Evening star., 1933-06-04
BY JAMES WALDO FAWCETT.


The furore created by disclosure.
/, that the Morgan partners paid no H.
come taxes in 1881 and 1882, charging
calls past efforts of former President
Hoover, former Secretary of the Treas.
ury Mellon and other leaders to secure
q change in the law to prevent such
escapes from income tax payments.
The fault in the income tax Law
now being indicted with such indigna-
ton, has long been obvious, but Con-
gress has failed to remedy it until the
significance Of testimony offered In the
Mitchell case in New York, and the
Morgan hearings in Washington really
awakened public opinion. It is difiicult
for some political observers to under
stand why there should be such vio-
lent storm as that currently raging
about a matter in which the public
previously has refused to be interested
1t required dramatization by J. P. Nor
gan & Co. to awaken any interest.
of 1861-lS72 there appears to have
been no consideration of capital gains
and losses. Income Of all kinds was
taxed. The law of 1894 was declared
unconstitutional. Therefore, it was
with the enactment of the Sixteenth
Amendment, ratified by the States and
declared in effect on February 25, 1913,
that serious consideration of the prob
lem may be said to have begun.
The new law read in part as follows
NET income shall include gains, prof
its and incomes derived from salaries,
wages or compensation for personal
services of whatever kind, and in
whatever form paid, or from profess
sions, vocations, businesses, trade. COM
merce or sales or dealings in property,
whether real or personal, growing out
of the ownership or use of or interest
in real or personal property; also from
interest, rents, dividends, securities or
the transaction of any lawful bust
ness carried on for gain or profit, or
gains or profits and income derived
from any source whatever including
the income from. but not the value of,
property acquired by gift, bequest, de-
wise or descent"
Policy Remains Unchanged.
Dr.. Edward E. Pratt, writing in the
Encyclopedia Americana says: THE
term income in this connection is con-
fined to actual money income. The
general view Is that income is regular
and periodic and that irregular returns
In the shape of inheritance should be
reached by the inheritance tax. Profits
from transactions in stocks and real
estate are included only when realized.
A clear distinction seems to be made
between gross and net income"
According to this Interpretation, in
come from successful speculation in the
stock market was taxed 1t was a form
Of earnings, and therefore was amen
able to the provisions of the law. But
tacitly, If not formally, losses in specu-
lation were admitted to the account.
The law, then, was defective in that
regard. It was entirely legal to charge
of capital losses.
During the two decades since, the en-
actment Of the first regulations nu-
merous and various amendments to the
law have been made and unmade. But
the philosophy Of the Government did
not change in any remarkable degree.
Congress continued to think Of taxable
income as net income. In other words,
1t took notice Of the fact that an indi-
vidual may lose in trading In stocks or
bonds a sum equal to or in excess Of all
that he may earn by the exercise of his
regular vocation. The term met in
come" meant gross income less speci-
fed deductions" and the term gross
income" meant "gains, profits, and in
come derived from salaries, wages, or
compensation for personal service, Of
whatever kind and in whatever form
paid, or from professions, vocations,
trades, businesses, commerce, or sales or
dealings in property, whether real or
personal. growing out of the ownership
or use of interest in such property; also
from Interest, rent, dividends, securi-
ties, or the transaction of any business
carried on for gain or profit. or gains
or profits and incomes derived from any
source whatever"
The revenue act OF 1924 was sup
posed to constitute q complete re-
statement OF the income tax law" Two
years before its enactment Secretary
Mellon had urged upon the Senate
Finance Committee and the House
Ways and Means Committee for "a new
deap' with regard to investments OF all
kinds. He was concerned with the
vast quantities Of money hidden" in
tax-exempt securities and urged cur
failing the number of these.
Transactions Beyond Reach.
He was no less perturbed by the un-
written understanding whereby STOCK
Exchange transactions, plus and minus.
remained beyond the effective reach OF
the revenue machinery OF the Govern
ment.
In his annual report for the year
ended June 80, 1922, he said: "A most
serious gap in the existing revenue laws
arises from the treatment of capital
transactions. The law taxes capital
gains and recognizes capital losses, but
the taxpayer retains the initiative and
refrains from realizing taxable gains
while taking deductible losses
The situation Is particularly serious
under the revenue act of 1921, which
limits the tax on capital gains to l212
per cent, but puts no limit on the de-
duction of capital losses. This means
that capital losses may entirely cancer
real income, while capital gains Will
not be realized at all. or, If realized,
are taxed at only 1912 per cent.
Under the present system the Gov
ernment is being whipsawed, ana the
Treasury, therefore, strongly urges tnaI
the existing provision as to capltal
gains be made to apply conversely 10
capital losses and that the amount oy
which the tax may be reduced on &C,
count of losses from the sale of capital
assets should not exceed 1212 per cent
of the amount Of the loss.
"This would. to large extent, check
one of the methods widely used by tax
payers at the present time for decreas-
ing their yearly income.
"The alternative is to refuse to recog-
nize either capital gains or losses Tor
income tax purposes, and if the pres
ent situation were allowed to continue
there is no doubt that it would save
revenue to adopt this course. ms Is,
in fact, the practice which has been
followed In England for many years.
Mills Bill Sheived.
Normally. it might be thought, such
a plea might have brought corrective
action. In point of fact, there was
move In that direction. Ogden Mills
then q member Of the House OF Repre-
sentatives. introduced H. r. 134l3 IN an
attempt to secure amending legislation.
There was a hearing before the Ways
and Means Committee on January D,
1923. But nothing came Of it.
NHal1np returned IN INT