To place a heavier burden on the owners-shareholders or savings account holders, as they are variously known-would, in our opinion, be unfair.

Without lengthening this statement unduly, suffice it to say a direct income tax on building and loan associations will result in at least a partial reversal of the policy of Congress to foster these institutions on a sound basis, will reduce or at least cause a disruption in the supply of home mortgage financing and may well lead to increased governmental activity in this field.

Therefore, we urge that there be no change in the tax status of building and loan associations.

(Mr. Kreutz submitted the following list of building and loan associations in the United States and possessions.)

Building and loan associations in the United States and possessions

The CHAIRMAN. Does that conclude your main statement?

Mr. KREUTZ. Yes, sir.

The CHAIRMAN. Mr. Reed?

Mr. REED. Mr. Kreutz, do many associations own buildings that have space to rent to other tenants?

Mr. KREUTZ. No, sir; just a few. Most of the buildings owned by the associations are single-purpose buildings.

There was a point made this morning about buildings in Chicago. I am not acquainted with all the facts. I do know that the Bell Savings and Loan Association, which is a big institution, and which does own indirectly a large building, in order not to have that building on the tax-exempt rolls, has placed its ownership in a separate corporation, the stock of which is wholly owned by the association so that any revenue from that building operation is taxed.

Mr. REED. It is not a general practice?

Mr. KREUTZ. No, sir.

Mr. REED. What is the requirement of the Internal Revenue Code for reporting payments by building and loan associations?

Mr. KREUTZ, Building and loan associations have been discriminated against in that regard. They are required to report all dividends in excess of $100 whereas banks are not required to report interest unless it exceeds $600, I believe.

Some figures we had sometime ago showed that something around 60 percent of all the dividends paid by building and loan associations are reported by the associations to the Internal Revenue Bureau.

Mr. REED. Just how do the activities of the building and loan association compare with the activities of the commercial bank? Mr. KREUTZ. I would prefer, if you do not mind, to have one of these gentlemen, who operates an association, answer that. Mr. O'Malley of Wilkes-Barre has a $5 million association.

Mr. O'MALLEY. In Wilkes-Barre, we accept savings, handle the financing of homes, the selling of Government bonds, whereas commercial banks handle savings accounts, notes, bonds, a travel department, travelers' checks, safe-deposit boxes, and trust departments. Mr. REED. Thank you very much.

Does any one of you know about the State of New York, whether they have a tax on building and loan associations?

Mr. KREUTZ. No, sir; there is no tax whatever on building and loan

associations.

Mr. REED. I assumed that was so. Thank you very much.

The Chairman. Mr. Jenkins.

Mr. JENKINS. I want to ask one or two very general questions. Is there any other agency that can take the place of a building and loan association?

Mr. KREUTZ. None; no, sir.

Mr. JENKINS. The fact that the building and loan associations have grown in considerable stature financially proves that those who had the idea started first; in other words, they saw what was coming and they filled a gap. A wonderful gap has been filled by their activities. Mr. KREUTZ. The movement grew like religion or anything else of

merit.

Mr. JENKINS. In these days we talk a lot about inflation. There would be no better way for us to curb inflation than to encourage people to put their money into building and loan associations?

Mr. KREUTZ. That would be so; yes.

Mr. JENKINS. That would be as effective as anything we could recommend.

Now I have just one other question. On the last page, page 14,

you say:

As shown by the figures presented and the official reports, savings and loan associations already produce 49.2 percent more tax revenue per million dollars of savings (deposits) than do insured commercial banks.

How does that work, without going into too much detail?

Mr. KREUTZ. A building and loan association as such is a group of partners who have banded together. Their earnings are pooled and distributed among them. They pay taxes on those earnings. The amount of taxes is based upon a 20-percent tax rate for the small person, in which class we would place the building and loan member. Figured at 20 percent, the tax on the dividends distributed to the building and loan associations in 1949 amounted to $5,000 per million dollars of savings accounts or deposits.

In contrast to that, the total amount of tax revenue produced through the operation of insured commercial banks-and that includes the corporate taxes which the banks pay; includes the taxes estimated at 30 percent on the dividends paid by the stockholders of the bank, and a 20-percent tax on the interest on deposits-was $3,300 of taxes per million dollars of deposits.

Mr. JENKINS. Which paid the larger amount of money out, the savings banks of the country or the Federal savings and loan associations? Which is larger, the savings accounts of the banks or of the associations?

Mr. KREUTZ. I do know that the insured commercial banks of the country paid in dividends to their stockholders more than they paid in interest to their depositors. The amount per million dollars of deposits, of course, is much greater for the building and loan associations. The amount of interest paid by the insured commercial banks of the country in 1949 was $328 million, as contrasted to $268 million paid by the building and loan associations. But, of course, the building and loan associations are just a fraction of the size of the commercial banks.

Mr. JENKINS. I believe that is all, Mr. Chairman.

The CHAIRMAN. Is it not true that the faster the building and loan associations expand the more competition they can give the taxpaying banks?

Mr. KREUTZ. No, sir; I should say not. The matter is relative. I should say that size of an association does not place it in a better competitive position. That is to say, a larger association is in no better competitive position, relatively speaking, than the smaller association.

The CHAIRMAN. I know; but, whether large or small, the two come in competition in the same activities, right across the street from each other or as next-door neighbors. They are in competition for the same business, and one pays the tax and the other does not, regardless of size. Does not the one who pays no tax have an advantage over the one who does pay a tax?

Mr. KREUTZ. If we had no building and loan associations in the country, then there would be no competition at all.

The CHAIRMAN. There would be competition among each other. There would be competition with other banks, other loan institutions. That would not eliminate competition.

You would not take that position?

Mr. KREUTZ. No. My point was that, if there were no building and loan associations, the banks would have no competition of that sort. The more associations there are, the greater their assets, the more formidable they may appear to the bank as competitors. We do not think there is real competition between the two. The banks are doing a different kind of business. Building and loan associations are doing a business of encouraging thrift and encouraging home ownership.

The CHAIRMAN. That is commendable. It was brought out here this morning that the commercial banks pay a much lower rate of interest than the savings and loan associations. If there is not a competitive advantage there, why should not one pay as much interest as the other?

Mr. KREUTZ. I wonder if the issue is not a question of whether Cooperative movements of this kind are to be killed off in favor of large business owned and controlled by a few who are in it for personal profit?

The CHAIRMAN. That same issue could be raised by every small taxpayer in the land: that if he does not have lower taxes he will be knocked out of business and the activities transferred to larger business.

We do not recognize that in taxing corporations. We tax them on their income, whether large or small. We get more taxes from the larger because their income and profit is much more. We do not excuse a small corporation from paying taxes on the ground that, if he does pay taxes, it will put him out of business. We could not do that; could we? Is that your argument?

Mr. KREUTZ. I tried to make clear that from our studies the building and loan associations, as such, being groups of people who have banded together, do pay into the Treasury a larger amount of tax per $1,000 of their savings than do the insured commercial banks. The CHAIRMAN. We are not talking about savings; we are talking about profits. Profits are what we tax. Now, if they pay more on their profits than the commercial banks do on their profits from exactly the same business, we would like to know about it, and to whom they pay it and when they pay it.

Mr. KREUTZ. I wonder if I might compare a building and loan association with the trust department of the bank. A bank manages a trust department and manages trust funds which are loaned out in one form or another, and earn interest. The bank, as the trustee, then distributes the earnings which it receives to the beneficiaries of those trusts and sometimes will distribute 3 percent perhaps, whereas that bank is paying its own depositors only 1 percent or 11⁄2 percent. It might be said that the bank's own trust department, the activity of its trust department, is in competition with its own savings-deposit business.

The CHAIRMAN. We are talking about loans, about the interest paid by building and loan associations, and what they do with the profits.

79120-51-pt. 2- -21

Mr. KREUTZ. The profits are distributed, sir.

The CHAIRMAN. They are not all distributed.

Mr. KREUTZ. They are all distributed except the amounts which are necessary to take care of expenses and losses.

The CHAIRMAN. That is true, but if they make profits, whether they hold them or whether they distribute them, why should they not pay taxes like others in exactly the same kind of transactions, exactly the same kind of business? That is what I cannot understand. Now, nobody here wants to put the building and loan associations out of business, but I do not see why they should have a competitive advantage and not be taxed by the Government, especially in this emergency when other institutions with whom they compete are asked to pay increased taxes.

Mr. KREUTZ. We think they do pay the tax, for the building and loan association is an association owned by a group of people who get all the profits made by the cooperative undertaking and they pay the tax on what they receive; they pay the tax on the net profits. The CHAIRMAN. When they get it, if and when.

Mr. KREUTZ. Yes.

The CHAIRMAN. What if they do not get it? Suppose they get out of the association, what becomes of profits and the money they had in the institution? It is still left there; is it not?

Mr. KREUTZ. They will withdraw their share of the distributed earnings. They do not sacrifice their share of the distributed earnings. The CHAIRMAN. I understand with respect to distributed earnings, but what happens to the profit that has not been distributed? They do not get anything more than they put in, no matter how much has been accumulated. That would be part of their profit. They do not get it, because it has not been distributed. It is in reserve, but they do not get it at all, and there has been no tax paid on it.

Mr. KREUTZ. As I stated, the insured associations of the country at the end of 1949 had reserves of 6.9 percent of their assets. Those reserves, in relation to the need to building reserves in accordance with the studies made by the Federal Savings and Loan Insurance Corporation, as set out in the letter of the Corporation, to which I have referred, are not excessive. In fact, we would like to see them build even larger reserves.

The CHAIRMAN. The banks pay pretty liberal salaries; do they not? It was brought out here this morning that an officer of a savings bank in New York receives a salary of $60,000 a year. In the Government salaries are not so high. Yet, taxes were not paid out of the earnings of the corporation of which he is the head.

Mr. KREUTZ. Generally speaking, these associations pay very small salaries, relatively speaking.

The CHAIRMAN. They have to compete on the market for employees. They would have to pay as much as other people; otherwise they would not get help.

Mr. KREUTZ. As far as clerical help is concerned; yes. But we have found from studies that executive officers of associations by and large were paid below the standard rates around the country. Maybe it is the love of the work they are in. That is the result of the studies. The CHAIRMAN. Other taxpayers are necessarily going to have their taxes increased, and these tax-free organizations, as far as their profits before distribution are concerned, no matter how large, should pay the Federal tax.