Evening star., 1935-01-24
HOLDING COMPANY
TAX QUESTIONABLE
Child Labor Ruling Against
CoerCive Methods of Re.
form in Way.
BY DAVID LAWRENCE.

LAW VASGANS6s
While the administration has not
done anything more than discuss the
matter in a general way, there Is an
extraordinary Importance attached to
the principle back of the plan to tax
holding companies in the electric
light and power industry.
When President Roosevelt the other
day called in Attorney General Cum
mings, Secretary Morgenthau and
Chairman McNinch of the Federal
Power Commission to discuss legisla-
ton to regulate holding companies,
the information officially divulged
later was that the idea Of taxing the
companies had been suggested and
was being studied from a legal view
point and that no decision had been
reached as to the course that would
be followed
The general impression here among
well-informed lawyers, however. is that
any such tax would be held uncon-
Stitutional by the Supreme Court Of
the United States. For if it were
proper to tax holding company for
a punitive reason, it would be just as
easy to use the taxing power for any
social purpose or reform in any matter
of corporation activity. Control of all
business by the Federal Government
would then be simple objective to
attain.
Famous Child Labor Case.
The chief precedent which is cited
as to the use of the taxing power as a
means of accomplishing reform is in
the famous child labor case, in which
the Supreme Court of the United
States said:
In the light of these features of
the act court must be blind not to
see that the So-called tax is imposed
to stop the employment of children
within the age limits prescribed. Its
prohibitory and regulatory effect and
purpose are palpable All others can
see and understand this. How can
We properly shut our minds to it?
Here the so-called tax is penalty
to coerce the people of a State to
act as Congress wishes them to act
in respect of a matter completely the
business of the State government
under the Federal Constitution"
In the holding company problem
there is today no concealment of the
desire of the administration to regu-
late holding companies for reform OBJ
jectives which. however commendable,
cannot be reached by the taxing power
If the foregoing precedent is observed.
Bringing the taxing power into play
for legislative purpose other than
to raise revenue has been uniformly
denounced by the Supreme Court as
a subterfuge, so if holding companies
are really to be regulated, the source
of constitutional power must be sought
elsewhere.
Where would 1t come from? The
holding company bill now being spon-
sored by the administration looks first
to the interstate commerce clause Of
the Constitution on the theory that
a holding company is related to oper-
ating companies by the use Of the
mails, by the sale Of securities across
State lines and by general interstate
transactions. There Is one lower
court decision which has ruled that
a holding company engages in inter-
state commerce by supplying services
or materials or funds to an operating
company. But this has never been
carried to the highest court.
Transmission of Power.
Where, of course, interstate trans
mission of electricity is concerned,
there is no doubt as to the right of
the Federal Government to intervene
through its regulatory bodies, either
the Federal Power Commission or any
other agency it selects. AS for the
sale of securities nationally, this now
is covered by the securities act and
is handled by the Securities and Ex-
change Commission.
But it is doubtful whether action
can be taken by Congress which would
be upheld by the courts if all holding
companies were selected for dis
criminatory treatment. For if the
right to control holding companies
incorporated under State laws is as
sumed by Congress with respect to
utilities, it could be applied subse-
quently to holding companies in every
other industry and business, from
newspapers to chain stores and from
mining to automobile production.
There is also some question as to
how holding companies can be
reached which have already issued
securities, as Congress cannot make
a retroactive law and cannot pass
anything conf1scatory-that is, any
measure which seeks to take away
property without paying for it or
which strives by arbitrary action to
cause loss to holders of property.
Method May Be Found.
But method of regulating holding
companies may be found under the
right to prevent monopolistic prac-
ticeS, and it seems to be a foregone
conclusion that some legislation will
be passed at this session, irrespective
of whether it is based on sound con-
stitutional grounds.
For the policy here nowadays is
something like that of the late Presi-
dent Theodore Roosevelt in Panama
when he said he had seized the ter
ritory and the talk could come after
ward. The present administration
believes in assuming power and letting
the litigation come afterward, know
ing full well that court procedure is
long drawn out and full of techni-
calities and that maybe, when the
rights are fully determined, the OBJ
jective-namely, the destruction of
holding companies, for instance-will
have been accomplished anyhow.