Los Angeles herald., 1910-03-16
FILES DEFENSE
OF NEW TAX LAW
GOVERNMENTS ANSWER IS
SUBMITTED
HOLDS THAT CORPORATIONS ARE
LEGALLY ASSESSED
Solicitor General Submits Brief Sup
porting constitutionaIity of
Important Provision
of Tariff
Associated Press1

1t is the work of Lloyd w. Bowers,
solicitor general, but bears the sigma
ture also of his chief, Attorney Gen
eral Wickersham. On it the govern
ment will share its oral defense of the
law when the corporation tax case
comes up for argument, probably
today.
The first point sought to be made
is that the tax is not a direct tax
upon property, but is an excise tax
upon the carrying on or doing busi-
ness"
The declarations of the statute, as
we'll as decisions of the courts, are
relied upon to support this point.
AS to the statute, Mr.. Bowers says,
in his brief, that II shows the trans
action of business TO be the subject
of the tax and that the income of
business is used merely as measuring
the amount of tax, which rests not
upon that income, but upon the
occupation from which 1t is derived
1t is in the argument that the tax
is not direct, one that Mr.. Bowers
first considers the claim that inasmuch
as the tax is not levied upon part
nerships or individuals, but is put on
corporations and joint stock companies
and it Is therefore assessed on fran
chises. The distinction between part
nerships and individuals on the one
hand and corporations and joint stock
companies on the other, is explained
as proceeding from the presence or
absences of franchises. but from the
wide and important diversity of legal
rules affecting the two kinds of busi-
ness of these two groups
Is Not Direct Tax
Even it this tax were regarded ex-
20
use of franchises" continued Mr..
Bowers. instead of being a tax on
the entire conduct or transaction of
business under many special condi-
tions, it would be altogether different
from a direct tax on the franchises
themselves
The second point Mr.. Bowers seeks
TO make is that the tax is not a direct
tax upon the shares of the stockhold
ers, nor upon the income. The reasons
given for the tax not being direct tax
on property is held to apply to the
claims that it is not a direct tax on
the shares or income of the stock
holders.
The third point is that the tax does
not become direct in the special case
Of a company engaged in the business
of handling or dealing in real estate.
Five of the fifteen cases for consid-
Grafton by the court involve such cor
porations. Mr. Bowers claims they
raise no constitutional question, but
only the query as to whether they
are engaged in carrying on or doing
business"
If any corporation is not so engaged
it is not reached by the statute, he
says.
The fourth point Mr.. Bowers seeks
to establish is that the tax is not an
infraction of the general power of the
states to authorize the formation of
corporations and stock companies.
Even if the tax were on franchises
it still would not be a tax on the
legislative power of the state.
Can Tax Franchises
No authority exists, Mr.. Bowers
contends, that holds or even suggests
that the United States cannot tax
franchise of a state corporation es-
tablished for ordinary business pur-
poses, on the theory that such federal
tax will interfere with legislative in
dependence of the states in their own
sphere.
One reason assigned for exempting
individuals and partnerships is that
they are without the aid of legal rules
applicable to corporations and joint
stock companies. Both reason and
authority. it is claimed. justify the
| exemption OF corporations WHOSE net
| income is not over $4,000.
Exemptions from taxation Of linn
| tied amount of individual property are
well nigh universal" says Mr.. Bow
ers, land they rest doubtless upon the
! just and necessary policy of leaving
a living opportunity unburdened by
| government"
Labor, agricultural and horticultural
| organizations are exempted, he says,
| because they seem hardly to be Or
! ganized for profit"
! He adds that If ii is necessary the
statute could we'll be construed as not
exempting such associations if their
! primary purpose is business profit.
Lodges Are Not Corporations
The exception of societies operating
under the lodge system, he contends,
| iustifies itself. Such. Mr.. Bowers
! says, are the knights of Pythias,
knights of Labor. certain Masonic Or
ders, the Red Men and the Wodmen
of the World.
"It is almost humorous" he adds,
"to urge that such organizations must
be considered insurance companies
! having purely or chiefly pecuniary
| functions"
One reason given in justification of
| the measurement Of the tax received
| from an resources was that the prop
al
! business asset.
Reply is made to the objection to
the limitation to the amount of inter
est deduction in arriving at the net
income.
without the Imitation says Mr..
Bowers. corporations and joint COM
panies by issuing bonds for all or most
of their capital-either with or with
out an accompanying issue of stock
could distribute the business profits,
however large, in the form of interest
payments, and the tax in that way
could be entirely or largely avoided"
The solicitor general urges that the
tax does not subject the corporations
to unreasonable searches or seizure by
reason of its publicity feature. Neither
the making nor the publication of the
returns can by any possible view be
interpreted as search or seizure, he
contends.
Finally, it is contended that the tax
may properly be collected in 1910. This
is based on the argument that the tax
is not laid on the income which was
received before the law went into ef-
feet, August 5, 1909, but is merely
measured by that income.
-o -