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Mr. PAIEWONSKY. It was limited to the only two distilleries that were in operation. Mr. Chairman, I have affidavits to prove that the statement of Mr. Brauer that his distillery was in operation at this particular time is completely false and without foundation. I will submit it.

Senator MILLER. May I ask a question at that point?
The CHAIRMAN. Senator Miller.

Senator MILLER. It was my recollection that Mr. Brauer stated he was not in operation in 1957, but he was in operation in 1956 and 1955.

Mr. PAIEWONSKY. That is not what I am stating.

Senator MILLER. I understood you to say he was not in operation in 1957.

Mr. PAIEWONSKY. He was not in operation in 1955, 1956, 1957, 1958, or 1959.

Senator MILLER. Then you deny his statement that he was in operation ?

Mr. PAIEWONSKY. Absolutely. It is totally without foundation.
Mr. LEVENTHAL. Mr. Chairman, may I speak for a second ?
The CHAIRMAN. Certainly.

Mr. LEVENTHAL. I do not recall whether you were in the room when Governor Merwin's wire was read by the chairman into the record, but among the facts set forth in that is that Brauer did not even apply for a distiller's license, he did not even apply for a distiller's license, until 1959, which he would have had to have had before operating a distillery. We have other affidavits that we can submit, if you like, showing that he did not operate in 1959 either. But I am indicating that so far as the years 1955 and 1956 are concerned, which he did testify he was operating a distillery, that is negative by the Governor's own cable.

Senator MILLER. I recall that Mr. Brauer testified that he was operating in 1955 and 1956.

The CHAIRMAN. He did.
Senator MILLER. You categorically deny it?

Mr. LEVENTHAL. Yes, sir; and the Governor's cable also indicates that.

The CHAIRMAN. Very well. Proceed. Mr. PAIEWONSKY. During the hearing, persons considering operation of new distilleries were told by the legislative committee that they would be given equal treatment if they brought in molasses for Virgin Islands distillery operation.

All of the rum produced from distillation of the molasses purchased under this subsidy was shipped by us to the United States.

So far as Mr. Brauer is concerned, he was not operating a distillery at that time. He never even applied for a distiller's license before 1959, after the termination of the subsidy. His maximum purchase of molasses was a matter of approximately eighty 50-gallon drums purchased in 1960. I understand the correct figure is 75.

These are still lying in a yard, unused. Even today he does not have the equipment necessary for operating a distillery for production of rum from molasses and he apparently paid a "retail” price when he bought a small quantity in drums.

Senator MILLER. There was a statement made by you last week regarding the importation of alcohol from Peru, or high wines. Was he operating in that capacity? I do not recall that you stated that Mr. Brauer was the one that was doing that. You said certain people. Was he operating in that capacity ?

Mr. PAIEWONSKY. I do not know, sir. I know that this matter came up before the Governor and the legislature took action to prevent this type of operation which they felt would jeopardize the islands' industry and also jeopardize the return of internal revenue taxes.

Senator MILLER. You do not intend to allege that Mr. Brauer has been doing this; is that correct? Or did you intend to allege that?

Mr. LEVENTHAL. May I speak to that for clarification ?
Senator MILLER. I would rather have the witness.

Mr. PAIEWONSKY. I am not sure. I am not familiar with Mr. Brauer's type of operation. I understand his operation was confined to the manufacture of cordials and the manufacture of wines, fruitflavored wines. I am not at all conversant with whether he was involved in this or whether he was not involved in this.

Mr. LEVENTHAL. May I interject that Governor Merwin's telegram also statedOne thousand barrels of Peruvian high wines had been imported by Goddards, Ltd., and was about to be processed by one Emanuel Brauer and shipped to the United States as Virgin Islands rum.

That processing would not have been a distillation. It would have been a rectification, a blending, or redistillation, technically the redistillation process. But not a distillation from grain products or molasses.

Senator MILLER. -We are not getting into a question of where the parties are not together over whether it is a distillation or a rectification process, are we?

Mr. LEVENTHAL. Yes, that is the point. Only a distillation process would use the molasses. The whole problem that he was talking about was he could not get molasses. The only people who can use molasses are the distillers. He is a rectifier.

Anybody who puts flavors in is a rectifier. Anybody who takes a spirit and puts in a flavor is a rectifier. But that is a very critical

point.

Mr. PAIEWONSKY. Mr. Brauer's complaints about his failure to receive a subsidy were linked to suggestions of huge profits for the two St. Croix distilleries. A price higher than 7 cents would have meant a loss to us in 1957. For the entire period 1954–61, Riise Chemicals & Distillers Corp. shows a loss, without any deduction whatever for a salary payable to me as chief executive officer.

In 1960 for the first time we made a small profit, and that is the year we bought a substantial quantity of molasses on the outside.

Senator MILLER. May I ask another question ?
The CHAIRMAN. Senator Miller.

Senator MILLER. Was there any benefit derived taxwise from that
loss?
Mr. PAIEWONSKY. No, sir.
Senator MILLER. There was no offset against any other income?
Mr. PAIEWONSKY. No, sir; it is a carry forward.

Senator MILLER. It was a straight carry forward ?
Mr. PAINWONSKY. Yes, sir.
Senator MILLER. Thank you.

Mr. PAIEWONSKY. Our losses in earlier years do not, however, indicate that the distillery is not a good property. We suffered losses in 1957 and 1958 due to the incredibly bad grades of the VICORP molasses. Tests by an independent chemist showed that VICORP molasses, the 1958 molasses, had a sugar content of only 42 percent, and was heavy and excessively solid.

The CHAIRMAN. I read the other day from the audit of the General Accounting Office, which said it had 62 percent sugar. Are we talking about the same year? Mr. PAIEWONSKY. That was 1960, I think.

The CHAIRMAN. It is the year in which you had the argument over the payment; I will put it that way.

Well, go ahead.

Mr. PATEWONSKY. This entailed additional handling at the distillery and corresponding additional expense. As to the 1960 crop, VICORP itself supplied us with certificates showing 47 to 48 percent sugar, which is also too low.

Our refusal to pay had the result of focusing attention on a bad situation and helping to move it toward improvement. Under the 1961 agreement, VICORP has guaranteed 52-percent sugars and maximum density as specified. With proper molasses equal in quality to that available in the British Islands, both VICORP and the distillery can do well.

Our 1954–60 loss position is partly attributable to VICORP's failure to supply the water required by the 1954 contract.

The CHAIRMAN. Can I read you a little bit from the audit of the Comptroller General of the United States dated February 1961, page 47?

This purchaser referring to Riisehas refused to pay for molasses delivered to him from April 1959 to December 1959, stating that in normal business practice the term “molasses" under the contract would imply molasses having a sugar content of not less than 52 percent and that the molasses received by him was not of the quality contracted for. Laboratory analysis of samples of molasses taken from the 1959 crop production indicated that the molasses were of high quality and had a sugar content in excess of 52 percent. Has that been called to your attention?

Mr. PAIEWONSKY. Yes, sir. And I saw an analysis showing that. But we never received molasses of that quality because in our experience in the distilling business we have never had molasses of such poor and inferior quality as we received during the 1958–59 crop.

Now, I will say this, Senator: that the samples of molasses are taken after the strike of sugar is taken, and separated to crystals. That is pumped in batches from a small tank into a big holding tank.

If samples of small batches are taken, you will find layers, and especially this type of molasses, which ran as high as 93 bricks, which was almost impossible to pump. It was almost like a solid. This is in various layers in the tanks.

Each layer would have a different percentage of sugars. So some layers might have 52 percent, others might have 48. The 1960 crop, which we all agree, and which has showed up in our fermentation tests to be of better quality than the 1958–59, still, the analysis from those that VICORP has given us, the last deliveries of 1960, shows a sugar content as low as 47 or 48 percent sugar content.

The CHAIRMAN. I only wanted to read this to you. Mr. PAIEWONSKY. The only reason for a capital gain arising out of our sale to Schenley is the writing down of properties and equipment by virtue of depreciation allowances.

The CHAIRMAN. I was not trying to criticize you for taking capital gains on this. I think every prudent businessman has to do that if he is going to stay in business.

Mr. PAIEWONSKY. Throughout this discussion I have refrained from responding in kind to the witness who was adverse.

I will not pretend that it was easy to hear such savage, sensational, and totally unjustified charges, to see them spread in the public prints or to hear from my family that they were featured in the Virgin Islands and Puerto Rico as headline news of the day.

I take comfort in the knowledge that those who offer to serve, and do serve, public trusts are frequently targets of such abuse.

This is something you gentlemen know far better than I. It seems to me an unfortunate part of the democratic process.

However, I wish to assure you that if I am confirmed I shall not carry back to the Virgin Islands any grudge that would interfere with the fair and impartial administration of my duties.

I thank you for the courtesy and consideration you have shown me.

The CHAIRMAN. Let me give you a small trace of comfort, Mr. Paiewonsky, by saying that I do not think there is a person engaged in public life who has been a candidate for public office who has not been shocked, sometimes, at things he has read about his own experience.

Are there questions?

Senator DWORSHAK. Mr. Chairman, I am a little confused about whether this manipulation of molasses or alcohol, or call it what you will, for treatment in the Virgin Islands and then subsequent transshipment resulting in getting grants from the United States under the program set up by Chairman Butler, Senator Butler, of Nebraska, during the 83d Congress.

I have asked the committee counsel, Stewart French, to check up and he calls my attention to page 15 of this report, submitted by Senator Butler. I will read this paragraph, quoting Senator Butler:

I will state at the outset in my discussion of major issues with respect to the new organic act that I am recommending to the committee and the Congress that the Virgin Islands be granted a return of the internal revenue taxes on a matching funds formula, namely, that a dollar of the internal revenue taxes paid by mainland consumers on the mainland on Virgin Islands products be granted the islands' treasury for every dollar of local revenue the islands themselves collect.

Reference has been made to a purchase by the distilleries, I presume in which you are interested, of 2 million gallons of molasses. When you purchased that, where did you get it—Cuba?

Mr. PAIEWONSKY. Puerto Rico, sir.

Senator DWORSHAK. And you took the molasses into the Virgin Islands and through some processing then transshipped the rum to the United States ?

Mr. PAIEWONSKY. Yes, sir.

Senator DWORSHAK. In that process you think that there was full and complete compliance with the spirit of this recommendation that that would legally and ethically entitle the Virgin Islands Government to this grant by the United States in that the 2 million gallons of molasses did not originate in the Virgin Islands, but were brought in from outside and subsequently transshipped ?

Do you think that was compliance with the recommendations by Senator Butler ?

Mr. PAIEWONSKY. I think Senator Butler was fully aware that the industry of the Virgin Islands, the rum industry of the Virgin Islands, depended on outside sources for its molasses, primarily Puerto Rico. They received a part locally.

The entire industry that existed in St. Thomas, V.I., at that time got 100 percent of their supply of molasses from Puerto Rico.

The CHAIRMAN. Would it not also be true that any time you buy an outside product and by your processing of it you add a 50 percent or more to the value of it, it is then regarded as a native product to the Virgin Islands? Mr. PAIEWONSKY. That is correct, sir.

The CHAIRMAN. Did you, by your processing of this rum from the original molasses which was purchased at 5, 6, or 8 cents in Puerto Rico, add more than 50 percent to the value of it? Mr. PAIEWONSKY. It added more; yes.

The CHAIRMAN. Therefore, it put it under the law as a product of the Virgin Islands.

Mr. PAIEWONSKY. Yes, sir.

Senator DWORSHAK. Under that procedure, is it not entirely possible that Schenley, which company will now operate one of the distilleries, the large one, that you formerly owned, could bring into the islands unlimited amounts of molasses for treatment or for processing into rum and then to be transshipped to the United States or to other countries for consumption, that we might visualize a grant amounting to $15 million or $20 million every year from the United States ?

Would that be ethical and legal in your estimation?

Mr. PAIEWONSKY. Senator, I think you are off on a wrong premise for this reason : Both Schenley and Seagram's operate in Puerto Rico. They have distilleries in Puerto Rico. They have very large distilleries in Puerto Rico.

Senator DWORSHAK. Are they going to close down their distillery in the Virgin Islands, then?

Mr. PAIEWONSKY. No, sir. I will just say there are unlimited quantities of molasses in Puerto Rico. Puerto Rico has the same privilege as we have. But the big drawback here is that the United States can only consume a small quantity of rum; consumption is relatively limited.

If you take the statistics, I think the total sales compared with all other liquors in the United States is approximately 2 percent.

Senator DWORSHAK. So that would limit the amount.

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