner as to enable the corporation to avoid or defer the payment of income tax on the gain or profit of, to wit, $1,995,502.68, realized by it through the sale of said five vessels to the Commission in late 1941 and early 1942, on the theory and apparent promise that said fund would be used in the construction of new vessels for addition to the American merchant marine, but a dispute has arisen between the Commission and the corporation as to the way and manner in which said so-called construction reserve fund shall be used and applied, which dispute is now pending before and is undetermined by the Commission, and which dispute is now under consideration by Commissioner John M. Carmody with a view to a report by him thereon to the Commission. (8) It is claimed on behalf of the Commission that the five vessels acquired from the corporation in late 1941 and early 1942 were purchased pursuant to the proclamation of the national emergency by the President on May 27, 1941, and under the provisions of the act of June 6, 1941 (55 Stat. 242), infra, which act provides that vessels may be purchased for the emergency at such prices as the Commission "may deem fair and reasonable and in the public interest"; but that act contains no provision for the trade-in of, and the allowance of credit for, obsolete vessels against new vessels to be constructed as provided in sections 510 and 511, Merchant Marine Act, 1936, as amended, as hereinafter shown. The matters mentioned above, as well as statutes applicable and pertinent to the facts herein set forth, are commented upon more fully as follows: The following tables (A) and (B) will afford ready comparison of the abovementioned transactions between the Commission and the corporation. (A) Following are descriptions of, and the prices paid for, the obsolete vessels sold by the Commission to the corporation under the agreement of June 8, 1940: (B) The descriptions, dates constructed, dead-weight tonnage, and prices paid for the obsolete vessels purchased by the Commission from the corporation as aforesaid are as follows: NOTE. The foregoing data shows that the Commission sold 43,316 dead-weight tons for $596,000, and purchased 43,965 dead-weight tons (different and older vessels) for $3,374,700, notwithstanding the Commission had the right to repurchase the vessels for $506,000, plus improvements and less depreciation. The vouchers and checks on and with which payments were made by the Commission to the corporation for the vessels last mentioned are as follows: Data found in the files and records of the Commission disclosed the following concerning three of the vessels bought by the Commission from the corporation: Each of the checks mentioned was endorsed "For deposit" to the credit of the corporation at its bank in Mobile, Ala. Checks Nos. 470 and 623 were drawn against funds of national defense, War Shipping Administration, being disbursed by and for the account of the Commission; and the other three checks were drawn against funds appropriated directly to the United States Maritime Commission. Computation: $243,500.00 26, 524) 327, 054. 04 12. 33 Total cost of the three vessels to Waterman. Waterman received $75 per dead-weight ton for these Data not available as to cost to Waterman of acquisition and reconditioning of steamship Raphael Semmes (9,601 dead-weight tons) or steamship City of Alma (7,480 dead-weight tons), both of which were sold to the Commission at $75 per dead-weight ton. Sums approximating $3,374,700 have been deposited by the corporation in a so-called construction reserve fund, under section 511, Merchant Marine Act, 1936, as amended, and, for the most part, that amount has been invested in Government bonds, indicating that the corporation may receive the increment of the fund, though it is said to be in an account controlled jointly by the Commission and the corporation. In connection with the foregoing, it is observed that, according to representatives of the Commission, it was estimated that it would cost $150,000 per ship, or a total of $750,000 to recondition the ships sold to the corporation under the sales agreement of June 8, 1940, and that estimate is but $33,097.32 less than what was claimed the corporation expended in reconditioning the vessels after their acquisition. The Commission's records tend to show that the invitation to bid for the vessels sold to the corporation by the sales agreement of June 8, 1940, was "framed to meet Waterman's desires"; and the corporation was the only bidder under the invitation. Said records show, too, that rejection of the corporation's bid was recommended "as inadequate." It was further disclosed by the Commission's records that the corporation claims to have made improvements upon the five vessels purchased by it from the Commission under the sales agreement of June 8, 1940, as follows: Adding the claimed improvements of. $783,097.32 to the aggregate sales price of the five vessels, namely, $596,000, the corporation's investment in them as of May 27, 1942, as reflected by the Commission's record, would have been $1,379,097.32, or $1,995,602.68 less than the $3,374,700 paid for the five obsolete vessels purchased by the Commission from the corporation in late 1941 and early 1942, without regard to the element of depreciation which would have been for consideration had the Commission, under its option, repurchased the vessels sold to the corporation under the agreement of June 8, 1940. There is thus indicated a gain to Waterman of $1,995,602.68 from its two transactions with the Commission, notwithstanding section 902, Merchant Marine Act, 1936, as amended, infra, provides that vessels taken under an emergency may not be acquired at prices "deemed enhanced by the causes necessitating their taking and use," and the act of June 6, 1941, infra, provides that vessels purchased thereunder shall be acquired at prices that are "fair and reasonable and in the public interest." As heretofore stated, the proceeds of sale of the five obsolete vessels by the corporation to the Commission have been deposited in a so-called construction reserve fund (purportedly under sec. 511, Merchant Marine Act, 1936, as amended, infra); but a reading of that act, and particularly the section mentioned, in the light of the facts, circumstances, and conditions surrounding the transactions between the Commission and the corporation, shows that there is for consideration the question of whether the establishment of the so-called construction reserve fund was an afterthought, resorted to as a means of avoid-ing or deferring payment of income tax on the gain accruing to the corporation from the sale of its five obsolete vessels to the Commission. There is also for consideration a question (as yet undetermined by the Commission) of whether the corporation is obligated to use the so-called construction reserve fund for the construction of vessels in addition to those it obligated itself to construct under the sales agreement of June 8, 1940, and it is to be remembered that the Merchant Marine Act, 1936, as amended (secs. 510 and 511, infra), providing for trade-in of obsolete vessels and the allowance of credit for new vessels to be constructed, precludes the payment to shipowners of the determined value of the obsolete vessels turned in thereunder, as was done in the instant case of the vessels sold to the Commission. THE STATUTES INVOLVED Pertinent provisions of the agreement of June 8, 1940, and of the statutes involved, are hereinafter quoted and discussed, in the light of the facts hereinbefore set forth. The applicable provisions of the sales agreement of June 8, 1940, between the Commission and the corporation, read as follows: ART. 7. Requisition of vessels. In the event the United States shall acquire ownership of any vessel through purchase or requisition under the provisions of section 902 of the Merchant Marine Act, 1936, as amended (herein called the "Act"), after delivery to the buyer, the amount to be paid to the buyer or any succeeding owner of such vessel shall in no event exceed the depreciated cost of the vessel to the buyer or such succeeding owner, or the fair and reasonable scrap value of such vessel as determined by the seller, whichever is the greater. Such determination by the seller shall be final. In computing the depreciated value of such vessel, depreciation shall be computed on the schedule adopted by the Bureau of Internal Revenue for income-tax purposes. The cost of any such vessel, for the purposes of this article 7, and upon which depreciation shall be computed, shall be deemed to be an amount equal to (a) the purchase price of the vessel, plus (b) the cost of any improvements made on such vessel by the buyer and repairs thereto made by the buyer subsequent to delivery of said vessel but prior to its first voyage, plus (c) any amounts paid the seller pursuant to article 6 hereof in event of resale of the vessel. ART. 8. Construction of new vessels.—(a) On or before December 8, 1940, the buyer shall execute a contract or contracts to construct or cause to be constructed within the continental limits of the United States, four new vessels of size, type, and speed satisfactory to the seller, which new vessels shall be substantially the same as the seller's C-2 type, with a sustained sea speed of not less than 151⁄2 knots and approximately 9,600 dead-weight tons. Each vessel, upon completion of construction, shall be documented under the laws of the United States. If the buyer shall file an application for aid in the construction of said four new vessels under the provisions of section 509 of the Act, the seller shall approve the same, provided that the buyer is not in default under any of the provisions of this agreement, and provided further that the cash net current position of the buyer is substantially the same or better than the cash and net current position estimated by the buyer as of November 1, 1940, namely, not less than $2,000,000 in cash. "The failure of the seller to approve the application of the buyer for financial aid for the construction of said four new vessels under the provisions of section 509 of the Act for the reason that the cash or net current position of the buyer is not substantially the same or better than that estimated by the buyer as of November 1, 1940, shall not release the buyer from its obligation to construct or cause to be constructed said four new vessels as aforesaid." Said agreement then provided in detail: (1) That if it should be determined by the Commission that it was not consistent with the best interests of the United States, nor consistent with the purposes and policies of the act, that the corporation enter into the construction agreement on or before December 8, 1940, the time therefor might be extended; (2) for the deposit with a bank approved by the Commission of sums aggregating $1.500,000, with the understanding that the sum would be placed in a construction fund if a contract for the construction of the four new vessels were entered into on or before December 8, 1940, otherwise it might be invested in Government securities, and so forth. NOTE. The records of the Maritime Commission show that the construction contract provided for as above in and by the sales agreement of June 8, 1940, was entered into on or about November 6, 1940. The provisions of pertinent and involved statutes are as follows: |