Evening star., 1936-04-10
TAX PLAN SEEN |
AFFECTING BANKS
Surplus Levy Expected to
Put Stockholders Ahead
of Creditors.
BY DAVID LAWRENCE.

Considerable opposition Is forecast
particularly when the tax bill reaches
the Senate, though tust why members
OF the House Of Representatives should
allow the credit position Of many
sound American businesses to be weak
ened and leave the job of averting
such dangers to the upper house IS
inexplicable except on one ground.
namely, that the administration Will
not permit the House to assert itself,
but will insist on the passage OF the
measure.
The situation that exists IN many
thousands of company credit situa-
tions is that loans have been made by
the banks with the understanding that
they may be paid back in two or three
years. In most instances the loans
are put on a 60-day or 9-month basis,
with an understanding that there will
be renewals. There also are informal
understandings as to when the notes
will be paid off.
May Force Loan Calls.
But a company which makes, for
instance, 100000 in profits and owes
the banks $4,000 would ordinarily get
rid of the bank loan before paying
ANYTHING to the stockholders in the
form of dividends. Under the pro-
posed tax the company would face
heavy penalty unless it distributed the
earnings to stockholders. If it there
fore did what the Government wanted
done, the banks might feel as a duty
to their own stockholders that they
must call the loan and force the COM
pany into a receivership in order to
put pressure on the company and pre-
fent it from complying with the pur-
pose of the tax law, which is to force
distribution OF undivided earnings.
Then there's the case Of the COM
pany with a bond issue outstanding
and with earnings sufficient each year
to pay sinking fund requirements, but
bank credit has been extended on the
theory that aside from sinking fund
the company would have sufficient
left each year out Of earnings to retire
the bank loan. When the company is
compelled to pay out its earnings In
the form of dividends. it means a
change in the credit rating or credit
position Of the company with the bank
loan outstanding. -
The entire credit situation may have
to be revised in respect to many other
wise sound and solvent companies be-
cause the Government in effect says
that debt shall be subordinated to the
payment of dividends to stockholders.
There is, of course, talk of providing
by amendment to take care Of such
situations, but unfortunately there are
few signs as yet that the House Of
Representatives Is aware Of the dan
gers involved.
rs Billions Outstanding.
Approximately $4,000, 100000 are
outstanding in loans today in the Ma
tion's banks and about one-ffth Of
that sum. namely, 5000. 600. 900, are
what Is known technically as in the
"slow" classification. The definition
Of SLOW" which the bank examiners
use now Is not what 1t used to be be-
cause there have been excluded from it
companies with an excellent financial
situation whose borrowings are not to
be paid back in two or three years. In
other words, the word SLOW" no longer
refers necessarily to the time in which
the loan has to be amortized. So
probably the total sum of loans pos
sibly affected by the proposed undi-
vided earnings tax may run well above
$780, 100000.
Every bank will have to consider
whether in view Of the compulsory dis
>tribution of earnings-for the rate is
so prohihitive that 1t will become COM
pulsory-the amount retained by each
company as surplus is sufficient to war
rant a continuance of credit.
Banks Have Understandings.
Nearly every bank in making loans
has written or unwritten understand
ing to the effect that the credit may
not be renewed if there is any materia,
change in company's condition. The
tax problem will make such a material
change in thousands upon thousands
Of cases and this will reopen the whole
question of whether the credit given is
or is not properly secured, whether
additional collateral shall be demand
ed, and whether the company's policy
OF distributing dividends gives protec-
tion to the bank and how much pro-
lection.
The reason why a fiat corporation
tax Is simpler is that even If it is a
heavy tax, it does not involve the
problem of discretion in the handling
Of earnings. Heretofore the bank as
creditor has always had much more
advantageous relationship to future
profits than the stockholder. When
interest and retirement on principal
had been taken care of, the stockholder
or equity owner usually came into the
picture. The Federal Government un-
der the New Deal would now reverse
the policy and put the stockholders
hrst-not because the latter insist on
1t, but because it Is mistakenly rea-
soned that the Federal Government
will get more in taxes. Actually what
will happen is that money that should
60 toward payment of back debt or to-
ward the accumulation of more work.
ing capital so as to avoid future bor-
rowings will be forced into dividend
distributions. '-a
More Profit I'm Strength.
Strong companies with surpIuses
already accumulated and in a strong
cash position will be able to make more
profit. They will be able to maintain
their prices while weaker companies
will have to add the extra taxes to
their cost Of doing business. Thus,
contrary to New Deal philosophy, the
rich will grow richer and the poor will
grow poorer-at least so far as the
small businesses of the country are
concerned which depend on bank
credit, because they do not have suf-
ficient working capital to get along
without borrowing. Nor will they, II
the proposed tax becomes law, get
chance to build up a sizable surplus,
A..