The sun. [volume] (New York [N.Y.]) 1833-1916, 1915-11-09
NEW TAX DECISION
HITS CORPORATIONS
L. S. Supreme Court Says In
tercst on Debt Up to Capital
Only May Be Deducted.
BROADWAY co. IS LOSER

WASHINGTON, Nov. s.-A decision
handed down by the Supreme Court
to-day affects many corporations which
pay taxes under the income tax law.
The Forty-two Broadway Corporation
of New York city lost Its action to
recover taxes paid for 1909 under
the corporation tax feature In the
Aldrich law. which was re-
enacted In the present tariff law.
The action was brought against
Charles w. Anderson, ex-collector OF
internal evenue. The corporation had
won In the FEDERAL District Court for
the southern District of New YORK.
and on appeal the Circuit Court OF
Appeals affirmed the judgment. Inc
Government carried the case up, ana
the Supreme Court In an opinion TO-
1 day by Justice litney held that the
| Government had a right to retain the
taxes.
The issue turned on the construc-
ton of the language in the nrst clause
of paragraph 2 of the thirtS-elgnt
section OF the corporation tax act. The
company, which is known as "a realty
corporation" was organized to con
struct II building and collect n pay
| oNfI Itf1ltISs IL "a ~ 10 N'i'
talization of only $500 paid up. but a
a bonded debt ION which 1t paid inter
est amounting to 81 10000. h cor
poration claimed the right to deduct
from the gross income, Tor purposes Oh
estimating the net income FOR AKA.
ton. the interest paid on this bonded
debt.
1t was contended by the Government
that under the wording of the act the
| .pt,,narx pnanfI dadttf interest nlly
on the debt up TO an amount equal TO
the capital stock. Cnde the Conten-
ton of the corporation the company
would not nave been liable to II
taxes. The amount involved for the
year 1909 was / per cent. upon a net
income Of sl7S.l36. .
The Government cited the second
paragraph OF the proviso To section
IS. which follows:
such net income shall he ascer-
tanned by dcducting from the gross
amount of the income Of such corpor-
alton. joint stock company or asso-
citation or insurance company received
within the year from all sources; hrst,
all the ordinary and necessary expenses
actually paid within the year out of
ONE IN the maintenance and opera
ton Of its business and properties. IN
GLIDING all charges. such as rentals or
franchise payments. required to be
made as a condition to the continued
use or possession # property; third.
interest actually paid within the gear
on its bonded w other Indebtedness to
amoun Of such bonded and other
Indebtedness not exceeding the paid
up capital stock Of such corporation,
49, stock company" &c.
Justice pituev said There was
error. II seems to us. Ia seeking "A theo-
r~et,cLlly accurate definition of the net
income instead OF adopting the mean
ing which j. so clearly defined in the
act ITSELF
After pointing out that tie corpora
ton tax feature OF the Plyuc-Aldr!cl
act was not intended 10 be "A tax Oh
! Incomes. hut IAN excise upon conduct
of business" Justice Pitney said:
Congress evidently had in view the
fact that some corporations tother than
banks and like institutions which for
obvious reasons are separately con-
siderrdJ carry a current indebtedness
exceeding the amount of the paid M
capital stock, and with respect to such
corporations intended To limit the in.
terest deductions to so much Of the IN
. dehtedness as did not exceed the capt
tai"
The court declared that this was not
All ordinary classification, saying:
at Is not necessary to attribute 70
D 'blNkltFN a lAi l''Nf w AFNbh "
impose an extra burden upon corpora
lions carrying on their operations with
a nominal capital stock or with an IL
de%btedness largely exceeding the amount
Of the capital stock. it is more reason
able to say that Congress deemed that
where the Indebtedness does not eN'
coed the capital II should no longer b.
treated as an Incident. hut that the
carrying of the ind btedncss should hs
considered as a principal object OF the
cooperative activities. and the opera
tons OF such a corporation are CON
;. Quoted more for the benefit Of the crcdi-
tors than OF the stockholders. and that
the contribution Of the corporation q
the EXPENSES OF the Government should
be administered with this fact in view.
"Thcre IL no question of the power
of Congress TO ADOPT such a basis OF
distinction. and since the line must bs
drawn somewhere II was certainly not
arbitrary TO draw 1t at the precise
point where the ~pecuniary interest OF
:. the creditors overhalanced that of tn,
/ stockholders"