The Brattleboro daily reformer. (Brattleboro, Vt.) 1913-1955, 1918-06-15
Perplexingl Question on In
vested Capitaland d. Exclu-
sion of Borrowed Money
MANY sINJUSTICES
HAVE BEEN REPORTED
Witnesses Call the Attention of Ways
and Means Committee Of the House
to These Points Difficult to Make
Everything Fair.

a Z.
NEW YORK, June 15-Among the
features of the federal excess profits
tax law which hapescome in for severe
criticism by reason of the fact that they
have operated with injustice and in.
equality, are those which deal with the
determination of Invested capital
and, secondly, the exclusion of Dor
rowed money, as it affects the small
business man, and also in its operation
on cases of so-called accidental capi-
talization. Tax experts say that
these features have caused more trouble
and confusion than any others, and it
is their hope that congress, in framing
new revenue legislation, will give the
public relief byasimplifying the pro,
visions and by reducing to minimum
the cases of injustice, it being realized
that it is practically impossible to write
| tax statute which would be absolutely
fair to all taxpayers.
| Instead .of accepting the capital ac-
| tually employed in a given business as
the measure of the percentage on which
the tax is based, the act rigdly ex-
cludes all capital except that which is
contributed or earned by the owners of
the business. Money or property Dor
rowed is excluded from the computations
A company with. an investment of
Sl,000,00o, fairly represented by $780,.
4 200 common stock and 100000 pre-
l'ferred stock, and earning $250OO0, is
taxed Sal 400 The same concern with
/ S50o,000 stock and 100000 bonds, earn.
ing 100000, less s. per cent interest on
the bonds, is taxed $74, 1000. The whole
tax in each case is borne by the holders
| of the common stock.
/ Following is another illustration OF
how the exclusion of borrowed money
provision operates an injustice: An es
II tablshed business loses its senior part
4 Aer. The WIDOW is unwilling. to leav.
his capital IN the business, except a.
a loan to the firm on the Endorsement:
of the junior partners. The business j.
earning after salary allowances, $4,000
ON $4,000 actual capital. It's ia,
! should be about $4,000. If 100000 O.
this capital becomes borrowed. capital
costing 8 per cent, If viii be earning
: $34, 900 on a $4,000 net capital and tn,
tax will fall at the Copper cent rate OF
every dollar over $6,66667. The part
ners would get only 40 per cent Of tn
! profits above this amount if they .un
dcrtook the risk E The tax would b
practically prohibitive of the transac
G ton. ks9
l Generally speaking, ''invested car
a ital' is the sum of the original or cor
n trihuted capital and the earned SUI
t plus or undivided profits, excluding, i
: the case of a corporation or partner
4 ship, the profits of the taxable yea
e Under the regulations it is required t
t be determined primarily from the cal
z ital and surplus account on the book
It and then adjusted to meet various sp,
n cial provisions of the act and regul;
e tions. If the computed taxes are III
IS duly severe, the taxpayer may appl
q for relief under section 210, which pr,
L vides for exceptional cases of har,
! ship. In all such eases the investc
. capital and the rate of tax which is d.
4 pendent on 1T bear7the same relation
i met income. as that found to exist
j representative corporations, par
!. nerships, etc. engaged in like or sin
!. liar trade. or business.
III Following is an illustration of no
= the law operates in a ease of this sor
3 A small manufacturing corporation, c
J | tablished 35 years ago with two stool
= holders, had capital stock of 500
i0Q0. A few years later the two stoel
r holders increased its actual capital /
I advancing 100000 as loan. Add
| tional loansI bring the actual capital i
+ to $l,000,00Q plus the original $4,000
i The company earns in 1917 $4,000
i and, after deducting 100000 as intere
L on the loan, shows $270,000, or q
|fper cent on the nominal capital As
| matter of Fact, it is earning 80 p,
! cent on its total capital, all owned /