Evening star., 1936-04-04
COLLEGES FACE
WRATH OF TAX
Proposed Bill Is Seen as
Blow to Investment
Operations.
BY DAVID LAWRENCE.


Colleges, universities, labor unions
and educational institutions may find
themselves driven out Of the invest
nent field for their endowment funds
If the House subcommittee report on
the undistributed earnings tax be-
comes law without modification.
For the committee report defines
the term "undistributed net income"
to mean "the adjusted net income
minus the sum of taxable dividends"
paid during the tax year.
Taxable dividends, it will be as
sumed, means dividends that can be
taxed. But the dividends received by
colleges, universities, charitable and
other non-profit organizations from the
investment of their funds cannot be
taxed. Hence any big industrial COM
pany which happens to have among
its stockholders any of these educa-
tional institutions will find that it
cannot deduct as taxable dividends
that portion Of its income which is
paid out as dividends to the institu-
tions and hence the penalty becomes
greater, depending on how much the
educational or charitable institutions
happen to hold.
Raises Penalty.
In some instances, where a COM
pany happens to have Is or 80 per
cent of its securities in the hands of
charitable organizations due to be-
quests or trusts set up by philan-
thropists in the past, an interesting
question will arise as to how those
companies can be prevented from pay
ing higher penalty than companies
which do not happen to have such
institutions among their stockholders.
The words taxable dividends"
however, were put in the committee
report for a purpose. It may be that
the object was to prevent any con-
fusion with stock dividends, which are
not taxable. 1t might, of course, be
that the words taxable dividends"
were used to discourage educational
institutions from investing their funds
in industrial enterprises and to compel
them to keep their funds wholly in
Government securities.
Whatever the aim, the fact remains
that all educational and charitable
institutions may find that a literal
Interpretation of the House committee
report places company in which
they hold shares at serious dis
advantage as compared with another
company that does not number such
institutions among its stockholders.
If these companies find that it costs
them too much money to have on
their list any stockholders whose divi-
dends cannot be deducted from ''un-
distributed net insome" effort will be
made either to call in the stock or else
to purchase the shares from the in
stitutions, in which case the latter
will find other companies eager to
prevent them from acquisition Of other
shares.
Correction Possible.
Some amendment permitting the
Undistributed net income to have de-
Quoted from it all dividends that are
taxable including the dividends paid
to organizations specifically exempted
by Federal law from taxation would
seem to be needed to correct the
defect.
1t is interesting to note that the
House subcommittee retains the idea
of an exemption from taxation for
education and charity itself as in
The old law for its report says:
1T is recommended that corpora
tionS now exempt from income tax
under section 101 of the revenue act
of 1884 Qabor, agricultural. charitable
and other non-prof1t corporations) be
exempt from the new plan and from
the corporation tax under existing
law"
Companies Embarrassed.
While the committee, therefore, has
taken care to see that the charitable
and educational institutions are them
selves not taxed, it has left the COM
panies in which such institutions hold
stock in a predicament. The embar-
rassments that might flow to educa-
tional and charitable enterprises in
the event that they constitute handi-
cap to industrial corporations are such
that a drive to amend the proposed
definition of undistributed net income
may confidently be expected when the
significance Of the present inadequate
phraseology Of the committee report
is fully understood by all the educa-
tional enterprises concerned.
The incident illustrates how difficult
1t is for the taxpaying companies to
determine what the proposed tax
really means, since the hearings at
present being held are upon theo-
retical proposal and not on any
specific piece of legislation as is Gus
tonary.
(Cnnvrirht 1Q2R