other two or three years, and that he thought it unlikely that the question under consideration would come to a head, either by the conclusion of a convention such as we have in mind or by Japanese operating in Bristol Bay, for several years to come. In the meantime, private suggestions had been put forward by Japanese officials to the effect that it might be desirable for the United States, Canada and Japan to conduct a survey of the fishery resources of the north Pacific with a view to the eventual conclusion of a fishery convention along the lines of the Fur Seals Treaty of 1911.

So far as halibut is concerned, Mr. Dooman did not believe that the possibility is imminent of Japanese being interested in halibut on an extensive scale, although it is true that a few Japanese fishing vessels had been catching certain types of ground fish for reduction into fertilizer and oil.

Mr. Hickerson expressed the thought that problems arising in the Pacific appear to be somewhat less difficult than those arising in the Atlantic, for the reason that in the former area only the salmon appear to be involved-and that only because of the possible interest of one other country-whereas in the Atlantic many types of fish and many countries were involved.

The Canadian Minister pursued that thought and said that it seemed to him that it would be wise to explore the possibility of a convention being concluded between the United States, Canada and Japan. If such a convention were concluded, a precedent and an example will have been created for the setting up of an agreement of the widest possible compass.

It was suggested to the Canadians that our approach to the Japanese might be made easier if it were possible for us to show that we on this side of the Pacific were making an effort to solve our own salmon difficulties through the Sockeye Salmon Convention of 1930.97 The Canadian Minister agreed and Mr. Wrong expressed the opinion that in the course of the next ten days we would probably know the decision of the Canadian Government regarding the acceptance or rejection of our Senate's reservations to the Convention, which is not yet in operation.98

Mr. Dooman said that it did not seem to him that a pessimistic view with regard to the conclusion of a three-power agreement such as that suggested by Sir Herbert was called for at the present time: the salmon resources of Kamchatka were being rapidly depleted, due in large part to the policy of the Soviet Government in farming out the so-called "fishing stations" and the importance of canned salmon in

"Signed at Washington, May 26, 1930, Foreign Relations, 1930, vol. I, p. 505. For protocol of exchange signed at Washington, July 28, 1937, see ibid., p. 512 (bracketed insertion).

919456-54-66

Japan's foreign trade are two reasons which should dispose the Japanese toward cooperating in conserving the salmon resources of the eastern Pacific. It would have to be realized that the conclusion of such a convention would require the making of sacrifices by both Canada and the United States to permit Japanese participation in salmon fishing, and that the uncompromising attitude of the salmon interests on the west coast would have to be taken into consideration. There then ensued a discussion among the Canadians of the likelihood of the Japanese threat to the salmon resources of Canada being raised in the Canadian Parliament, and there seemed to be a consensus among them that the question would be raised. The Americans made the comment that it also seemed likely that some resolution, probably espousing the view of the American salmon interests that the red salmon found in Bristol Bay are property of the United States, would be introduced at the next session of Congress.

The Canadian Minister observed that the discussion had inclined him to the view that the course to be pursued by Canada and the United States should be to seek with Japan a solution of the Pacific problem, leaving the wider problems presented in the memorandum of the Canadian Department of Fisheries to be resolved at some later date. He added that he would recommend that the Canadian Government endeavor by appropriate means to support and reenforce whatever the American Government might seek to do by way of representations to the Japanese Government. Mr. Dooman said that an instruction to the Embassy at Tokyo is in the course of preparation, and that upon completion he would be glad to confer further with members of the Canadian Legation.

SETTLEMENT OF CASE PRESENTED BY THE JAPANESE GOVERNMENT ON BEHALF OF JAPANESE STEAMSHIP COMPANIES SUBJECT TO UNITED STATES WAR PROFITS TAX FOR THE YEARS 1918 AND 1919 99 811.512394 Shipping/54

The Ambassador in Japan (Grew) to the Chief of the Division of Far Eastern Affairs (Hornbeck)

TOKYO, December 20, 1935. [Received January 21, 1936.]

DEAR MR. HORNBECK: You will recollect that in my talk with the President on September 23rd I took up with him the question of the war profits tax assessed by the Treasury Department against certain Japanese steamship companies and I said to the President that at least as a matter of equity, if not of law, this was an issue in which,

"For previous correspondence, see Foreign Relations, 1934, vol. III, pp. 827 ff.

in my opinion, the Japanese were in the right and we in the wrong. The President showed definite interest in the matter and said that he would take it up with Mr. Coolidge,1 Under Secretary of the Treasury, with whom he expected to confer on the following day, and that if no satisfaction were obtained in that quarter he would have a bill introduced in Congress with a view to bringing about an equitable solution of the case.

At the time of my visit to Washington it appeared that the Treasury Department looked at the matter purely from the strictly legal point of view which, from the standpoint of that Department, was perhaps a logical position to take as it may not have lain within the province of the Treasury to consider the element of equity. It therefore seems possible that only Congressional action may provide the solution.

I am writing to express the hope that you will think it desirable to follow this matter up and possibly to suggest, either to the Secretary or to Mr. Phillips,2 that unless action is taken at the commencement of the Congressional session the President be reminded of his promise to me in this connection. The Japanese have not mentioned the matter on my return but it is one of those cases which if equitably settled would, I think, create a favorable basis for appealing to the Japanese Government for equitable treatment in other cases involving our own interests.

If it is felt that it would be helpful and appropriate for me to write to the President myself on this subject at any time please let me know and I shall be glad to do so. You will remember that, in accordance with the President's request, I sent him on September 23rd a one-page memorandum 3 setting forth the principal facts in the case. Sincerely yours, JOSEPH C. GREW

811.512394 Shipping/38

4

The Department of State to the Japanese Embassy *

The views of the Japanese Government, as set forth in a memorandum transmitted with the Japanese Embassy's note No. 158 of August 20, 1934,5 in regard to additional war profits tax asserted by the Treasury Department of the American Government against three Japanese shipping companies, namely, the Nippon Yusen Kaisha, the Osaka Shosen Kaisha, and the Toyo Kisen Kaisha, have received the careful consideration of the American Government.

1 Thomas J. Coolidge.

William Phillips, Under Secretary of State.

Not attached to file copy of covering note.

Handed to the Japanese Ambassador by the Under Secretary of State, April 27. * Foreign Relations, 1934, vol. III, p. 830.

The issues involve income tax liability for the years 1918 and 1919 of all three of the companies, and also for the year 1920 in the case of the Nippon Yusen Kaisha. All of the three taxable years involved are governed by the Revenue Act of 1918.6 That Act provided that in the case of a foreign corporation "gross income includes only the gross income from sources within the United States [Section 233 (b)]". The Attorney General held, in an opinion rendered November 3, 1920 [32 Op. Atty. Gen. 336, 345], and published as a Treasury Decision [T. D. 3111], that in the case of a foreign steamship company "income from sources within the United States" means under this Act "income from freight and passenger traffic originating within the United States."

The Revenue Act of 1921, which, of course, had no retroactive effect as to the years 1918, 1919 and 1920, contained detailed provisions as to the method of determining the "income from sources within the United States" of foreign corporations. Under this latter Act, "gains, profits and income from (1) transportation or other services rendered partly within and partly without the United States . . . shall be treated as derived partly from sources within and partly from sources without the United States" and "the portion of such net income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Commissioner (of Internal Revenue) with the approval of the Secretary (of the Treasury)". In conformity with the authority granted under the portion above quoted of the Act, the Treasury Department on August 23, 1922, issued Treasury Decision 3387 which provided a detailed and somewhat involved formula for apportioning income as between sources within and sources without the United States.

This formula was much more favorable to the steamship companies as a group than the provisions of the Revenue Act of 1918 as interpreted by the Attorney General; and the representatives of the Japanese steamship companies and of other foreign steamship companies whose cases under the Revenue Act of 1918 had not been closed urgently insisted upon being given the benefit of the formula set out in Treasury Decision 3387. On January 21, 1924, the Attorney General reaffirmed his opinion of November 3, 1920, and expressed the view that the provisions of the Revenue Act of 1921 could not be applied retroactively to the Revenue Act of 1918. However, on July 1, 1927, the Treasury Department informed the Attorney General that the conclusions reached by him in these opinions had never been acquiesced in by the foreign steamship companies, and that the

Approved February 24, 1919; 40 Stat. 1057. 'Brackets in this document appear in the original. * Approved November 23, 1921; 42 Stat. 227. 'Omission indicated in the original.

tax returns of a large number of steamship companies were then pending awaiting the determination by the courts of the proper method of computing tax liability for the years prior to 1921. On July 7, 1927, the Acting Attorney General rendered an opinion which recited the foregoing circumstances and the concluding paragraphs of which were as follows:

"The questions involved are difficult, and there is room for difference of opinion about them and the outcome of the litigation is doubtful, but the opinions referred to stand in the way of your dealing with these cases in the exercise of authority granted to you by law and in a way to serve the best interests of the United States. The questions do not arise under the Revenue Act for 1921 [42 Stat. 227], or any later Revenue Act.

"Under all the circumstances, you should be free to deal with the cases as the conditions seem to require, and, in order that you may do so, the opinions referred to are hereby withdrawn [Acting Attorney General to the Secretary of the Treasury-35 Op. Atty. Gen. 244].

In computing the taxes to which exception is taken by the Japanese steamship companies, the formula prescribed by Treasury Decision 3387 was used. The application of this formula produces a much smaller aggregate tax than would result from application of the Revenue Act of 1918 as interpreted by the Attorney General, although under such interpretation no part of the Charter hire received by the Japanese steamship companies under the arrangement of 1918 between the American Government and the Japanese Government whereby Japanese vessels were placed at the disposal of the American Government, or subsidies received by the steamship companies from the Japanese Government, would be included as income. On the other hand the formula used in the computation of taxes requires the inclusion as one among many other factors of all income from services performed by vessels whose voyages include United States ports in the total amount to be allocated as "income from transportation and other services rendered partly within and partly without the United States".

It is not possible to explain the formula in a few words, but it may be said that in effect it contemplates as one of its principal factors that the taxable income of a foreign vessel should bear that relation to the entire income derived from that vessel that the time spent by the vessel in American waters bears to the time occupied by it in making a round trip between the foreign terminal port and an American port of call.

It is obvious that a subsidy received by a foreign steamship company from a foreign government is not "income from sources within the United States". However, the view of the Japanese Government that such subsidies "cannot be objects of taxation by the American