The Richmond Virginian. (Richmond, Va.) 1910-1920, 1920-03-22


definitely; therefore issues Of gov
eminent bonus. after September /.
1917. were only exempted from taxa
ton H. l:taited amounts and for
periods of two and FIVE years as pro-
Yided in The laws authorizing the
various issues These provisions
make 1t possible for an investor to own
"a maximum principal amount of
slG0. 1000 Of the As and 4 rs, exempt
from all income, and excess profits
taxes. The Victory "a % notes in
any amount like the First Liberty
3ia po bonds are exempt from all
taxation, except estate oF inheritance
taxes.
Among the other issues that are
tax-eyempt under the Federal Revenue
law are bonds issued by Federal Land
banks and joint stock land banks
While hare exempted from all taxa
/ ton, except estate or Inheritance
: taxes, because they are "instrutncn-
I talities Of the United States govern
ment.' The object of the Federal
Farm Loan Act was to stimulate the
! DEVELOPMENT OF agriculture. and to
provide the farmer with funds at
low rate of interest II bonds issued
to obtain such funds had been sub
jeet to taxation 1t would have been
g much more difficult to sell them, and
! the cost of the money to the farmer
would have been much greater. Bonds
issued by the War Finance Corpora
ton are partially exempt from taxa
u0n, the interest on any amount OF
these bonds being exempt from
Normal Federal Income Tax. but cub
! Ject to surtaxes and excess profits
! taxes, The interest on principal
amount not exceeding SIS 900 is. how
/ ever. exempt from all Federal taxa
/ ton. except estate or inherit nee
| taxes
There is big demand for tax-ex-
! empt securities because OF the decided
advantage to wealthy investors Of
owning them. The advantage. how
ever, is not the same in all caaes
owing To our graduated rates OF CUR
tax For instance. an investor hav-
ing present taxable income OF $40,
600 per annum would obtain as good
return from an additional invest
ment lit 5.1e e taxable bonds as ne
would from 49, taxexempt bonds.
whereas an investor having a taxable
/ income OF 100000 per annum
: would have to receive II 1-3T on an
additional investment in taxable bonds
+ to give him the same net yield after
taxes as he would obtain from An 90
tax-exempt bonds To investor with
incomes over $1,000, 900 per annum
an additional investment In II Te tax
exempt bonds is equitable 10 a taxable
investment yielding about ls%Go
In thn case OF the small investor.
it is more profitable To invest In the
high yield bonds that can be obtain
ed at The present time, than in tax
exempt secur ties. and, even in the
case OF larg" investors. certain
proportion Of taxnhle securities can
be owned to antage. In view OF
the Possibilities OF subsequent ap-
Ipreciation in value If tax rates de-
cline. it might be desirable in many
cas- to own taxable securities giving
a lower net return at present. Any
reduction Of tax rates would. Of
course. tend TO increase the market
value of taxable securities, but not
that of tax-e1empt securities
+ Many corporations have invested IN
state and municipal bonds, becau
Of the exemption from taxation Of
the interest received thereon. Under
the excess profits tax law, however.
whien is exempt from taxation
totAer than United States govern
ment hondsl are considered mad
Missile assets" for the purpose of
computing invested capital The
result is that u corporation owning
such securities has 10 reduce its I'm
vested capital az provided in the
revenue law. AS a TeIQRtiOH IN Ill.,
vested capital reduces the amount
OF the exemption from excess profits
tax and increases the amount taxable
at the higher rate. "A corporation pays
moro tax by reason OF owning state
and municipal bonds. II a larger DER
centage of the corporations asset Is
are tax-exernpt securities, the addi-
tional tax may amount to more than
the interest received on the bonds.
- H. h.. f. ytrasrn oh ~nfA
red to are the only securities that
have complete or partial exemption
/ from taxation, there are so-called
! tax free bonds'' which give the hold
! er the be nefit of having the normal
fedora. income tax up to 2 por cent
I paid for him by the debtor corpora
/ ton. such bonds, which fnciude
railroad. public utilities, and indus
trials, contain covenants which usu-
ally read about as follows: Primer
! pal and interest of this bond will he
paid without deuction for any taxes
/ that the corporation may be required
/ t. withhold or retain under any pres
| ent o. future law OF the United
States ." II will be observed that a
: corporation only agrees TO pay its
bond holder whatever tax it is re-
quircd to withhold or retain. To
| protect the rights Of holders OF such
| bonds the revenue act was framed
+ SO that withholding of the NY 30 r~-
quired in the case OF bonds contain
I ing q tax free covenant. b cunt
that has 70 be withheld in such cases
is. howe er, only ? per cent instead OF
II ! ner cent of per cent normal
tax hat hns to be naif by the bond
holder. for the reason that il the
debtor CORPORATIONS w"re r-o''i-a' to
Dry a higher rate it would involve a
considerable hardship which was not
contemplated when the bond was is
sue1 and the bond holder would be
obtaining benefit that he had not
paid for. Under a recent ruling oi
The treasury DEPARTMENT. however
he hond holder does not obtain the
benefit that he formerly did. as he
is required to rercrt ne income the
amount cf tax paid for him by debtor
corporations. and "a taxes oaid are
not allowable deductions under the
federal income tax law. no deduction
can he taken from this tax. The tax
paid for bond holders in such cases
is. however. allowed as credit
sai CT the amount of tax payable to
the United States