thirty days' notice period, either upon complaint or upon its own initiative without complaint, to enter upon an investigation of the proposed discontinuance or change. Upon the institution of such investigation, the Commission, by order served upon the carrier or carriers affected thereby at least ten days prior to the day on which such discontinuance or change would otherwise become effective, may require such train, ferry, station, depot or other facility to be continued in operation or service, in whole or in part, pending hearing and decision in such investigation, but not for a longer period than four months beyond the date when such discontinuance or change would otherwise have become effective. If, after hearing in such investigation, whether concluded before or after such discontinuance or change has become effective, the Commission finds that the operation or service of such train, ferry, station, depot or other facility is required by public convenience and necessity and that such operation or service will not result in a net loss therefrom to the carrier or carriers and will not otherwise unduly burden interstate or foreign commerce, the Commission may by order require the continuance or restoration of operation or service of such train, ferry, station, depot or other facility, in whole or in part, for a period not to exceed one year from the date of such order. The provisions of this section shall not supersede the laws of any State or the orders or regulations of any administrative or regulatory body of any State applicable to such discontinuance or change unless notice as in this section provided is filed with the Commission. On the expiration of an order by the Commission after such investigation requiring the continuance or restoration of operation or service, the jurisdiction of any State as to such discontinuance or change shall no longer be superseded unless the procedure provided by this section shall again be invoked by the carrier or carriers."

PROPOSED AMENDMENT TO INTERSTATE COMMERCE ACT
(A-September 11, 1957)

(a) It is hereby declared to be the general policy of Congress to promote and encourage, in the interest of national defense and public welfare, the construction, reconstruction, reconditioning, or acquisition of equipment and other property used in the transportation business by railroad corporations, and the retirement (in whole or in part) of debt incurred for such purposes after the effective date hereof. It is the purpose of this Act to provide implementation of this general policy through the establishment by any railroad corporation subject to part I of the Interstate Commerce Act of a construction-reserve fund, with the privileges and subject to the limitations herein prescribed. Such construction-reserve fund shall be established, maintained, expended, and used in accordance with the provisions of this section and rules or regulations to be prescribed jointly by the Interstate Commerce Commission and the Secretary of the Treasury. Such fund shall be maintained in a separate cash deposit, or in obligations of the United States or any agency thereof.

(b) In computing the taxable income under section 63 (a) of the Internal Revenue Code of 1954 of any railroad corporation subject to part I of this Act there shall be allowed as a deduction, in addition to the deductions specified in that code, all amounts deposited in the said construction-reserve fund prior to the filing of the income-tax return of such railroad corporation for such taxable year.

(c) In computing the gross income under section 61 (a) of the Internal Revenue Code of 1954 of any railroad corporation subject to part I of this Act there shall be included all amounts withdrawn from the said constructionreserve fund for purposes other than those specified in subsection (a) of this section: Provided, That any amount deposited in the reserve fund which shall be permitted to remain in such fund for five years after having been deposited therein shall be considered to have been so withdrawn from such fund on the first day following the expiration of such five-year period. Such amounts shall be subject to tax at the rate or rates and shall be subject to the provisions of the Internal Revenue Code applicable to the year in which such amounts were deducted under subparagraph (b) of this section (including the interest provisions of such code, as if a tax deficiency for such year, whether or not a tax deficiency would exist for such year otherwise). For the purpose of this section, any amounts expended or withdrawn from the reserve fund shall be applied against amounts deposited therein in the order of the deposits.

(d) The basis for determining gain or loss and for depreciation, for the purposes of Federal taxes, of any property constructed, reconstructed, reconditioned, or acquired by the taxpayer, in whole or in part, out of the constructionreserve fund, shall be reduced by that portion of the deposits in the fund expended in the construction, reconstruction, reconditioning, or acquisition of such property, or expended to retire debt incurred for such purposes after the effective date thereof: Provided, That no expenditures shall be made from such fund for such purposes in excess of the then adjusted basis of the property to which such indebtedness relates.

(e) As used herein, qualifying expenditures shall include only expenditures which are chargeable to the accounts prescribed by the Interstate Commerce Commission to show the investment of a railroad corporation in property devoted to transportation service.

September 11, 1957.

CONSTRUCTION RESERVE

SEC. 7. The Interstate Commerce Act, as amended, is amended by inserting after section 25 thereof a new section 25a as follows:

"SEC. 25a. (1) It is hereby declared to be the general policy of the Congress to promote and encourage, in the interest of national defense and public welfare, the construction, reconstruction, reconditioning, or acquisition of equipment and other property used in the transportation business by common carriers subject to the Interstate Commerce Act, and the retirement (in whole or in part) of debt incurred, after the effective date of this section, for such purposes. It is the purpose of this section to provide implementation of this general policy through the establishment by any such carrier of a construction-reserve fund, with the privileges and subject to the limitations herein prescribed. Such construction-reserve fund shall be established. maintained, expended, and used in accordance with the provisions of this section and rules or regulations to be prescribed by the Interstate Commerce Commission and the Secretary of the Treasury. Such fund shall be maintained in a separate cash deposit or in obligations of the United States or any agency thereof.

“(2) All earnings of the fund shall be deposited in the fund. Such earnings may be withdrawn by the carrier only for expenditures for the purposes established in paragraph (1) of this section. If such earnings are not expended for such purposes within five years from the date of deposit in the fund, 85 per centum of such earnings shall be paid to the United States as a tax, in lieu of any other tax which may be applicable to such earnings.

“(3) In computing the taxable income under section 63 (a) of the Internal Revenue Code of 1954, as amended, of any common carrier subject to this Act there shall be allowed as a deduction, in addition to the deductions specified in that code, the amounts deposited in the said construction-reserve fund prior to the filing of the income-tax return of such common carrier for such taxable year, without limitation except that the deduction allowed pursuant to this section shall not exceed in any one year an amount equal to the depreciation recorded in the operating expense accounts for such year under the provisions of the uniform system of accounts prescribed by the Interstate Commerce Commission.

"(4) In computing the gross income under section 61 (a) of the Internal Revenue Code of 1954, as amended, of any common carrier subject to this Act there shall be included all amounts withdrawn during the taxable year from the said construction-reserve fund for purposes other than those specified in paragraph (1) of this section: Provided, That any amount deposited in the reserve fund which shall be permitted to remain in such fund for five years after having been deposited therein shall be considered to have been so withdrawn from such fund on the first day following the expiration of such five-year period. Such amounts shall be subject to tax at the rate or rates and shall be subject to the provisions of the Internal Revenue Code of 1954, as amended, applicable to the year in which such amounts were deducted under paragraph (3) of this section (including the interest provisions of such code, as amended, as if a tax deficiency for such year, whether or not a tax deficiency would exist for such year otherwise). For the purpose of this section, any amounts expended or withdrawn from the reserve fund shall be applied against amounts deposited therein in order of the deposits.

"(5) The regulations prescribed by the Interstate Commerce Commission and the Secretary of the Treasury, pursuant to paragraph (1) hereof, shall provide that no amounts may be withdrawn from the construction-reserve fund except (a) for the uses prescribed in paragraph (1) hereof or (b) upon payment_to the Secretary of the Treasury of the tax deficiency arising thereon under paragraph (4) hereof.

"(6) Amounts on deposit in a construction-reserve fund shall not be considered an accumulation of earnings and profits for the purposes of part I, subchapter G, chapter I, of the Internal Revenue Code of 1954, as amended.

"(7) The basis for determining gain or loss and for depreciation, for the purposes of Federal taxes, of any property constructed, reconstructed, reconditioned, or acquired by the taxpayer, in whole or in part, out of the constructionreserve fund, shall be reduced by that portion of the deposits in the fund expended in the construction, reconstruction, reconditioning, or acquisition of such property, or expended to retire debt incurred for such purposes after the effective date hereof: Provided, That no expenditures shall be made from such fund for such purposes in excess of the then adjusted basis of the property to which such indebtedness relates.

"(8) Qualifying expenditures under this section shall include only expenditures which are chargeable to the accounts prescribed and approved by the Interstate Commerce Commission to show the investment of a common carrier subject to this Act in property devoted to transportation service."

COMPETITIVE RATES

SEC. 5. Section 15a of the Interstate Commerce Act, as amended, is amended by inserting after paragraph (2) thereof a new paragraph (3) as follows:

"(3) In a proceeding involving competition with another mode of transportation, the Commission, in determining whether a rail rate is lower than a reasonable minimum rate, shall consider the facts and circumstances attending the movement of the traffic by railroad and not by such other mode."

Mr. LOOMIS. On Monday the committee heard testimony from Mr. Leighty, the chairman of the Railway Labor Executives Association. It will not be my purpose to answer Mr. Leighty in any detail.

At the hearings of this committee on H. R. 11527 I put in the record various statistics for the first quarter of 1958, and with respect to carloadings for the first 4 months of 1958, showing a decrease in April of 21.9 percent in car loadings. Last week the decrease in car loadings, in 1958 contrasted with the corresponding week in 1957, was more than 26 percent as compared with the 21.9 in April. So it has been getting progressively worse, and so far there is no sign of improvement.

Furthermore, Mr. Leighty presented various figures for past years. I think Mr. Freas already covered this subject with respect to current conditions, but during the first quarter of 1958 there were 41 class I railroads reporting a deficit. That included such roads as the Boston & Maine; New York, New Haven & Hartford; the Lackawanna; the Erie; the Lehigh Valley; the New York Central; the Central Railroad of New Jersey; the Pennsylvania; the Chicago & Northwestern; and the Milwaukee.

I do want to comment and just say one more thing about Mr. Leighty's statement before making a detailed comment on one of his exhibits.

If the Government ever desires to go into a full-scale investigation of labor practices and labor schedules in the railroad industry, the railroads would be most happy to have such an investigation and to cooperate in it.

But it should be a thorough investigation with plenty of time devoted to it so that we do not have the ordinary 30-day proceeding of

a Presidential emergency board where full attention cannot be given to all of the ramifications of the practices and schedules that obtain in the industry.

Exhibit No. 11, filed by Mr. Leighty on May 19, showed a "rate of return" for all railways in the United States for the years 1921 to 1956, based on the ratio of railroad net income to railroad capital stock outstanding in the hands of the public. The exhibit showed rates of return, thus computed, ranging between 5.3 percent and 13.5 percent in 1921-30; from deficits to a return of 3.5 percent in 1931-40; from 4.8 percent to 14.3 percent in 1941-50; and from 10.8 percent to 14.1 percent in 1951-56.

These so-called rates of return are misleading and improper for a number of reasons. In the first place, the capital stock shown in each year excludes all stock held by railway companies whereas the reported net income includes income arising from such stock holdings. Because of the resulting duplication in income as related to stock, the ratios shown as rates of return are about one-third higher than they would have been if based on total stock including that held by other railways.

To take a specific example, the Pennsylvania holds a substantial interest in Norfolk & Western, but in Mr. Leighty's computation all of the Norfolk & Western stock held by the Pennsylvania has been excluded. However, the income received by the Pennsylvania in dividends on the Norfolk & Western stock has been included in the Pennsylvania's income.

So you have a proposition where if one railroad owns any stock in another railroad that has been excluded from the computation of stock in Mr. Leighty's exhibit, but the income received has been included in the income figure. That completely distorts the picture that he attempts to paint.

In the second place, and of even greater significance, the calculation of a return on stock alone omits from the base the corporate surplus which represents stockholders' equity just as much as does the stated value of the stock alone.

In order to finance their improvement programs, railroads have found it necessary to retain from 50 to 60 percent of their net earnings for reinvestment in transportation property. The stockholders are just as much entitled to a return on such retained earnings as if the funds had been paid out in dividends and invested in additional stock. With the inability of the railroads to finance through the sale of equity securities it has been necessary to make the necessary additions and betterments by plowing back earnings in the property. But Mr. Leighty's figures give no recognition whatsoever to the earnings that have been plowed back into the property.

Railroad net income, in relationship to stockholders' equity, averaged only 5.3 percent in 1956 and only 4.4 percent in 1957.

A more significant measure of railroad earnings is the rate of return on net investment-the ratio of net railway operating income, before fixed charges and before adding nonoperating income, to investment in transportation property less depreciation.

The Interstate Commerce Commission has recognized that rates of return so calculated are within one-quarter to one-half of a percentage point of those derived by applying net railway operating income to the Commission's own valuation of such property. In this connection, the Commission said, in its report of April 11, 1952, in Ex parte 175 (284 I. C. C. 589):

Judged by any standard shown of record, the rates of return earned or prospectively to be earned by the railroads by the districts and regions specified in our former reports in this case, are substandard.

The rates of return computed on the basis of net investment in transportation facilities, 1947 to 1957, follow: 1947, 3.44 percent; 1948, 4.31 percent; 1949, 2.88 percent; 1950, 4.28 percent; 1951, 3.76 percent; 1952, 4.16 percent; 1953, 4.19 percent; 1954, 3.28 percent; 1955, 4.22 percent; 1956, 3.95 percent; 1957, 3.35 percent; year ended March 31, 1958, 2.88 percent.

There is attached the following: (1) Chart comparing return on net assets of various industries; (2) table summarizing returns on net assets of industrial groups, 1947 to 1957.

The substandard level of railroad earnings stands out clearly when comparison is made with those of other industries. Such a comparison is made annually by the First National City Bank of New York which publishes in its letter on business and economic conditions in April each year the return on book net assets of leading corporations in the United States. With respect to the basis used for computing rates of return, the bank says:

For comparing earnings in all lines of business the only common denominator is return on capital. In our tabulation we use the total of "equity capital," also spoken of as "book net assets" or "net worth" or "capital and surplus." Rates of return should be adequate to generate from within or attract from without the new capital needed constantly for replacement and growth.

That is from the April 1958 letter, page 47.

In the list of corporate groups for which the First National City Bank of New York computes return on net assets, the railroads have consistently been near the bottom. Among 73 such groups listed in 1956 and 1957 only 2 showed returns lower than that of the railroads. And the next page sets forth the statement from the bank letter. The last page contains a comparison of the ratio of net income of the class I railroads to the net assets of leading corporations by classes. I would ask that that be incorporated into the record. The CHAIRMAN. Without objection, it will be included.