J.64 FEDERAL RESERVE BOARD

WASHINGTON

X-3042 February 8, 1921.

SUBJECT: Regula t ions Governing Use of Revenue Stamps on Time Draf ts*

Dear S i r : ,

I t r e c e n t l y has been brought to the a t t e n t i o n of the Federa l Reserve Board t h a t cons ide rab le confus ion and misunders tand-ing e x i s t s among bankers with regard t o a t t a c h i n g revenue stamps to time d r a f t s , pu r suan t t o the p r o v i s i o n s of the Revenue Act of 1918 and the r e g u l a t i o n s of the Bureau of I n t e r n a l Revenue i s sued thereunder . In order to c o r r e c t t h i s cond i t i on , the Federa l Reserve Board f e e l s t ha t i t i s adv i sab le to s t a t e i t s unders tand ing of the p r e s e n t requirements as to the n e c e s s i t y f o r a f f i x i n g such stamps to time d r a f t s .

The Revenue Act of 1918, T i t l e XI, Schedule A, p rov ides as f o l l ows :

"Dra f t s o r checks (payable otherwise than a t s i g h t or on demand) upon t h e i r acceptance or d e l i v e r y w i t h i n the United S t a t e s whichever i s p r i o r * * * and f o r each renewal of the same, f o r a sum not exceeding $100, 2 cen t s ; and f o r each a d d i t i o n a l $100, o r f r a c t i o n a l p a r t t h e r e o f , 2 cen t s , "

In i t s Regula t ions 55 r e l a t i n g t o Stamp Taxes on Documents ( r ev i sed October, 1920), the Bureau of I n t e r n a l Revenue has p r e -s c r i b e d c e r t a i n s p e c i f i c r e g u l a t i o n s governing the at tachment of stamps to such d r a f t s and checks. In view of the C o n s t i t u t i o n a l l i m i t a t i o n upon t # e s upon e x p o r t s , t hese r e g u l a t i o n s make a d i s -t i n c t i o n between time d r a f t s cover ing the e x p o r t a t i o n of goods and time d r a f t s which do not cover an expor t t r a n s a c t i o n . This d i s t i n c -t i o n w i l l be fo l lowed i n the fo l lowing d i s c u s s i o n of the Bureau ' s

* r e g u l a t i o n s :

1. Time D r a f t s i n General (not cover ing an expor t t r a n s a c t i o n . ) A r t i c l e 33 of Regu la t ions 55 p rov ides g e n e r a l l y t h a t d r a f t s and checks payab le o therwise than a t s i g h t or on demand ( i n c l u d i n g s o - c a l l e d " t r ade accep tances" - See A r t i c l e 39) a r e s u b j e c t to the stamp tax " i f d e l i v e r e d or accepted w i t h i n t h e Uni ted S t a t e s . " For the purpose of these r e g u l a t i o n s , the t e r r i t o r i a l j u r i s d i c t i o n of

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

- 2 -1 6 5

X-3042

the united states includes the various s tates , the Dis tr ic t of Columbia, Hawaii and Alaska. The terms "delivered" and "delivery" contemplate .only the original delivery which makes the draft a valid negotiable instrument, i f a draft i s exempt, in view of the place of i t s acceptance and i n i t i a l delivery, subsequent del iveries for purposes of discount are immaterial, i f , however, a draft i s subject to the tax, but no stamp i s a f f ixed thereto at the time of i t s delivery or accept-ance, whichever i s prior, anyone vho receives such draft for discount or otherwise, without requiring the necessary stamp to be a f f ixed , i s subject to a penalty, (see Tit le %1, section 1102 of the Revenue Act of 1918).

A draft which i s mailed to the payee for the purpose of giving e f f e c t thereto i s "delivered," within the meaning of that term as used in the regulations, at the place of mailing. Consequently, a draft drawn in the united states but accepted and mailed in Canada to the payee in the united states i s not subject to the tax, although subse-quently i t may be discounted in this country by an American bank.

pursuant to these regulations, the Bureau has ruled:

(1) A time draft drawn and delivered outside of the United states but accepted within the united States i s subject to the tax. (see Article 34).

( 2 ) a t ime d r a f t drawn and d e l i v e r e d o r a c c e p t e d in the united s tates and payable in a foreign c o u n t r y i s s u b j e c t t o t h e stamp t a x , ( s e e A r t i c l e 4 4 ) .

(3) A time draft executed and mailed in the united States to a payee in a foreign country i s subject to the tax. (see Article 65).

(4) A time draft executed and mailed in a foreign country to a payee within tiie united s tates i s not subject to the tax unless accepted within the united s tates , (see Article 64).

(5) A time draft drawn abroad on a foreign drawee payable to the order of a foreign payee, a l -though i t passes throu# a bank in this country in the course of co l lect ion, i s not subject to the tax unless i t i s delivered by an agent of the drawer to an agent of the payee within the United states . (see Article 36).

T^m e D r a f t s c o v e r i n g e x p o r t a t i o n o f floods t o -Foreign c o u n t r i e s , A r t i c l e s 41, 42, and 43 of Regulations 55 determine toe present re-

» quirements as to the necessity f o r a f f ix ing stands to drafts covering exports to foreign countries. Article 43, as i t appears in Begula-°

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

-3 - X-3042

t ions 55 (revised October, 1920), has been superseded by T.D. 3100, approved December 11, 1)20.

Ar t ic le 4l provides in p a r t : "A time d r a f t d i r e c t l y covering exports to a fo re ign cour.try and which cons t i tu te ' and i n h e r i t , nec-essary, and bona f i de p a r t of the actual process of expor ta t ion i s ex-empt from the stamp tax ," So f a r as such d r a f t s are concerned, i t i s immaterial whether the time which the d r a f t has to run w i l l expire before or a f t e r the termination of the ocean shipment. Ar t ic le 43 as amended by T.D. 3^00, provides in p a r t : "A time d r a f t d i r e c t l y cover-ing a sa le f o r export t o a fo re ign buyer and drawn on a domestic bank as the authorized acceptor of the fo re ign buyer i s exempt from stamp tax ."

On the other hand, Ar t ic le 4l provides in p a r t : "Time d r a f t s drawn against the proceeds of" d r a f t s which are an inherent , necessary and bona f i d e pa r t of the ac tual process of exporta t ion "are subject to stamp tax." Art ic le 42 provides: "A time d r a f t drawn on a domestic bank f o r the purpose of securing money to purchase goods to be expor-ted i s subject to tax regardless of the f a c t tha t the cont rac t f o r the sale of the goods exis ted a t the time the d r a f t was drawn." Article 43, as amended by T.D. 3^00• provides in p a r t : "A time d r a f t drawn by or on an exporter or on h i s bank in payment f o r export shipments made by the manufacturer on the expor te r ' s order i s subject to stamp tax."

The requirement in Art ic le 4l that a d r a f t to be exempt must d i r e c t -ly cover exports to a fo re ign country and cons t i tu te an inherent , nec-essary, and bona f i de par t of the actual process of exporta t ion has been s t r i c t l y construed by the Bureau of In terna l Revenue in i t s in-formal ru l ings . The Commissioner has said that the typ ica l d r a f t cover-ed by th i s regulat ion i s a d r a f t drawn upon a fore ign buyer and a t -tached to the b i l l of lsuiing. Such a d r a f t , however, i s exempt from the tax, although i t may be discounted and negotiated in t h i s country. The Commissioner has a lso ruled that an equivalent d r a f t drawn upon a fund or agency es tabl ished in th i s country by a fore ign Government •or fore ign purchaser to f a c i l i t a t e exchange i s iexempt. In the l a t t e r case, the domestic bank or agency accepts by virtue" of a c r ed i t agree-ment with the fore ign purchaser, hence the d r a f t i s considered equivalent to one drawn upon the fo re ign purchaser himself and so may be said to be an in tegra l pa r t of the process of exporta t ion.

On the o the r hand, the f a c t tha t a d r a f t i s drawn in connect ion with an export t r a n s a c t i o n does no t render the d r a f t exempt from the stamp tax , a l though the d r a f t may f a c i l i t a t e the process of expor ta -t ion and to t h a t ex t en t c o n s t i t u t e a p a r t of the t r a n s a c t i o n . For i n -s tance , the Bureau has ru led t h a t where an American e x p o r t e r sh ips goods to a f o r e i g n purchaser and depos i t s the ocean b i l l s of l ad ing wi th an American bank ( e i t h e r wi th or wi thout a t r ade b i l l or time d r a f t drawn on the f o r e i g n buyer a t tached t h e r e t o ) , with i n s t r u c t i o n s t h a t these documents be forwarded to i t s agent abroad f o r d e l i v e r y to the e x p o r t e r ' s nominee aga ins t payment or o therwise , a d r a f t drawn by the

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

X-3042

expo r t e r f o r the purpose of a n t i c i p a t i n g payment by the f o r e i g n purchaser and accepted, by the American bank wi th which the b i l l s of lading wore depos i t ed i s sub jec t to the stamp t a x . While the t r ade b i l l or fore ign d r a f t , i f such has been drawn, i s exempt from the tax, the Bureau consign t ha t in any event the d r a f t drawn upon the American bank to ant ic ipate payment by a f o r e i g n purchaser r ep resen t s a domestic f i n a n c i n g , s ince i t i s accepted by v i r t u e of a c r e d i t agreement with the domestic s e l l e r r a t h e r than by v i r t u e of a c r e d i t agreement with the f o r e i g n buyer, and consequent ly i s sub jec t to the t ax .

In t h i s connect ion the Commissioner s t a t ed under da te of September 8, 1920:

"Such a d r a f t i s merely a domestic means of u t i l i z i n g domestic c r e d i t allowed on account of the c o l l e c t i o n s to be made by the bank, when f o r e i g n b i l l s bf l ad ing a re de l i ve red to i t , f o r payment by the f o r e i g n buyer . As a d r a f t under these circumstances cannot be considered as s t r i c t l y cover ing expor ts t o a f o r e i g n country and does no t c o n s t i t u t e an i n h e r e n t , nec-e s s a r y , bona f i d e p a r t of the a c t u a l p rocess of e x p o r t a t i o n , t h i s o f f i c e holds t h a t the d r a f t i s sub j ec t t o the stamp t a x , "

The Commissioner f u r t h e r s t a t e d under date of October 12, 1920:

"This exemption does not extend t o d r a f t s which repre -sen t processes of domestic f i n a n c i n g or t o d r a f t s which r ep re -sen t the p re l imina ry or subsequent adjustment or use of ac-counts or funds involved in expo r t a t i on , and does not apply to d r a f t s given by the domestic buyer to the domestic s e l l e r or drawn on the former as a means of payment f o r goods purchased to be expor ted . "

In view of these r u l i n g s , i t would seem t h a t , so f a r as bankers 1

acceptances a re concerned o the r than those drawn on f o r e i g n banks, the ques t ion whether in a given ins tance a stamp must be a f f i z e d to an ac-ceptance depends l a rge ly upon whether the accep t ing bank looks t o the domestic s e l l e r or e x p o r t e r t o p lace i t in funds to meet the acceptance on m a t u r i t y , o r whether i t looks to the f o r e i g n purchaser f o r reimburse-ment. In the f i r s t ins tance a stamp i s r e q u i r e d . In the second ins tance the acceptance i s exempt from the t a x .

To summarize, i t appears tha t the fo l lowing d r a f t s covering expor t s are exempt from the stamp t ax :

( l ) A d r a f t drawn by an American manufacturer or expor te r upon a f o r e i g n purchaser or upon the p u r c h a s e r ^ f o r e i g n bank. A d r a f t of t h i s c h a r a c t e r u sua l l y accompanies the shipping documents and i s forwarded wi th them f o r acceptance upon t h e i r r e l e a s e . Such a d r a f t i s exempt, a l though d iscounted and nego t i a t ed i n t h i s coun t ry .

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

- 5 - 3U3042

(2) A d r a f t drawn by an American manufacturer o r e x p o r t e r upon a domestic "bank or o the r domestic agency which ac t s f o r the f o r e i g n buyer i n accept ing the d r a f t .

On the o ther hand, the fo l lowing d r a f t s are sub j ec t to the t ax :

(1) A d r a f t drawn f o r the purpose of a n t i c i p a t i n g the c o l l e c -t i o n of a t rade b i l l or a time d r a f t covering the expor-t a t i o n of goods*, and accepted by an American bank wi th which such t rade b i l l or time d r a f t has been depos i ted f o r c o l l e c t i o n ,

(2) A d r a f t drawn f o r the purpose of a n t i c i p a t i n g payment by the f o r e i g n purchase r , where no t rade b i l l or time d r a f t has been drawn on the f o r e i g n purchase r , and ac -cepted by the American bank with which the Shipping documents have been depos i t ed .

(3) A d k a f t drawn by an American expor te r on a domestic bank, or on an American expor t e r by the manufac turer , i n payment f o r goods purchased by the expor t e r f o r export abroad.

I t should be remembered t ha t a l though the Commissioner of I n t e r n a l Revenue has ruled t h a t under the Revenue Act -of 1918 a d r a f t drawn upon an American bank f o r the purpose of a n t i c i p a t i n g payment by a f o r e i g n purchaser f o r goods exported i s s u b j e c t t o the stamp tax , n e v e r t h e l e s s , such a d r a f t may be e l i g i b l e f o r r ed i scoun t or purchase by a Federa l Reserve Bank, under the p rov i s ions of the Federa l Reserve Act, as an acceptance growing out of a t r a n s a c t i o n involving the expor t a t ion of goods.

3« Time D r a f t s Covering Shipments to the Canal Zone and Other Outlying 'Possessions. A time d r a f t cover ing a r t i c l e s shipped from the United S t a t e s , Hawaii and Alaska to the Canal Zone are sub jec t to the stamp tax i f the d r a f t s a re d e l i v e r e d wi th in the United S t a t e s , Hawaii or Alaska. (See A r t i c l e 45 ) . The tax i s no t a p p l i c a b l e , however, t o a time d r a f t cover ing a shipment t o the Virgin I s l a n d s , P h i l i p p i n e s or Por to Rico, because of express l e g i s l a t i o n exempting such shipments, (See A r t i c l e 4b) ,

Very t r u l y yours ,

G o v e r n o r .

To a l l Chairmen, cop ies to Governors

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis