The substance of that is that a debt, although it is not a debt incurred in the taxpayer's trade or business, qualifies under that section to receive tax treatment as if it were a short-term loss.

Mr. KEAN. Of which 50 percent of that can be taken.

Mr. LYNCH. That is right, and which can be written off against-
Mr. KEAN. Against capital gains.

Mr. LYNCH. 100 percent to be written off against capital gains.
That letter to Mr. Reynolds is dated 1948.

Mr. KEAN. December 30, 1948.

Mr. LYNCH. December 30, 1948.

And, as I understand it, it has to do with loans made to the Democratic National Committee for the State of New York in 1940 and I believe some part in 1944.

Mr. KEAN. In 1944, yes, there was $96,000, I believe. Is that correct?

Mr. LYNCH. I am so advised.

May I ask Mr. Martin and Mr. McLarney to join me here?

Mr. KEAN. Surely.

Along that line, in the letter it refers to loans made in 1947.

Mr. LYNCH. Those are notes dated 1947.

Mr. KEAN. Those are notes dated 1947, which means that those were renewals of the old loans made in 1940 and the one made in 1944?

Mr. LYNCH. That is correct.

Mr. KEAN. How much were the loans that were made in 1940? Were those loans all made to the New York committee? There seems to have been a New Jersey proposition in there.

Mr. LYNCH. May I suggest this: In the letter which you have before you there is a statement as to the dates and amounts of the notes, some of which are renewal notes, and perhaps it would be more helpful if Mr. McLarney would give you the original transaction as well.

STATEMENT OF EDWARD I. McLARNEY, DEPUTY COMMISSIONER, BUREAU OF INTERNAL REVENUE, WASHINGTON, D. C.

Mr. McLARNEY. Mr. Chairman, the first note was dated October 31, 1940, in the amount of $75,000.

Mr. KEAN. $75,000, on October 31, 1940.

Mr. McLARNEY. That is right, and that loan was made to the Democratic State Committee, New York City.

The second note was dated November 26, 1940, and that loan was made to the New York State Democratic Committee in the amount of $100,000.

The next note was dated October 31, 1940, and it was made to the New Jersey State Democratic Committee. There were two notes aggregating $100,000, one for $60,889.55, the other $39,110.45.

On November 1, 1940, a note was received for a loan made to the Illinois State Democratic Committee in the sum of $25,000. As of May 27, 1942, the New York committee paid the balance of a note amounting to $60,889.55.

Mr. KEAN. The New York committee paid in 1942 $69,000?
Mr. McLARNEY. On May 27, 1942.

Mr. KEAN. Did they pay that with interest or not?

Mr. McLARNEY. Those notes all carried interest.

Mr. KEAN. They did carry interest?

Mr. McLARNEY. Yes.

Mr. KEAN. So that this payment of $69,000 was with interest?
Mr. McLARNEY. With interest, principal plus interest.

On July 25, 1942, $25,000 was paid on the Illinois note, which was dated November 1, 1940.

Mr. KEAN. In other words, the Illinois note was all paid off?
Mr. McLARNEY. The Illinois note was all paid off; yes, sir.

As of October 14, 1944, a further loan was made for $96,000.
Mr. KEAN. In other words, he had loans already out amounting to
some $200,000 and he made an additional loan of $96,000 in 1944?
Mr. McLARNEY. That is right.

Mr. KEAN. To the New York committee?

Mr. McLARNEY. To the New York committee.

Mr. REED. The Democratic committee?

Mr. McLARNEY. The New York Democratic Committee, yes, sir. Mr. KEAN. Is that the end of any payments?

Mr. McLARNEY. The last payment made was July 25, 1942 for the sum of $25,000.

Mr. KEAN. That is when they paid off the Illinois note?
Mr. McLARNEY. Yes, sir.

Mr. KEAN. What happened to the New Jersey loan? I believe the letter from you to Mr. Reynolds mentioned:

Note of Democratic State Committee of New York dated February 27, 1947, payable on demand to Democratic State Committee of New Jersey, endorsed without recourse by the Democratic State Committee of New Jersey, by (not stated in letter), $39,110.45.

Mr. McLARNEY. Just that note is outstanding, $39,110.45.

Mr. KEAN. Are you sure that there was interest on all the notes? Mr. McLARNEY. The $96,000 note was a demand note with interest payable after demand was made, at the rate at 1 percent.

Mr. KEAN. That is, the $96,000 note had 1 percent interest. How about the rest of the notes?

Mr. McLARNEY. According to our records here, the $75,000 note made in October 1940 as well as the $100,000 note made in November 1940 apparently did not bear interest.

Mr. KEAN. Then your first statement is incorrect?

Mr. McLARNEY. That is right.

Mr. KEAN. Now, that Illinois note bore interest, did it not?

Mr. McLARNEY. The record here is not clear, Mr. Congressman, as

to whether or not it did bear interest.

Mr. KEAN. I understood it did, that the Illinois note bore interest, but if you cannot testify to that

Mr. McLARNEY. Is this the $25,000 note?

Mr. KEAN. Yes.

Mr. McLARNEY. Yes, that bore interest at 5 percent.

Mr. KEAN. At 5 percent. In Illinois he charged 5 percent while in New York he charged nothing except 1 percent on $100,000.

Now, was this payment of the $69,000 a repayment by New Jersey, or what is the situation? I mean the write-off was not against New Jersey, was it?

Mr. McLARNEY. The write-off was based on the loans that Mr. Reynolds made on which he held notes from these different committees.

Mr. KEAN. This New Jersey note seems to have been endorsed by New Jersey.

Mr. McLARNEY. To Mr. Reynolds, that is right.

Mr. KEAN. What I am trying to find out is this: I think it is so that the Democratic State Committee from my own State paid back some money.

Mr. McLARNEY. Do you mean the $39,000, Mr. Congressman?

Mr. KEAN. Yes. Did they not pay that? The note to New Jersey originally was $100,000.

Mr. McLARNEY. It was $100,000.

Mr. KEAN. And the $69,000 that was paid back, was that New Jersey?

Mr. McLARNEY. The $69,000 was paid by New Jersey. So they had outstanding at the time the ruling was made $39,110.45.

Mr. KEAN. Of New Jersey?

Mr. McLARNEY. Of New Jersey.

Mr. KEAN. But that had been endorsed without recourse.
Mr. McLARNEY. That is right.

Mr. KEAN. Now, how much, therefore, was outstanding of these loans on December 31, 1948?

Mr. McLARNEY. $310,110.45.

Mr. KEAN. $310,110.45. Was that all? Where did I get the idea in my head that it was some $400,000?

Mr. McLARNEY. I believe if you would add back the payment of $85,000 you would arrive at your figure. I think that is right. If you take the $310,110.45 which was the balance outstanding on notes as of December 31, 1948, and add to that figure the two payments that were made, aggregating $85,000, I think you would arrive at a total of $400,000.

Mr. KEAN. I understand, though it is a little mixed in the figures, that New Jersey paid its debt in full and took a note from the New York Committee for the $39,000 and it endorsed its obligation over so that the obligation at the end was New York's entirely, is that correct?

Mr. McLARNEY. I think that is correct.

Mr. KEAN. New Jersey did pay?

Mr. McLARNEY. New Jersey paid $60,000.

Mr. KEAN. And the debt was New York's.

Now, this was the situation: Mr. Reynolds had a $310,000 note. What happened?

Mr. McLARNEY. Well, after Mr. Reynolds had made demands on the State Democratic committee for payment

Mr. KEAN. Do you have a record that he made the demand?

Mr. McLARNEY. We have representations to that effect in the request for ruling letter prepared by his attorney.

Mr. KEAN. You have representations?

Mr. McLARNEY. Representations in the request for ruling letter that demand for payment was made.

Mr. KEAN. In other words, you took the word of Mr. Reynolds' lawyer that Mr. Reynolds had tried to get this money back?

Mr. McLARNEY. That is true, Mr. Congressman, and based upon such representations we made the ruling.

Mr. KEAN. You have no proof in any way that he ever did try to get the money back?

Mr. McLARNEY. Excepting the proof based upon the examination of the tax return when the return was reached for audit.

Mr. KEAN. What do mean, when it was reached? What was the proof? Did Mr. Reynolds on his return-if you can give the information here, and I do not know whether you can or not-show proof, by - letters and various things, that he had demanded payment?

Mr. McLARNEY. We have in the record a letter from the Treasurer of the Democratic State Committee dated December 23, 1948, in which they say to Mr. Reynolds that they have to advise him that the committee is unable to pay these loans.

Mr. KEAN. When did that matter first come up? How did it come up? Was it before the 23d of December? Was that letter written after the first meeting with someone, with the officials, or was it before? Mr. McLARNEY. The request for ruling is dated December 28, 1948. Mr. KEAN. That is the request for ruling to you, but before then did not somebody talk to one of the officials of the Treasury Department and ask him about the case?

Mr. LYNCH. I will be glad to answer that.

Mr. KEAN. All right.

Mr. LYNCH. On December 27, Judge Mayock, whose full name is Welburn Mayock, who, I understand was general counsel of the Democratic National Committee, came in by appointment to see Mr. Foley. Mr. Foley asked me to be present at the time and I was present at the time.

Mr. KEAN. This was on December 27?

Mr. LYNCH. This was on December 27.

Mr. KEAN. That was the first time you had heard about this matter? Mr. LYNCH. No. I want to say this: That on December 21, 1948, according to my notes, I made an inquiry of a staff member of the Bureau of Internal Revenue on an entirely hypothetical basis. I asked the question whether or not a loan to a political committee could be charged off as a nonbusiness debt when it becomes worthless, or if and when it becomes worthless as a capital loss offsetting capital gains. That inquiry was on an entirely hypothetical basis, on the basis that someone would present the problem of whether or not this could be done with respect to loans to the Democratic National Committee. My only inquiry at that time

Mr. KEAN. Why did you make this inquiry?

Mr. LYNCH. The only thing I could say on that is: I never saw Judge Mayock. I do not think I heard of the matter from any outsider at that time, and the only thing I can presume, and this was in 1948-the only thing I can presume is that probably somebody called up and said they wanted to have an appointment to raise the question, in which case it would not be unusual if I thought I would have anything to do with the matter to get myself a little bit schooled on the answer to the question, not to give the answer to it, but just to learn what the posture of the matter was.

Now, that is the only thing, and that was not presented to the Bureau as a question for their consideration; it was just an abstract question as to whether or not there could be considered under that question the write-off of debts to a political committee. The answer that I got was a purely hypothetical answer that there was nothing in the section that excluded political debts.

Now, if I might pick up then-—

Mr. KEAN. Just along that line, you made that telephone conversation on December 21?

Mr. LYNCH. December 21.

Mr. KEAN. Then 2 days later the Democratic National Committee, or rather, the State committee, wrote a letter to Mr. Reynolds stating that they were unable to pay.

Mr. LYNCH. This information I know I did not pass on to anyone. Mr. KEAN. You did not pass it on?

Mr. LYNCH. Oh, no. This was simply information, because someone must have told me that people were coming in on this matter, and it was entirely my own schooling.

Mr. KEAN. But they asked you first; somebody asked you the question?

Mr. LYNCH. I think somebody said these people are going to come in and ask this question.

Mr. KEAN. Somebody told you that people were coming in, and after they decided they were going to come in, then they wrote the letter to Mr. Reynolds.

Mr. LYNCH. I could not contribute to that. I mean my conjecture or yours would be just as applicable on that.

Mr. KEAN. Now we have gotten the case up to where the general counsel for the Democratic National Committee-this was not the State committee but the National committee-came in to see Mr. Foley in your presence.

Mr. LYNCH. That is correct.

Mr. KEAN. And then what happened?

Mr. LYNCH. As I recall it, he stated what the problem was. doing this by recollection.

Mr. KEAN. I understand.

I am

Mr. LYNCH. And he outlined that the problem was that the Democratic National Committee of New York had received these loans back in 1940 or 1944. I do not recall any great amount of detail about it, except that they were loans from several years past. He said that they had intended to try to pay these debts off, that they then found themselves in the situation where they faced either bankruptcy, filing a voluntary petition in bankruptcy in order to wash them out, or be enabled to effectuate a settlement on a nominal basis. That was the substance of what was said.

But we told Judge Mayock, Mr. Foley, and myself, was that the matter should be taken up with the Bureau of Internal Revenue, that it should be taken up by the principals or their representatives, and that they should make their own arrangements for taking it up with the Bureau of Internal Revenue. This is not novel, because under any circumstances like that we would not purport to give them an answer to the question on it, because those are obviously matters that have to be taken up after an opportunity to get into the facts, and by the people within whose competence and responsibility lies the decision. Mr. KEAN. Do you have notes there of what took place?

Mr. LYNCH. I have notes only of the fact that I went in to see Mr. Foley with Judge Mayock that day, and only notes of the fact that on the following day I called Mr. Oliphant which I am giving you-we made no memorandum of the conference.

Mr. KEAN. You made no memorandum at all? All you have is your notes?