B-114876, JUN. 12, 1957

B-114876, JUN. 12, 1957

TO MAJOR GENERAL W. E. POTTER, PRESIDENT, PANAMA CANAL COMPANY:

YOUR LETTER OF APRIL 18, 1957, CONCERNS THE MEASUREMENT OF THE EXTRAORDINARY LOSS INCURRED AS A RESULT OF THE CONVEYANCE OF CERTAIN PROPERTIES OF THE PANAMA RAILROAD COMPANY (HEREINAFTER REFERRED TO AS "THE COMPANY") TO THE REPUBLIC OF PANAMA PURSUANT TO SECTION 2, JOINT RESOLUTION, APPROVED MAY 3, 1943, 57 STAT. 74, 75.

THE JOINT RESOLUTION, AMONG OTHER THINGS, AUTHORIZED THE COMPANY TO CONVEY ALL OF ITS RIGHT, TITLE, AND INTEREST IN THOSE LANDS OF THE COMPANY LOCATED IN THE CITIES OF PANAMA AND COLON WHICH THE SECRETARY OF WAR NO LONGER CONSIDERED NECESSARY FOR RAILROAD OR CANAL PURPOSES. WE ESTIMATE THE COST OF LANDS CONVEYED PURSUANT TO THAT RESOLUTION AS $1,227,000. THROUGH APPRAISALS THE CONVEYED LANDS WERE INCREASED IN VALUE TO $11,759,956, AN APPRAISAL INCREMENT OF ABOUT $10,533,000 OVER THE ORIGINAL COST AS ESTIMATED BY US.

SECTION 2 OF THE ACT OF JUNE 29, 1948, 62 STAT. 1075, 1076, WHICH ACT REINCORPORATED THE COMPANY UNDER FEDERAL CHARTER, ADDED SECTION 246 TO TITLE 2, CHAPTER 12, CANAL ZONE CODE. SECTION 246 PROVIDES THAT THE INVESTMENT OF THE UNITED STATES SHALL CONSIST OF THE NET DIRECT INVESTMENT IN THE COMPANY AND SURPLUS (ACCUMULATED RETAINED EARNINGS) AND THAT THE COMPANY SHALL PAY INTEREST TO THE TREASURY ON THE NET DIRECT INVESTMENT BUT NOT ON THE ACCUMULATED RETAINED EARNINGS. THE SECTION PROVIDES THAT EXTRAORDINARY EXPENDITURES OR LOSSES INCURRED THROUGH DIRECTIVES BASED ON NATIONAL POLICY AND NOT RELATED TO THE OPERATIONS OF THE COMPANY SHALL BE CONSIDERED AS REPAYMENTS TO THE TREASURY ANALOGOUS TO DIVIDENDS AND SIMILARLY APPLICABLE AS OFFSETS AGAINST DIRECTLY CONTRIBUTED CAPITAL.

THE LANDS CONVEYED PURSUANT TO THE JOINT RESOLUTION, ABOVE, HAVE BEEN CONSIDERED AS AN EXTRAORDINARY LOSS INCURRED THROUGH A DIRECTIVE BASED ON NATIONAL POLICY. IN ACCORDANCE WITH A LETTER OF AUGUST 19, 1948, FROM MR. HAROLD MORSE, FORMER ASSISTANT DIRECTOR, CORPORATION AUDITS DIVISION, GENERAL ACCOUNTING OFFICE, TO MR. T. H. ROSSBOTTOM, VICE PRESIDENT, PANAMA RAILROAD COMPANY, THE COMPANY ESTABLISHED IN ITS BOOKS THE EXTRAORDINARY LOSS MEASURED IN TERMS OF APPRAISED VALUE, FOR USE AS A POTENTIAL OFFSET AGAINST ANY FUTURE CAPITAL CONTRIBUTION BY THE GOVERNMENT TO THE PANAMA RAILROAD COMPANY. MR. MORSE'S POSITION, AS SET OUT IN HIS LETTER, WAS CONSISTENT WITH HIS TESTIMONY BEFORE THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES AND THE ABSTRACTS FROM HIS STATEMENT CITED IN THE SENATE HEARINGS CONCERNING THE APPLICATION OF THE EXTRAORDINARY LOSS PROVISION TO THE PROPERTY TRANSFERRED TO THE REPUBLIC OF PANAMA UNDER THE 1943 JOINT RESOLUTION.

YOU SAY THAT YOU DO NOT SEE HOW THE BACKGROUND AS SET FORTH IN YOUR LETTER, STATED IN ESSENCE IN THE PRECEDING PARAGRAPH,"CAN BE CONSTRUED OTHER THAN AS ESTABLISHING THAT THE USE OF APPRAISED VALUES FOR THE 1943 CONVEYANCES WAS CONTEMPLATED AND FIXED IN THE ENACTMENT OF SECTION 246 (D)" AND THAT A FAIR EVALUATION OF THE FOREGOING HISTORY CLEARLY JUSTIFIES THE POSITION THAT THE TREATMENT AS ORIGINALLY DEVELOPED BY THE GAO SHOULD CONTINUE UNCHANGED AS A SETTLED FEATURE OF THE ACCOUNTS OF THE COMPANY.

NEITHER THE 1943 JOINT RESOLUTION NOR SECTION 246 OF THE 1948 FEDERAL CHARTER OF THE COMPANY EXPRESSLY PRESCRIBES THE BASIS FOR FIXING THE VALUE OF EXTRAORDINARY LOSSES. THE COMMITTEE REPORTS ON THOSE LAWS LIKEWISE ARE SILENT ON THE SUBJECT. THE ACT OF SEPTEMBER 26, 1950, 64 STAT. 1038, WHICH WAS DESIGNED TO IMPLEMENT RECOMMENDATIONS OF THE BUREAU OF THE BUDGET AND OF THE PRESIDENT WITH RESPECT TO THE ORGANIZATION AND OPERATION OF THE PANAMA CANAL, ALSO, IS OF NO HELP ON THE ISSUE. WE FULLY REALIZE THAT MR. MORSE'S STATEMENTS LEND SUPPORT TO YOUR VIEW THAT THE APPRAISED VALUE IS TO BE USED IN MEASURING THE VALUE OF THE EXTRAORDINARY LOSS. ARE, NEVERTHELESS, UNABLE TO CONCUR WITH YOUR STATEMENT THAT THE LEGISLATIVE HISTORY OF THE LAWS IN QUESTION REQUIRE THE USE OF APPRAISED VALUE FOR THAT PURPOSE. ON THE OTHER HAND, WE RECOGNIZE THAT THE STATUTES DO NOT NECESSARILY REQUIRE THE USE OF BOOK OR COST VALUE. AS YOU WELL KNOW, HOWEVER, THE TREATMENT URGED BY YOU REDUCES THE INTEREST-BEARING NET DIRECT INVESTMENT OF THE COMPANY BY AN APPRAISED VALUE OF $11,759,956, RATHER THAN THE COST VALUE OF $1,227,000. IN OUR OPINION SOUND ACCOUNTING PRACTICE REQUIRES THAT THE INTEREST-BEARING NET DIRECT INVESTMENT BE REDUCED BY THE COST OF THE CONVEYED LANDS RATHER THAN THE APPRAISED VALUE. THIS IS SO BECAUSE THE DIRECT INVESTMENT BASE INCLUDES THE COST VALUE OF THE LANDS, AND RECOGNITION OF THE APPRAISED VALUE FOR THE PURPOSE OF REDUCTION OF THE INTEREST-BEARING NET DIRECT INVESTMENT RESULTS, IN EFFECT, IN A CREDIT OF AN UNEARNED DIVIDEND, I.E., THE EXCESS OF THE APPRAISED VALUE OVER COST. NO PROFIT ACCRUED TO THE COMPANY THROUGH THE TRANSFER OF THE LAND TO THE REPUBLIC OF PANAMA. ALSO, SINCE THE INTEREST IS ATTRIBUTABLE TO THE INVESTMENT IN CANAL TRANSITING FACILITIES, THE COMPANY'S TREATMENT RESULTS IN A REDUCTION IN EXPENSES CHARGEABLE AGAINST TOLLS. THIS RESULT COULD BE CONSIDERED TO BE INCONSISTENT WITH THE CONCEPT ADOPTED IN 1950 BY THE CONGRESS THAT THE CANAL ENTERPRISE SHALL BE SELF-SUSTAINING AND INVOLVE NO BURDEN ON THE UNITED STATES TAXPAYERS.

WE RECOMMEND THAT IN ACCORDANCE WITH THE GENERALLY ACCEPTED ACCOUNTING PRACTICE OF RECOGNIZING ONLY REALIZED GAINS OR LOSSES ON DISPOSAL OF ASSETS THE INTEREST-BEARING PORTION OF THE INVESTMENT OF THE GOVERNMENT BE ADJUSTED EFFECTIVE JULY 1, 1951, TO REFLECT ONLY THE COST OF THE ASSETS.

A COPY OF THIS LETTER IS BEING FURNISHED THE CHAIRMEN, COMMITTEES ON APPROPRIATIONS, UNITED STATES SENATE AND HOUSE OF REPRESENTATIVES.