The San Francisco call. [volume] (San Francisco [Calif.]) 1895-1913, 1901-12-13
BANKS MUST PAY
TAX On PROFITS
Internal Revenue Office
Files Important
Ruling.

j. w. Yerkes, Commissioner of Internal
Revenue, has rendered a decision that
will affect the banks of the Pacific Coast
to the extent of several million dollars
winch they will be required to pay as in
ternal revenue tax on undivided profits.
In February, 1899, the United States At
torney General held that undivided profits
differ from surplus and should not be
taxed. Under this opinion the Treasul Y
department refunded a large amount to
the banks.
Commissioner ]. W. Yerkes has lust
notified Collector Lynch that the depart
men6 mas decided to again collect the
THIS change In ruling will make a differ
ence Of thousands of dollars each wear.
The full decision is as follows:
The act Of June Is. 1898. and the act of
employing capital not exceeding S2j, 900 shall
pay $50; when using or employing a capital
exceeding S25, 900, for every additional $1,000
in excess Of $25, 900. 81; and in estimating cap
ital surplus shall be included.
The law defines banker and describes the
business of banking. The law provides that
bankers shall pay tax on the capital employed
Ii. e., employed in the business Of banking)
and that in estimating capital surplus shall be
This office holds that capital is taxable
whether invested, as in the case Of the United
States bonds or the bank building or circulat-
ing, as in the case of money, including money
profits
capital it is obviously the purpose of the law
to have the tax imposed apply to all money
used or employed by banks as capital in carry
ing on their business.
Money borrowed by banks. and used as cap
ital, is held to be taxable and 1T is clearly no
borrowed by bank from its own undivided
profits.
The fact that surplus so used consists wholly
or in part of undivided profits, or that such
undivided profits have have not been form
ally set apart for such use, seems wholly i'm
material so far as the purpose of the act is
concerned II is the use and not the authority
to use that brings such profits within the tax
ing provisions of this act.
Banks should, therefore, return for taxation
the capital, the surplus fund, their undivided
profits or other profit and loss account except
so much thereof as may be actually necessary
and has been set apart to meet ascertained liza
abilities and losses, or to pay dividends act
ually declared by the directors of the bank to
as salaries and other necessary annual ex-
penses.
The opinion of this office is that capital and
surplus" include all funds employed by the
bank in the business of banking, and that nat
orally and in the ordinary course of banking
business are so employed, excluding only such
funds which, though temporarily used by the
bank, are Of necessity Withdrawn from the
banking business through the payments of divi-
dends, taxes, ascertained losses fixed charges
Of whatever character.
Any decision of this office at variance with
the above Is hereby rescinded.
/. w. Hellman Jr. in discussing the de-
cisioa last evening said:
Last year the Commissioner of Internal Rev
enue decided that the banks need only pay
taxes on their capital and as much of their
surplus as was made necessary by the law
That beyond that point they would not have to
pay national bank taxes. This decision pro-
vides that not only will they have to pay
taxes on their capital and their entire surplus
but also on their entire undivided proits-that
Is, on all their profits that have not been d.
vided among their stockholders.
II Will make great difference to many
panks, because 1t has become customary among
larger institutions to retain their surplus
prohts In a fund known as undivided profits
In great many cases the undivided profits
OF the banks are as large the combined cap
ital and surplus.
This decision will affect every bank on this
coast TO the extent of $1,000 70 500 600 a vea r