That would limit this floor tax to liquor for beverage purposes, would it not?

Mr. BERKSHIRE. That is right. But I do not see how you can tax liquor on intended use.

Mr. LEWIS. There are some 230,000 of these people who will become involved in its administration?

Mr. BERKSHIRE. More than that, I believe.

Mr. LEWIS. Whatever the figure may be. Will this floor tax involve their making any additional or special reports to the Government?

Mr. BERKSHIRE. It will; yes, sir. The way the floor tax has been handled heretofore, the collector sends out a notice and a blank, and they make a sworn return as to the amount that they had as of a particular date.

Mr. LEWIS. And that will have to be reported, whether they try to traffic in the revenue business or not?

Mr. BERKSHIRE. That is right. This bill would not require that, but the answer that I made to some member a moment ago is that we thought that it ought to apply to all of them.

Mr. DINGELL. One more question. The large pharmaceutical manufacturers using alcohol in medicine, and in various preparations, are they under some sort of a permit system now?

Mr. BERKSHIRE. No, sir.

Mr. DINGELL. They pay the tax the same way as any other purchaser?

Mr. BERKSHIRE. They buy tax-paid alcohol, unless they are making a commodity in which they can use denatured alcohol. Of course, the denatured alcohol is withdrawn free of tax and those users of specially denatured alcohol are under a permit.

Mr. DINGELL. Their buying of alcohol for medicinal purposes would come in under the phraseology contained in this resolution; they would be exempt from this 25-cent additional tax, is that right? Mr. BERKSHIRE. That is right, under this wording.

Mr. Chairman, may I make this further statement? Mr. Helvering, the Commissioner, asked me to state that he had intended to come down here and wanted to, but was unable to do so, and that I might say for him that he had looked into this matter and believed that this is the orderly way of handling the increase; that is, to provide a floor tax.

Mr. ROBERTSON. What is the position of the Treasury on exempting completely nonbeverage alcohol from the 25-cent additional tax? Mr. BERKSHIRE. I just answered that on this side, Mr. Robertson. The Treasury thinks that for the difference of 25 cents, it would probably not be a feasible thing to do. The industry probably would not want it themselves, because there would have to be some permit system set up in order that we might know when the spirits were being withdrawn for that use.

Mr. ROBERTSON. Suppose the whole tax were imposed on all users of distilled spirits, medicines, and so forth, and then they were permitted to file an application for refund, if they showed that it actually went into medicine. Would that be practicable?

Mr. BERKSHIRE. I do not believe it would be practical for the 25 cents. I doubt if the industry would be interested for that much of a saving.

Mr. CULLEN. If that is all, we thank you for the statement that you have made, Mr. Berkshire, and the information you have given the committee in answer to the questions they have asked of you. The next witness is Mr. J. Harry Covington.

Mr. Covington, please state your name and whom you represent, for the record.

STATEMENT OF HON. J. HARRY COVINGTON, REPRESENTING HIRAM WALKER & SONS CO. AND OTHER DISTILLERS

Mr. COVINGTON. Mr. Chairman and gentlemen: My name is J. Harry Covington, of the law firm of Covington, Burling, Rublee, Acheson & Shorb, Washington, D. C.

My firm is regular counsel for Hiram Walker & Sons, Inc.

Mr. CULLEN. May I interrupt to ask you how much time you want? Mr. COVINGTON. I think I can finish in 10 minutes, Mr. Chairman. Mr. CULLEN. Do you want to proceed without interruption? Mr. COVINGTON. I believe I would prefer that, Mr. Chairman, because I think it would conserve the time of the committee.

I have undertaken to condense as much as possible the statement that I want to make to this committee.

Mr. CULLEN. That is what the committee would like. You may proceed with the understanding that you will not be interrupted until you have finished your presentation.

Mr. COVINGTON. The distillers for whom I speak today, and they are among the largest distillers of the country, are: Baltimore Pure Rye Distilling Co., Brown-Forman Distillery Co., Inc., The Fleischmann Distilling Corporation, Frankfort Distillers, Inc., Glenmore Distilleries Co., Hiram Walker & Sons, Inc., Merchants Distilling Corporation, National Distillers Products Corporation, Seagram Distillers Corporation, Schenley Products Co., Stitzel-Weller Distillery, The Frank L. Wight Distilling Co.

As I say, they are the largest distillers in the United States, and they produce in the aggregate a very large proportion of the total output of distilled spirits in the country.

Mr. McCORMACK. They are pretty good clients, Judge, aren't they? [Laughter.]

Mr. COVINGTON. Yes, sir; but I am not limited to them as clients. Mr. COOPER. Judge, you are representing here and speak for all of those whose names were given?

Mr. COVINGTON. Yes, sir; I do.

These distillers favor the passage of House Joint Resolution 683 to provide a floor-stock tax of 25 cents a gallon upon distilled spirits, except brandy, produced or imported into the United States, upon which the existing $2 tax has been or will be paid prior to July 1, 1938, held by retailers in excess of 50 gallons, and by other persons or concerns without exception for sale for beverage purposes.

I assume that members of this committee are generally familiar with what a floor-stock tax is. Its nature and operation will, therefore, only be briefly stated.

Whenever an excise tax has been imposed by the Federal Government, or an existing excise tax increased, upon a commodity manufactured, a tax in the exact amount of the primary excise tax is imposed upon such commodity already manufactured or processed and

in the hands of the manufacturers or processors or intermediate distributors or retailers held for sale to the ultimate consumers.

These floor-stock taxes are imposed both to prevent tax avoidance and to prevent undue price discriminations in an industry.

A random examination discloses that the floor-stock tax was provided for when the tax on tobacco was increased in 1898.

It was imposed when the distilled-spirits taxes were increased in 1917, in 1918, and after the prohibition period had ended, in 1934. In the Agricultural Adjustment Act of 1933, which imposed processing taxes on a variety of agricultural products, equivalent floorstock taxes were imposed on the processed commodities subject to the tax when in the hands of the processor, distributor, or retailer.

Dr. Mordecai Ezekiel discussed floor-stock taxes at a hearing on that act before the Senate Committee on Agriculture. And I may say in parentheses that at the time the processing-tax provision went into the Agricultural Adjustment Act in the House, it all took place so rapidly, there was not an opportunity for an extended explanation of the significance of floor-stock taxes. But when the bill came to the Senate, there were extended hearings upon it, and Dr. Ezekiel, who is the economic advisor of the Secretary of Agriculture and regardless of the economic questions upon which persons may divide at the present moment, he is known by all persons familiar with economists as an able one-made a detailed statement about the bill. He has been at the Department for a long time, and he is a skilled economist. Dr. Ezekiel, at the hearing of the Committee on Agriculture of the Senate on March 17, 1933, stated with an extended explanation, that the floor-stock tax was necessary in the interest of equity: that when you impose a new excise tax or a new processing tax, then a compensatory floor-stock tax is necessary in the interest of equity to all branches of the business concerned.

In the short time, therefore, at my disposal, I do not want to elaborate on the sound economics of floor-stock taxes in connection with manufacturing excise taxes. The fact is that it has been the uniform practice in this Government to impose such taxes in connection with excise taxes on manufacturers.

As the representative of the Treasury has pointed out in the case of the whisky taxes, that has been the continued practice of the Govern

ment.

Now, I hope that this committee will keep the legislative situation clearly in mind. The failure to provide for an appropriate floor-stock tax in the recent revenue act in the form in which it appeared in the earlier laws for increased liquor taxes, going back for a period of 30 years, was entirely due to exigencies beyond anyone's control. As I recall the situation, the so-called "third basket" provision in the revenue bill, the close corporation tax provision, was stricken from the bill on the floor of the House and there was an immediate recognition of the fact that a good many million dollars of revenue had been lost thereby, upon Treasury estimates. And immediately Mr. Robertson, of Virginia, proposed as an alternative the imposition upon distilled spirits, excepting brandy, of an additional tax of 25 cents. That proposal was adopted. It all took place rather hurriedly. The bill was gotten out of the House and went over to the Senate. The Senate Finance Committee removed the provision for the increased tax, and as it passed the Senate there was no provision in

the bill. That was the situation when the bill went to conference. And, of course, the conferees were confronted with the problem either of accepting or rejecting the amendment which had originally gone into the House bill. The Senate either must recede or the House must recede. The net parliamentary result was that there was restored in conference the original House provision with its defective absence of the compensating floor tax.

So that there was nothing abnormal about the situation, nor was there anything peculiar to liquor taxation involved in its failure to provide for appropriate floor-stock taxation.

Now, the large distillers for whom I speak, gentlemen, are actuated by an enlightened self-interest in urging the passage of the pending joint resolution. They do not wish the large wholesalers and retailers, with abundant credit, to buy abnormally prior to July 1 next and thus have others of their customers with limited credit at a disadvantage for some months to come. The largest possible number of distributors and retailers who purchase a distiller's product is a sound business wish.

And I may say to the gentleman from Arkansas, Mr. Fuller, that I have just asked two or three of the most important distillers for whom I speak, and they say that they would not care if you imposed the $2.25 tax tomorrow morning, if you will put into effect the appropriate compensatory floor-stock tax and at the same time effect an arrangement in the law whereby there will not be that volume of liquor to escape taxation which is always in any normal day in transit.

These distillers wish to give to the committee a demonstration of the fact that they are here really because they are interested in maintaining an orderly trade situation. They believe in wide distribution. They do not want to see their ordinary outlets disturbed. They do not want to see one man at disadvantage as against another man. And I may say, in reply to a question that was asked by someone here, that one of the very reasons urged by Dr. Ezekiel in 1933 for the imposition of a floor-stock tax, as a compensatory tax, was the ability, in the absence of it, of the very large department stores, with their abundant credit, to make extensive purchases which they could later along use for discriminatory and destructive price cutting.

There is no absolute means of knowing, but from the best information that can be gotten, I wish to say, on behalf of the distillers, that their information is that the larger number of wholesalers and the larger number of retailers in the country who are themselves interested in orderly and nondiscriminatory sales, are in favor of the pending proposal for a floor-stock tax.

If the floor-stock tax is imposed, there will be no incentive for anyone to make extraordinary withdrawals from bond before July 1. The withdrawals, on the other hand, in the absence of it, will certainly take place.

Now, may I say just one more word to Mr. Treadway, of Massachusetts, about what I think was a misconception that he had concerning the increased financial requirements incident to several months of withdrawals? One must assume that the large distillers of the country are amply equipped to finance ordinary withdrawals from bond from day to day, from week to week, and from month to month, with the payment of the $2 tax that is involved. So that all that they would be required to do in connection with large forward withdrawals would be

to increase their financial commitments to the extent of making provision for an additional 25 cents.

Now, in the case of the distillery company for which we are regular counsel, Hiram Walker & Sons, Inc., which has the largest single plant in the United States, at Peoria, Ill., their financing of withdrawals, to the extent of the additional 25 cents of tax, would be measured only at about two or three hundred thousand dollars a month or about a million dollars for a 4-month period.

Now, there would be no trouble in taking care of that amount of additional financing.

When you regard the fact that the internal-revenue tax is a large portion of the cost of a gallon of whisky, and that the cost of a gallon of whisky before the tax is paid, is measured in cents and not in dollars, you can see the wisdom, if the distillers do not have legislation that enables them to know that all of their customers are provided for equally, in picking up the advantageous amount that would be involved in the saving of the 25-cent tax on 3 or 4 months' supply of whisky, where it only means financing the additional 25 cents per gallon over the tax which they now regularly finance.

I think that is all I have to say, Mr. Chairman, in behalf of the distillers. I am quite satisfied that if the floor-stock tax is imposed, the withdrawals will be substantially normal. I am equally satisfied from all the information which can be gotten that if it is not imposed, they will be abnormal.

Mr. CULLEN. You do not feel that the withdrawals, in the event of the passage of this resolution, would be abnormal by the distillers or by their customers?

Mr. COVINGTON. If this resolution passed?

Mr. CULLEN. Yes.

Mr. COVINGTON. Oh, no; I have no means of knowing, but I assume that what Mr. Berkshire was referring to as "abnormal withdrawals" must be withdrawals by some of our smaller concerns in certain localities. I have asked all of the large distillers that we are speaking for and they tell me that up to this time, hoping for, and believing in the wisdom of Congress with respect to this legislation, that their business has been moving along in an absolutely normal channel, and that their withdrawals have been just those day-to-day withdrawals that they are accustomed to make for the purpose of taking care of their regular requirements.

Mr. CULLEN. I think the impression is abroad that the distillers or their customers are stocking up in various places.

Mr. COVINGTON. They will, if this is not enacted. There is no question about that.

Mr. TREADWAY. On that point, Mr. Covington, do you agree with the estimates made by Mr. Berkshire that if this is not passed there will be withdrawals of 6 months' supply?

Mr. COVINGTON. Mr. Treadway, I have no accurate means of knowing that. After all, I am merely a lawyer.

Mr. TREADWAY. Yes; but you consult with your clients.

Mr. COVINGTON. I do; and I am told by the people for whom I speak, and particularly the company which we regularly represent in the United States, that the withdrawals will certainly be for several months ahead, whether for 6 months or not. It will, I presume, depend upon the financing capacity of the concerns. One concern