Evening star. [volume] (Washington, D.C.) 1854-1972, 1921-01-14
Adverse Rulings Would Force
Government to Return
$500, 600, 900 Collected.
UNCERTAINTY FURNISHES
| EXTRA SESSION PROSPECT
Budget Plans Hinge Largely on
Invested Capital and Capital
Assets Litigation.
BY DAVID LAWRENCE.

All calculations as to the size of the
budget needed to run the government.
all estimates as to the amounts that
must be raised for taxation either by
tariff duties or income taxes may be
upset if the Department of Justice
should lose two cases which have just
been argued before the Supreme Court
of the United States.
The most important financial liti-
been engaged" is the way officials at
. the Department of Justice describe
the cases. and it is estimated that
fully $500.O00,000 in taxes that already
have been collected may have to be
given back by the government if the
outcome of the cases is unfavorable.
Rivsling in importance the famous
stock dividend cases. the two big
principles at issue in the pending
cases are of far-reaching Importance
to the business men Of the country
as we'll as to all persons who have
money invested in trust funds.
Invested Capital Case.
One is known as the invested capi-
tai case and the other the capital
assets case. The first grows out Of
the rise in value of some coal lands
from 100000 to something like
10000. 900 in few years The con-
amount of the ten millions and the
government claims that the new
stock is really profit.
Land increases in value through a
variety of circumstances. and while
in this case many improvements we're
made. the increase in value came
about as it does in go many cases
through the increased demand for
products of the soil.
There are hundreds of thousands
Of similar instances throughout the
country, and just as soon as the case
was put on the calendar for argu-
men fifteen firms promptly filed
briefs to protect their own interests
The question as to whether the in
creased value is profit and subject to
tax or whether it is an increase in
capital contributed by the soil is so
vital that it may affect the entire tax
question and either require new laws
by Congress or new rulings by the
Treasury Department.
Seeks to Oyertnrn RuIInS. -
The other case involves a SIM more
interesting principle. 1t ia in connec-
tton with the Ryerson estate Of Chi
cago, and the Merchants Trust Com
pany is seeking to have ruling of
the Treasury overturned. Millions of
dollars have been held by the trust
company for the heirs of the Ryerson
estate That money has trebled in
value because the securities in which
the money was invested have gone up.
Now the trust company. felt that it
ought to- sell the securities and rein
vest the money thus obtained. The
trust company contends that the in
creased amount OF money is simply ar,
addition to capital and is not profit.
1t further argues that the individual
legatees may get increased incomes
through payments from the fund. but
that the government taxes those pay
nents by reaching the individual
On the other hand, the government
claims that profit is measured alway 3
by the difference between the financial
standing OF a firm or a trust fund or
an individual at one date and the
financial standing of the same at any
later date.
This profit or surplus has been SUBJ
3ect to attack before and the govern
ment lost in the. stock dividend case.
The present case is really another
way TO get around the stock dividend
decision: The government has been
trying for some time to get at war
profits and prevent their distribution
as capital stock Moreover. it would
be comparatively easy matter to
evade taxation in either of the cases
outlined above. as. for instance, if the
small payments during the years of
high tax laws and larger payments
later on when income tax rates are
gradually reduced.
Case Argued by HuEAes.
Former Associate Justice Hughes
argued the invested capital case for
the coal lands company and his brief
was considered by observers as espe-
cially convincing. OF course, no one
knows how the court will decide and
ments, no matter by whom they are o.
how convincing they appear. But II
he government should lose the cases.
Congress will have to stir about and
find out some new ways to raise rev.
enue. whether by tariff or incame
taxes or consumption taxes.
The budget of four billion which the
Wilson administration suggested and
which the republicans think they can
cut down to three billion may ac-
tually be reduced to that figure only
to have a court decision change the
total that must be raised. This hap
pened in the stock dividend case and
embarrassed the republicans in Con-
gress.
The Depa rtment Of Justice purposely
asked that the cases be advanced on
the calendar SO that they could be
decided before the trainers Of the tax
Legislation got too deep in their tasks.
It's another reason. too. why the
whole tax problem is not likely to be
tackled at this session of Congress-
but will await the sDecial session to
be called by President Harding.
Copyright, 1921,