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Mr. EBERHARTER. According to the information furnished us by the same staff, at the same time, the profits of the associations belonging to the Federal Home Loan Bank Board last year amounted to $40 million. I am not talking about the reserves and I am not talking about the dividends. The profits were $40 million last year. On that, not 1 cent of tax was paid; was it?

Mr. KREUTZ. That would be the amount transferred or retained in reserves, I believe.

Mr. EBERHARTER. The undivided profits of the members of the Federal Home Loan Bank system in 1948, undivided profits, were $40,334,000. On that not 1 cent of tax was paid?

Mr. Kreutz. No, sir. I think it is a misnomer, however. Undivided profits are really part of the reserves.

Mr. EBERHARTER. I think associations know how to make a report to the Federal Home Loan Bank Board. The reserves for the year 1948 were $69,911,000, and in addition to the reserves the undivided profits amounted to $40,334,000. The dividends they paid out, including interest on deposits and investment certificates, were $227,820,000. That does not include all the operating building and loan associations. It is only those who are members of the Federal Home Loan Bank system. I do not know how much the profits would be if we included those who do not belong to the Federal Home Loan Bank system.

Mr. KREUTZ. They would not be very much different, sir. Most of the associations were measured by their assets are members of the bank system.

Mr. EBERHARTER. Thank you.
The CHAIRMAN. Mr. Curtis ?

Mr. CURTIS. Who owns the profits of the building and loan associations, if there are profits made?

Mr. KREUTZ. The members.

Mr. CURTIS. Who owns the profits of a commercial bank if it makes profits?

Mr. KREUTZ. The stockholders.

Mr. Curtis. Now, what do you call the return the building and loan association makes to its investors? Dividends?

Mr. KREUTZ. Yes, sir.

Mr. Curtis. But for all practical purposes it is the payment of interest; is it not?

Mr. KREUTZ. Many people regard it as such, I suppose.

Mr. Curtis. So far as the practical arrangement is concerned, a man puts his money in there and he gets so much for the use of it; is that right?

Mr. KREUTZ. Yes, sir.

Mr. Curtis. To that extent it is comparable to the operation of the savings department of a commercial bank, it pays interest to the depositors to whom they have agreed to pay interest, and that is a business deduction to them; is it not?

Mr. KREUTZ. Yes, sir.

Mr. CURTIS. Now, why do building and loan associations want to have a reserve?

Mr. KREUTZ. If they do not have a reserve, they will not stay in business very long when times get rough, as they have in the past.

Mr. CURTIS. Now, it occurs to me if a tax has to be imposed on this particular type of business probably the recommendations of the Secretary of the Treasury ought to be carefully looked into. If we tax the undistributed reserves of a building and loan association, will we be favoring that building and loan association which operates conservatively and puts itself in a position to render the utmost service to the community if hard tiines come and prices of real estate

go down?

Mr. KREUTZ. No, sir; you would be penalizing that association.

Mr. CURTis. In other words, if the Congress finds that a tax has to be levied, following this line of thinking we would be rewarding the building and loan association that paid everything out that they could pay out?

Mr. KREUTZ. Yes, sir.
Mr. CURTIS. Their tax would be small?
Mr. KREUTZ. That is right.

Mr. CURTIS. If, on the other hand, the management of an association wanted to safeguard its people and investors and its borrowers and the community in general, it would be inviting a higher tax; is that right?

Mr. KREUTZ. Yes, sir.

Mr. CURTIS. Now, I notice that you have listed in the table filed 85 associations in my State of Nebraska. Are those all the associations or those that belong to your National Savings and Loan League?

Mr. KREUTZ. Those are all the associations in Nebraska.

Mr. CURTIS. They have assets of $131 million but the number of individuals having savings accounts is 71,800. That would indicate

. that the average investment there was around $1,825 per individual.

Mr. KREUTZ. Yes, sir.

Mr. Curtis. I further get from your paper that your figures indicate that for every $1 million deposited in building and loan associations, from the income derived there is eventually paid in the Federal Treasury an average of $5,000 for each $1 million; is that correct?

Mr. KREUTZ. Yes, sir.

Mr. Curtis. And for the commercial banks there is an average of $3,300?

Mr. KREUTZ. Yes, sir.

Mr. CURTIS. How do you account for the building and loan associations' figure being higher than the banks?

Mr. KREUTZ. A building and loan association has most of its assetsat the present time it is in excess of 80 percent-invested in mortgage loans made to other members. The average return on those mortgages is somewhere around 5 percent, today, maybe a little less than that. As a result of that return, they were able, in 1949, to distribute to their members dividends at an average rate of 2.52 percent or $25,000 for each $1 million of savings, and we applied a 20 percent rate against that income in the bands of the members and arrived at the $5,000.

In computing the amount which is produced in the insured commercial bank system of the country, we took the amount of taxes paid by the banks, we added to that a 30 percent tax on the dividends distributed to the stockholders of those banks.

Mr. Curtis. You just assumed that the average bank stockholder would be in the higher-income bracket?

Mr. KREUTZ. Yes, sir, and then we applied a 20 percent tax rate against the interest paid on deposits by banks. We took the total of those and divided them by the total deposits of the banks and we came out with the $3,300 figure.

As to why there should be that difference, I do not know. Those are the figures from the official reports of the Government.

Mr. Curtis. Do you have any information to give to the committee which would give us an idea to what extent building and loan associations have income other than from their lending of money on real estate and the Government bonds?

Mr. KREUTZ. Yes, sir, that is very easy. It is practically nil. Practically all their income is in the form of interest on mortgage loans which they have made to their members and interest on Government bonds which they own, partially as a patriotic move and partially in compliance with statutory liquidity requirements.

Mr. Curtis. Now, do a very high percentage of building and loan associations have insurance departments, where they are insurance brokers? Do they have a real-estate department and other departments that are income-producing?

Mr. KREUTZ. No, sir. You see a situation where someone in the real-estate or insurance business also is helping to run a building and loan association but the insurance and the real-estate business is his own business. The association cannot operate a real-estate and insurance business as an association. As a matter of fact, if it had not been for the insurance and real-estate business of some of the people who started these associations and helped to operate them, it would not have been possible to build them.

Mr. CURTIS. Is there any Federal requirement prohibiting the association from engaging in real estate, insurance, and other activities?

Mr. KREUTZ. Yes. So far as the Federal associations are concerned

Mr. Curtis. Not the associations; I mean the Federal Government requirements.

Mr. KREUTZ. None that I know of; no, sir. But I speak to the question of Federal associations which cannot do it.

Mr. Curtis. Do you know what the State law is in that respect? Mr. Kreutz. I do not know of any State where it is permitted, where a building and loan association may engage in real-estate and insurance business.

Mr. Curtis. Or any other income-producing business?

Mr. KREUTZ. No, sir; nor engaged in any other business that produces income.

The Chairman. Mr. Mason.

Mr. Mason. With respect to the comparison that was made on Page 4 between what is paid by the banks and what is paid by building and loan associations, your $5 illustration and your $3.30 illustration, your comparison is between the total savings deposits in the building and loan association and the total deposits in the commercial banks only a part of which are savings and in their deposits in the State commercial banks they have checking accounts and they have certain other things which enter into it, and those two comparisons are not equitable, they do not jibe with each other. If you compare the savings deposits of building and loan associations and then the total deposits of commercial banks, not the savings deposits in the commercial banks, then you are going to have a different picture entirely than if you compare savings deposits in the one with the savings deposits in the other. You will find that the savings deposits in the commercial banks pay at least as much, and probably more than the savings deposits in the building and loan association. You cannot compare the total deposits in commercial banks with the savings deposits in a build ing and loan association.

Mr. KREUTZ. It is very difficult to allocate a portion of the earnings of a bank to one department or another from the reports that are published. However, we did attempt to break down the demand deposits as against the time deposits of banks and the ratio, as you probably know, is about 1 to 3; that is, 75 percent of the total deposits are demand deposits, and then we attempted to divide the amount of tax paid by the banks into that same ratio and the tax paid by the stockholders on their stock at the same ratio.

We come out, as a result of those figures, with some figures which are not so favorable to building and loan asociations but which are still more favorable. These were hastily made and I would want to do a little further checking on them. This would show a tax produced by the savings deposits of banks of $4,726 per $1 million as against $5,000 produced by building and loan associations.

Mr. Mason. But the savings part of the commercial banks and the savings part of the building and loan associations are very close together, $4,700 against $5,000, if you have segregated the savings accounts in the commercial banks from the other accounts.

That is all, Mr. Chairman.

The ChairMAN. If there are no further questions, we thank you for your appearance and the information you have given the committee.

Mr. KREUTZ. Thank you, Mr. Chairman.

The CHAIRMAN. The next witness is Mr. William E. Webb, Jr., vice president of the North Carolina Association of Insurance Agents, Statesville, N. C., representing the State Associations of Insurance Agents.

Please give your name and address and the capacity in which you appear to the stenographer for the benefit of the record,



Mr. WEBB. My name is William E. Webb, Jr. I am a local insurance agent of Statesville, N. C. I am appearing on behalf of the North Carolina Association of Insurance Agents and similar organizations located in 23 other States representing approximately 16,744 insurance agents. A complete list of the State associations is attached to my statement setting forth the membership of each.

The CHAIRMAN. I might say that Mr. Webb's home and place of business is Statesville, N. c., in the district I represent. He and his father have been in the business for quite a while. He is a man of high character and outstanding business integrity.

Mr. WEBB. Thank you very much, Mr. Chairman.

About 50 percent of these agents sell mutual insurance as well as capital stock insurance. Nevertheless, they are wholly in favor of

imposing the same tax burden on mutual fire and casualty insurance corporations as are imposed on capital stock fire and casualty insurance companies.

Insurance agents for capital stock fire and casualty insurance companies are vitally affected by the income-tax treatment of the mutual fire and casualty insurance corporations. As corporate tax rates increase, the tax advantage of the mutual corporations becomes greater. With an excess profits tax in operation, the tax advantage enjoyed by the mutual corporations is almost great enough to offset their payment of policyholder dividends. We insurance agents do not see how our companies can continue to meet mutual competition when the mutual corporation can use the tax they don't pay to pay these dividends.

The Congress made a very commendable attempt to remove the tax advantage of the mutual corporations in the 1942 Revenue Act. This committee is to be especially complimented for its effort to impose full taxation on both the underwriting profits and the investment or banking profits of mutual fire and casualty insurance corporations. The issue was finally compromised by the Congress. It departed from our traditional concepts of net income to levy what in effect is a gross income tax on the mutual corporations which recognize the collectivist philosophy of the policyholder dividend. At the time, however, the mutual insurance corporations insisted that the gross income formula would yield substantially the same amount of tax as the capital stock company formula. No one could disprove that contention at the time although representatives of the capital stock companies insisted that it would not produce tax equality.

Now, 8 years later, we have sufficient experience to prove that the mutual formula does not begin to impose the same income tax burden on the mutual corporations as the capital stock formula imposes on the stock companies. This disparity will be further aggravated by the imposition of excess profits taxes which are inoperative on companies which are permitted to pay tax on income remaining after distributions. Any corporation that can reduce its taxable income through the deduction of policyholder dividends, dividends to shareholders, or patronage dividends can avoid having excess profits and thereby effectively escape the payment of excess profits taxes. It is a well known fact, in the industry, that few mutual fire and casualty insurance corporations paid excess profits taxes during World War II.

This disparity in the Federal tax treatment of the stock and mutual fire and casualty insurance corporations is without legal or economic justification, and should be corrected by requiring both types of corporations to pay Federal income taxes on the same statutory basis. The insurance agents, whom I represent, see no need for two sets of tax laws to measure the relative ability of the mutual and stock fire and casualty insurance corporations to pay taxes. Both types of corporations operate in a profit and loss economy. The mutual contention that by reason of its mutual operation it has no profits from its underwriting business is a perversion of the "nonprofit” philosophy that has permeated the "do gooder" thinking since Karl Marx penned the Communist Manifesto and Das Kapital.

Let us examine the word “mutual” since it purports to have some mystic significance whenever the mutual corporations seek to justify their tax advantage. In a broad sense, all insurance contracts are

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