Memorandum of Telephone Conversation, by Mr. Alexander Schnee of the Division of North and West Coast Affairs

A call was put through at four o’clock on the afternoon of May 6, to Mr. John J. McCloy, of the firm of Milbank, Tweed, Hope, Hadley & McCloy, representing the Pantepec Oil Company of Venezuela on the subject of the proposed protest of that company to the Venezuelan Government against the excess profits tax Decree No. 112 of December 31, 1945.

Mr. Schnee opened the conversation, stating that he now had the opportunity to discuss this matter with Mr. Flack and Messrs. Loftus and Townsend of the Petroleum Division, and was able to state that the Department felt that the objections raised by the Department in previous conversations with Mr. McCloy on the subject were still valid. Mr. McCloy stated that he had endeavored to incorporate the Department’s recommendations and to this end had amplified the sections of the draft of the proposed protest dealing with the five constitutional objections.

Mr. Schnee stated that it was the opinion of the men in the Department that the protest would reap the greatest reward for Pantepec if it were primarily, if not exclusively, limited to those sections of the protest dealing with the peculiarly burdensome nature of the tax on the Pantepec Company.

With respect to the five constitutional objections incorporated in the draft of the proposed protest, Mr. Schnee said that it was the opinion of the Department that these objections would not be favorably received by the Junta and that they would not create an atmosphere favorable to a compromise. Mr. Schnee specifically stated that Section No. 5 (referring to the legal powers of the Junta) would be likely to result in a feeling of animosity on the part of the Junta toward the Pantepec Company. Mr. McCloy replied that he had the same reaction to this point and that he had modified that section of the protest to read as follows:

The powers of a Junta Government are traditionally limited as to taxation. Although the Revolutionary Junta’s declarations in form purported to invest it with the full attributes of all public powers, the powers of such a government have heretofore been construed as limited to those functions which are indispensable to the conservation of institutional order and the rapid reestablishment of a new and permanent juridical order in accordance with the general principles proclaimed by the Revolution.”

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In reply to Mr. McCloy’s inquiries as to whether this point was now expressed in a manner which the Department thought acceptable, Mr. Schnee said that it was the unanimous opinion of all the interested Department officers that the protest would be most helpful if the constitutionality of the decree were not questioned in a strictly legal sense but if such references were concerned more with the spirit of the decree.

Mr. McClay thanked Mr. Schnee for his comments and inquired whether he had any additional thoughts on the matter. Mr. Schnee then referred to the draft letter to the Secretary and to the memorandum attached thereto, on page 5 of which there was a reference which might be interpreted as implying some sort of pressure on the part of the Department in bringing about an acceptance by the petroleum companies of the Venezuelan Law of 1943. Mr. McCloy replied that he understood the Department’s position in this matter very well and said that he would review the letter to the Secretary and the memorandum again.

Mr. Schnee said that if the Pantepec Company requested the Department’s assistance in this matter we would wait until the protest had been presented by the Pantepec Company and would then instruct the Embassy to approach the Venezuelan Government informally and at an opportune time for the purpose of offering some comments on the Pantepec protest. These comments would, for the most part, be restricted to the peculiarly burdensome nature of this tax upon the Pantepec Company. Mr. McCloy said that he would furnish the Department with a copy of the final draft and would communicate with us at an appropriate time in order that the Embassy might be instructed along the lines outlined.