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the sugar mill weighed this as a part of the cane and paid for it as cane. But it was mud and dirt. There was no means or method of removing this from the cane. This dirt went into the sugar operation and ended up in molasses. And our molasses contained, I believe, a large percentage of this mud, dirt, and so forth.

There are a lot of other things that were wrong, too, sir.

Senator DWORSHAK. Did VICORP file a suit for collection against you?

Mr. PAIEWONSKY. They did.
Senator DWORSHAK. And what was the outcome of that?

Mr. PAIEWONSKY. That has been settled. We have agreed to pay the thing in full to settle it, but I think we have focused enough attention on the matter now.

Senator DWORSHAK. When did you agree to pay in full ?
Mr. PAIEWONSKY. That was several weeks ago, sir.

Senator DWORSHAK. After you were proposed for the Governorship of the islands.

Mr. PAIEWONSKY. Well, we tried to settle this with VICORP before that, long before that; but they kept dragging this thing on. It has been settled now; yes.

Senator DWORSHAK. But you have entered into an agreement now, a contract, to repay the full amount you owed for the 1959 molasses?

Mr. PAIEWONSKY. That is correct, sir.

Senator ALLOTT. You purchased the Riise Distillery from the Government, did you not?

Mr. PalewONSKY. Yes, we purchased the VICORP facilities they had there. But it was an empty shell when we bought it. There was nothing usable in that plant.

Senator ALLOTT. There were no distillery implements of any kind in there?

Mr. PAIEWONSKY. We thought when we bought it that some of the equipment that was in it we would be able to use. But there is not a single piece now in there that we bought from them that we could use, except the buildings.

Senator ALLOTT. When did you purchase this?
Mr. PAIEWONSKY. We purchased this I think in 1953 or 1954.

Senator ALLOTT. I have had some information brought to my attention, Mr. Paiewonsky, that in 1957 the quoted price for molasses was 17 cents per gallon, and that you were buying it at that time for 10 cents from VICORP. Is that right? Mr. PAIEWONSKY. That is true, sir. May I tell you the circumstances how that price was derived ?

Senator ALLOTT. When did you enter into this contract for the purchase of this molasses?

Mr. PAIEWONSKY. The purchase of the plant and the purchase of the molasses were together, and the contract stipulated that we would negotiate the price based on the world market price around December of each year. At that time, or in the event we could not reach a decision or agreement in the price, there was a machinery set up for arbitration.

In this particular year there was the Suez Canal crisis. And the world price of molasses moved from 5 cents a gallon up to about 20 or 25 cents a gallon.

Well, under the conditions under which we were selling rum in the Virgin Islands, we could not manufacture rum and sell it at a profit at a 20-cent molasses price.

This matter went to arbitration. The cost at that time was up to about 16 cents. It fluctuates. Molasses price fluctuates all the way up. But the normal price of molasses runs between 5 and 10 cents.

Well, when this question came up, we went to arbitration, and the VICORP suggested that the third party should be Judge Cecil Snyder in Puerto Rico. We agreed to him and we went over to Puerto Rico and spent several days there with the expert from Agriculture and our people, our attorneys. And as a result of the arbitration, the arbitration board set the price at 10 cents.

Senator ALLOTT. It is a fact, though, that you were buying it at 10 cents, when the price, the quoted price for it on the open market, was 17 cents at that time, in 1957. You said “Yes” to this a few moments ago?

Mr. PAIEWONSKY. Yes. That was because it was set by arbitration.

Senator ALLOTT. How long is the contract for molasses at the present time?

Mr. PAIEWONSKY. The present contract is for the life of VICORP. It runs to 1969.

Senator ALLOTT. All right. And what is the price? Mr. PAIEWONSKY. The price is set up, the formula for the price is set up, that it would be 2 cents below the delivered price in St. Croix of the outside molasses, that is purchased on the outside.

In other words, we have to purchase molasses, additional quantities of molasses, on the outside, because VICORP does not produce sufficient molasses for the needs of the industry.

Senator ALLOTT. Well, how is the price fixed ?

Mr. PAIEWONSKY. The price is fixed at 2 cents a gallon below the delivered price.

Senator ALLOTT. Below the delivered price! Mr. PAIEWONSKY. In St. Croix; because there is a delivered charge of maybe 4 cents per gallon to bring it in to St. Croix.

Senator ALLOTT. As a director of VICORP, then, you would have an interest and control over the contracts with the distillery. You have said that you are divesting yourself of the Riise Distillery and taking in lieu thereof an interest in the Schenley Distillery, which you have in turn said, in a rather vague way, as I recall, that you would put it in a trust or divest yourself of it later. Do you have a copy of that proposed trust, and would you file it with the committee? Mr. PAIEWONSKY. Yes, sir. Senator ALLOTT. Do you have it with you? Mr. PAIEWONSKY. No. I have that in the statement here, sir.

Senator ALLOTT. So that in any event, even though you would dispose of Riise Distillery, you and your family—and I assume that this would mean your brother, your father and mother, your wife, and your sons and your immediate relatives, who operate some of your busi. nesses—you would still, as a director of VICORP, and as the stock. holder or holder of an interest in Schenley, have control, or part of the control, over the price of molasses which was sold, in effect, to yourself?

Mr. PAIEWONSKY. The price is fixed by formula which cannot be varied. This is a fixed contract that was made after the problem we had with VICORP, because VICORP claimed when they sold molasses that there was no stipulation as to quality, and they could give anything. They could give half molasses, half mud, half anything. So the contract was rewritten, and a quantity was pegged at 70 percent.

As a matter of fact, they wanted to write it at 100 percent, because they would have to get rid of the molasses. It would cost them money to get rid of that molasses.

Senator ALLOTT. You spoke of not making money back here at 10 cents. I have information that I believe is reliable that the raw material, the molasses, for a gallon of 90 proof alcohol-and this is what rum is, essentially, is it not-costs the distiller 2212 cents ? Would you say that that is true or not true?

Mr. PAIEWONSKY. That is correct, sir.

Senator ALLOTT. So when you talk about not being able to operate profitably on anything above 10 cents per gallon, there is quite a discrepancy between that and 221/2 cents, and the amount that this same alcohol sells for when it is placed in the market under the guise of rum or something else.

Mr. PAIEWONSKY. There are a lot of other costs that enter the picture, outside of molasses. Molasses is only a small part of the total cost. Rum is manufactured, and there is a labor cost. There are chemicals used. There are barrels. There is a period where you have to store the rum. There is outage. And you have to carry the plant, insurances, and everything else. So that the amount of molasses, the value of molasses, in a gallon of rum, is only a fraction of the total cost.

Senator ALLOTT. Well, I would be interested in seeing your books, or anyone else's books, for that matter, and seeing what fraction of the cost of the bottle consists of the cost of the raw alcohol.

Now, is this alcohol that you manufacture and convert into rum subject to a tax of any kind in the Virgin Islands?

Mr. PAIEWONSKY. Practically a hundred precent of what we manufacture goes to the United States, to customers in the United States, under our brand label. And it is subject to the same Internal Revenue taxes here as any other product of a similar nature.

Senator ALLOTT. Mr. Chairman, I do not want to take up all the time. I have many more questions.

But I would like to ask permission to insert in the record at this time, at a place adjacent to my questions concerning inheritance tax, subtitle I of the Virgin Islands Code Annotated, volume V, occurring on page 3, concerning inheritance tax, which shows the tax to be 2 percent from husband to wife, wife to husband, and to children, and to parents, and 8 percent on brothers and sisters. And I would like to have also included as a part of that the Annotations which are pertinent to these three sections in the Virgin Islands Code.

The CHAIRMAN, Without objection, that will be done. Mr. CARVER. Mr. Chairman, does this take care of the request that you wanted from the Department?

The CHAIRMAN. You had better check the record.

Senator MILLER. On that point: You say most of the products were shipped to the United States? Mr. PAIEWONSKY. From our distillery; yes. From St. Croix. Senator MILLER. Who was your major customer?

now on did not o, sir. Committer

Mr. PAIEWONSKY. We have several customers throughout the United States. Our major customer is Star Liquor Dealers in New York City. The Old Mr. Boston, in Boston. And we have a number of other customers. We have Federal Liquors in New Jersey. We have on the west coast the Bohemian International Distillers.

Senator CARROLL. Will the Senator yield ?
I did not understand. Customers for what?
The CHAIRMAN. Rum.

Senator DWORSHAK. At that point, Mr. Chairman, we might explore the possibilities of this labeling.

Mr. Paiewonsky, are you aware of the investigation which was made by a House Interior Committee recently in the islands? Do you know about the report they made making many charges about false labeling of rum which your distillery manufactured ?

Mr. PAIEWONSKY. I have heard that there was someone down in the islands, but I do not know anything about that, sir.

Senator DWORSHAK. You did not testify before the committee?
Mr. PAIEWONSKY. Recently? No, sir.

Senator DWORSHAK. No. The House Committee which carried on an investigation in the islands.

Mr. PAIEWONSKY. When was this, sir?

Senator DWORSHAK. About 2 years or so ago. Chairman Aspinall and several others were there in 1956.

Mr. PAIEWONSKY. Yes, sir.
Senator DWORSHAK. Did you testify?

Mr. PAIEWONSKY. I testified before the committee in Government House. It was not a formal committee. I think there was a hearing, and I did testify before that.

Senator DWORSHAK. There were some charges of false labeling on some of your products, but you were cleared at that time of those charges?

Mr. PAIEWONSKY. Yes, sir. There was no question about that. Yes, sir. It did not apply to us.

Senator DWORSHAK. A report has never been filed, and I do not know what the particulars are, but I am aware of it.

Thank you. Senator ALLOTT. Mr. Chairman, I have more questions on this, that I would like to ask at a more appropriate time than this, but not at this time.

Senator BURDICK. Mr. Chairman, I have one question, because it relates to the subject that has been developed.

At the time that you were buying rum at 10 cents a gallon from VICORP, at about that same period

The CHAIRMAN. Molasses.

Senator BURDICK. Molasses-excuse me—from VICORP, you had received a subsidy under a bill passed by the Virgin Islands Legislature?

Mr. PAIEWONSKY. The bill for the subsidy came subsequent, sir, at a later date.

Senator BURDICK. About 1958?
Mr. PAIEWONSKY. Later in 1957 or 1958; yes, sir.

Senator BURDICK. And was not that subsidy that was paid to the Riise Chemical Distillery and to St. Croix Sugar Cane Industries a total of $250,000?

Mr. PAIEWONSKY. Approximately that, over the 2 years. The subsidy actually picked up the difference, pegging the price of molasses at 7 cents, and paying the difference.

In other words, the government of the Virgin Islands—the subsidy was to permit the industry to continue on the basis of the purchasing of molasses at 7 cents. And above that, the government paid the difference.

Senator BURDICK. Were there any other distilleries?
Mr. PAIEWONSKY. Yes, sir.

Senator BURDICK. Were there distilleries in the island that did not receive the subsidy?

Mr. PAIEWONSKY. All operating distilleries received it. There were other distilleries that were not operating, that looked for subsidy, but it was not paid to them, because they were not in operation. They were told that if they brought in molasses or purchased molasses, it would be applicable to all of them.

Senator BURDICK. What portion of the $258,000 did Riise Industries receive?

Mr. PAIEWONSKY. Well, there are two distilleries in the islands, and it follows the same pattern with molasses from VICORP. We received 70 percent and the St. Croix Industries received 30 percent.

Senator BURDICK. Then you received 70 percentMr. PAIEWONSKY. On the subsidy, I think it worked out 6623 percent to Riise and 3313 percent to St. Croix Sugar Cane Industries.

Senator BURDICK. That is all. Thank you.

The CHAIRMAN. Since this question was raised of that shipment of rum, the investigation of the House committee—I do not know whether it is a public document or not-dated December 5th, 1956, deals with Goddard's, Ltd., Bolero, Inc., A. H. Riise, and Virgin Island Distillers. Mr. PAIEWONSKY. That is correct, sir.

The CHAIRMAN. And it says they have been shipping rum labeled 6 and 8 years old. “A vast quantity of this rum has been shipped out under false and fraudulent certification.” And because the local government did not do anything about it, the Federal Government could not do anything. Is that the way it came out!

Mr. PAIEWONSKY. There was a hearing, and we made our records available, and I do not remember the name

The CHAIRMAN. Senator Dworshak asked me about the report. I have never seen it until just now.

Mr. PAIEWONSKY. The local government had taken action, and prior to that the questions of age, and age requirements of the islands, were put under strict control, and there was no age statement on any Virgin Íslands rums.

The CHAIRMAN. There is no labeling at all on it any more. Mr. PAIEWONSKY. No, sir; not as to age..

The CHAIRMAN. There was no way of checking on it before, was there?

Mr. PAIEWONSKY. There was. We had an insular gager.

The CHAIRMAN. But you do not have a bonded warehouse or anything comparable!

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