stocks and dig into other assets to pay the taxes. Still others were undecided as to what course to take. But all were disturbed by the very real problem that would arise under the present tax law in the event of a forced distribution of General Motors shares.

I should like at this time to offer the testimony of these stockholders as exhibit A to accompany my statement. Their testimony is brief; their problems are typical of those that a distribution under the present tax laws would bring to 251,000 individuals scattered through every State in the Union.

The CHAIRMAN. Without objection, the insertion will be made. Senator KERR. Mr. Chairman, may I make a suggestion off the record?

(Discussion off the record.)

The CHAIRMAN. Without objection, it will be filed with the record. (Exhibit A referred to will be found in the files of the committee.) Mr. GREENEWALT. There is a further difficulty in the application of the tax law to the present case: its effect on the stockholders is not at all uniform. While this very heavy burden, which I have described, would be laid upon the individual shareholders, a tax-exempt organization such as a university or charitable institution would pay no direct tax at all, but would be hurt through the depressant effect upon values. For corporate stockholders, the taxable income would be measured by the cost of the General Motors stock to Du Pont which is substantially less than its current market value, and would be subject only to the intercorporate dividend tax.

While S. 200 would remove the inequity of an income tax on a compulsory distribution, it would not otherwise put the stockholder in a more favorable tax position than he is in today.

Under S. 200, no stockholder would be any better off financially. The 251,000 beneficial stockholders of Du Pont, including more than half of our 83,000 employees who work in 28 States, would merely have two pieces of paper instead of one representing the identical value. They would still be subject to capital gains tax when, like other citizens, they cashed in their stock certificates. They merely would not be subject to tax penalty so that antitrust policy could be carried

out.

The CHAIRMAN. Mr. Greenewalt, how would the capital gains tax be figured?

Mr. GREENEWALT. There is an exhibit which I am going to refer to in a moment, sir, which gives that calculation.

They would be required, in event of a distribution, to allocate the cost of their Du Pont stock between the Du Pont and the General Motors stock. Thereafter, when they sold either stock, they would pay a tax on any gain measured from the cost allocated to the stock. This is explained in detail in exhibit B which I would like to file at this point with the committee, one sheet, sir.

The CHAIRMAN. Without objection, the insertion will be made. (Exhibit B referred to is as follows:)

EXHIBIT B

Assume Mr. A purchased 10 shares of Du Pont common some years ago for $100 a share, or a total of $1,000. He receives in the distribution approximately 14 shares of General Motors stock. Immediately after the distribution, his Du Pont stock is worth $1,750 and his General Motors stock is worth $750.

The $1,000 cost basis would be divided between the Du Pont stock and the General Motors stock in the ratio of $750 to $1,750-or 30 percent to the General Motors, and 70 percent to the Du Pont. Thirty percent of $1,000, or $300, becomes the cost basis of the General Motors stock, or approximately $21.50 per share. Seventy percent of $1,000, or $700, becomes the cost basis of the Du Pont stock, or $70 per share.

Any sale of the General Motors stock at a price in excess of $21.50 per share, or of the Du Pont stock at a price in excess of $70 a share, will produce a taxable gain to the extent of the excess. Thus, if both the General Motors stock and the Du Pont stock were sold at one time, the taxable gain would be the same as it would have been if, in the absence of the distribution of General Motors stock, the Du Pont stock were sold at such time.

Mr. GREENEWALT. Under present law the stockholder cannot, except by death, escape the obligation to pay a capital gains tax. Under present law, however, he is free to meet that tax at such time and in such circumstances as suit his convenience. It is wholly inequitable to compel him, an innocent person, to pay this tax at a given time and in a given way.

The irony of the situation, it seems to me, is that the case runs against the Du Pont Co., yet the penalties would run not against the company, but against its stockholders. The company's operations would be unaffected by the decree. Historically, Du Pont has distributed the entire amount of dividends received from General Motors to its stockholders, less the intercorporate dividend tax. Dividends from the General Motors investment have not been used in the Du Pont Co.'s chemical business, so a diverstiture would not affect the company's operations or its future expansion.

Divestiture under the present tax laws would, as I have indicated, have serious consequences for Du Pont stockholders, who under no theory can be regarded as law violators. The Clayton Act is not punitive, but remedial, and there is no finding in the record of any monopoly or intent to monopolize, restraint of trade, or conspiracy. The Du Pont Co.'s investment in General Motors has been a matter of public record since its inception. The Federal Trade Commission and the Department of Justice made studies of the investment in 1927, but as a result of these studies neither agency made any criticism of Du Pont's interest in General Motors, no order was entered, and no suit was filed. While Du Pont made its initial investment in General Motors in 1917, there was no reason for any purchaser of Du Pont stock to suppose that the Clayton Act might be applicable to this acquisition before the Supreme Court made its ruling 40 years later. I do not understand anyone seriously to dispute the fact that the Supreme Court made new law in its decision. The Supreme Court decision calls for "equitable relief" so far as the company is concerned; but it doesn't call for a pound of flesh from the stockholders.

To sum up, the problem here is one of equity to American citizens. The Du Pont Co. does not ask for legislation to permit it to distribute its General Motors stock to its stockholders. In fact, we are vigorously opposing this action in the courts. The distribution is demanded by the Department of Justice as a result of the Supreme Court's new interpretation of section 7 of the Clayton Act. If it is in the public interest to require divestiture in this case, and in many others which now may be brought, it is equally in the public interest to protect the rights of the innocent people who are involved. Only the Congress has power to correct the tax laws when inequities become apparent. The courts cannot do it.

41.866-5920

This bill is aimed at the simple and very important objective of preventing injustice. It is aimed at preventing the fundamental injustice of punishing citizens who are innocent of any wrongdoings, by compelling them to take actions which subject them to taxes they would not otherwise be called upon to pay, and which other citizens are not required to pay.

There are ample precedents for this type of legislation, and they will be reviewed for you by witnesses better qualified than I to do so. For myself, let me close by saying that I can imagine no more worthy endeavor by the Congress of the United States than to protect American citizens against unfair and unjust treatment.

I believe S. 200 will accomplish this, and in simple justice, I commend it to you for your consideration.

Senator FREAR. Mr. Chairman, you asked a question of the president of the Du Pont Co., and exhibit B, I think, shows that.

The CHAIRMAN. It has been made a part of the record.

Are there any questions?

Senator KERR. Yes.

Mr. Greenewalt, you say:

The stockholders are innocent, but may, in the absence of remedial legislation, become innocent victims.

Is it a fact that the penalty imposed upon them would be just as severe as though they had with deliberate and premeditated intent got themselves into the posture of having themselves violate the antitrust law?

Mr. GREENEWALT. That is correct, sir.

Senator KERR. So that if not for the first time in history, certainly in a situation which would be about as dramatic as any that you could think of, they would be required to suffer a penalty though entirely innocent and committed by the Supreme Court as being perfectly honorable and fair?

Mr. GREENEWALT. That is correct.

Senator KERR. As thought they had deliberately entered into a consipracy and been found guilty of the violation of the law? Mr. GREENEWALT. That is correct.

The Supreme Court declared that the executives of both companies acted honorably and fairly.

Senator KERR. They are the representatives of the stockholders. Mr. GREENEWALT. The only way in which you can blame stockholders in any action is that they did elect representatives that broke a law. In this case, since the executives broke no law and were innocent themselves, the stockholders must of necessity be so.

Senator KERR. That is all.

The CHAIRMAN. Are there any further questions?

Mr. FREAR. May I just ask one thing? What is the program, Senator?

The CHAIRMAN. The committee will meet tomorrow morning at 10 o'clock, and the first witness will be a representative of the Justice Department.

Mr. FREAR. Could I ask through the courtesy of the chairman that the president of the Du Pont Co. remain? There were two or three

members of the committee, Mr. Chairman, who wanted to question Mr. Greenewalt. Would it be possible that he may be called later?

The CHAIRMAN. Do you mean tomorrow?

Mr. FREAR. Yes.

Mr. GREENEWALT. I will be very glad to, sir.

The CHAIRMAN. At this point the Chair offers for the record a statement by Mr. G. Keith Funston, president of the New York Stock Exchange, who is unable to be here today.

(The statement of Mr. Funston follows:)

STATEMENT PRESENTED TO THE SENATE FINANCE COMMITTEE BY G. KEITH FUNSTON, PRESIDENT OF THE NEW YORK STOCK EXCHANGE, IN CONNECTION WITH S. 200

I am sorry that a prior commitment has necessitated my being out of the country at the time of your hearing on S. 200. I had hoped to express in person my strong conviction that this is sound legislation which should receive your favorable consideration.

The purpose of S. 200 is to protect investors from unjust taxation when they are compelled to take possession of stock as a result of a court or commission antitrust order of divestiture. The bill would not provide a tax exemption, or any sort of preferential treatment, since the stockholder would have to pay a tax on his actual capital gain when he sold the stock.

The Internal Revenue Service has ruled, in connection with the Du Pont-General Motors antitrust proceeding, that Du Pont stockholders would have to pay ordinary income taxes-at rates ranging from 20 to 87 percent-on the value of any General Motors stock distributed to them. This would saddle thousands of investors with an inequitable tax burden in a situation beyond their control. The purpose of S. 200 is to forestall this unjust tax penalty, not only in the Du Pont-General Motors situation, but in any similar cases in the future. My main concern is that these investors should be treated fairly. Congress should do everything it can to encourage a broad base of corporate ownership in this country. The success of that policy could be undermined if investors were not assured of fair and equal tax treatment.

Congress has made it clear, in other legislation, that the tax on a distribution of stock required by law is to be postponed until the recipient sells the stock. The policy was first established in 1938 with respect to stock distributions required by the Securities and Exchange Commission under the Public Utility Holding Company Act. Congress has insisted on the same treatment when involuntary distributions of stock by banks and radio stations are required under the Bank Holding Company Act and the Federal Communication Commission Act.

There is no essential difference between these situations and a compulsory distribution of stock through an antitrust decree. The problem arises simply because the judiciary has power, under the antitrust laws, to order a corporation to distribute the stock of another corporation to its own stockholders, but does not have power to grant the tax relief which Congress has insisted upon in similar cases. The obvious remedy is for Congress, through passage of S. 200, to apply the same principle of taxation to this situation as it has applied to others.

The Du Pont-General Motors proceeding provides a dramatic example of an inequity S. 200 would prevent. Each of nearly 200,000 Du Pont stockholders is now a part owner of the assets of the Du Pont Co., including the company's holding of General Motors stock. If the distribution of the General Motors stock is required, each Du Pont stockholder will have two certificates-one representing Du Pont shares, and one for his allocable share of General Motors stock. These two certificates would represent exactly the same ownership as the single certificate for Du Pont stock he now owns. It would be patently unjust to impose a tax penalty on the stockholder simply because he is compelled, as a result of an antitrust proceeding beyond his control, to take direct possession of property he already owns indirectly.

The Du Pont stockholders will not receive tax income which should be made subject to an income tax. Indeed, if there is a court-directed distribution of General Motors stock, a downward adjustment in the price of Du Pont stock must follow. There will be no gain to Du Pont stockholders to justify a tax.

When a stockholder sells either the General Motors or the Du Pont stock, he will realize a gain, or suffer a loss, on his original investment. If the stockholder is to be treated fairly, Congress should make it clear through S. 200 that there will be no tax obligation until the stockholder actually realizes a gain on his investment. A contrary result would discriminate against a particular group of investors.

In 1954, the Du Pont Co. had 133,997 common stockholders. By early 1959, the number had increased by 45 percent to a total of 194,343—a number exceeded by only 8 U.S. corporations. This represents a large group of stockholders and an impressive broadening of corporate ownership, by any standard. An unfair and widely publicized tax discrimination against this group of investors would make more difficult our task of encouraging investments in sound common stocks. It is also pertinent that a sizable number of these stockholders, in order to pay the tax, might be forced to sell the General Motors stock they received. To the extent that such tax sales depressed the market value of General Motors stock, there would be an entirely unwarranted injury to the more than 700,000 holders of General Motors stock.

It is important to note that there is a wide interest in both Du Pont and General Motors stock on the part of investors who are in modest circumstances. This can be illustrated by the fact that General Motors is the most popular stock, and Du Pont is the 24th most popular stock, in the monthly investment plan. In presenting this plan, our member firms have encouraged small investors who have provided for contingencies to put their extra funds to work by investing in sound common stocks. Thousands of individuals in modest circumstances are putting aside small amounts on a regular basis to purchase the securities of their choice. They are in effect buying stocks by the dollars' worth. These are investors-not speculators-who are purchasing an interest in American business because they have faith that as the Nation continues to grow there will be rewards in which they can share. The fact that the Du Pont and General Motors stocks rank so high on the monthly investment plan list is clear evidence that these new investors consider them to be prudent investments. In my judgment, it would be a serious mistake for Congress to ignore a tax situation, arising out of a technical defect in the law, which would put discriminatory burdens on these people.

For these reasons, I am convinced that S. 200 is distinctly in the public interest. It would prevent an unfair tax and, at the same time, eliminate a potential obstacle which would tend to discourage many people from becoming shareowners a result which would be to their own and their country's disadvantage.

Senator FREAR. Mr. Chairman, with your permission, I submit for insertion in the record a letter from the Honorable Edward H. Levi, dean of the Law School of the University of Chicago.

The CHAIRMAN. It will be made a part of the record. (The statement of Dean Levi follows:)

THE UNIVERSITY OF CHICAGO,

THE LAW SCHOOL, Chicago, Ill., May 25, 1959.

Hon. J. ALLEN FREAR, Jr.,
Senate Office Building,

Washington, D.C.

DEAR SENATOR FREAR: You have asked me for the expression of my views on S. 200 which provides that for Federal tax purposes no gain or loss shall be recognized to stockholders because of receipt of divested stock when this distribution is pursuant to a proper order of a court, commission, or board in the enforcement of the Sherman or Clayton Act. In its present form S. 200 requires that the order of the court, commission, or board recite that "such divestment is necessary or appropriate to effectuate the policies of the Sherman Act or the Clayton Act, or both," and also recite "that nonrecognition of gain pursuant to section 1111 of the Internal Revenue Code of 1954 is required to reach an equitable judgment, decree, or order in such suit or proceeding."

In my view S. 200 adopts the correct principle of law and is in harmony with the spirit of the antitrust laws. The adoption of this correction in the Federal tax laws will help in the enforcement of antitrust policies. The same principle has been adopted in other similar areas of law such as the Public Utility Holding Company Act, the Bank Holding Company Act, distributions required by the