Evening star., 1938-06-04
F.H.A. HEAD CITES
4 TAX EXEMPTION
Rental Housing Units Are
Freed Under Terms of
Revenue Act.

Rental housing corporations with
mortgages insured under section 207
Of the National Housing Act are
granted full exemption from the tax
on undstributed profits under the
terms of the new Revenue Act which
just went into effect, Federal Housing
Administrator Stewart Mcdonald
pointed out today.
This exemption should further stim-
ulate the flow of private equity capital
into housing developments which are
to be constructed and operated under
the Federal Housing Administration
program, Mr.. Mcdonald said
The National Housing Act requires
that a corporation holding rental
property securing a mortgage insured
under section 207 be regulated by
the Federal housing administrator as
to rents. charges, capital structure,
rate Of return and methods of oper-
alton so long as the mortgage in
surance remains in force. These regu-
lations are in the interest of a sound
financing program and act to protect
both the mortgage and the equity
capital.
Investment Values.
Large financial institutions now
realize the sound investment values
inherent in F. H. A.-insured mort
cages on large-scale rental properties,
and mortgage funds for such develop
nnents are becoming available in salts
factory volume. the administrator
said. Equity capital to furnish the
funds not covered by the mortgage
loans also is needed in order to achieve
q program of building activities suf-
flciently extensive to provide neces-
sary housing and at the same time to
generate business activity along con-
struction lines.
Mortgages on large-scale projects
insured by the Federal Housing Ad-
nlinistration embody provisions for
the retirement of the debt over periods
of Is or 80 years. Income from the
property applied to retirement of the
debt reduces the amount of cash for
dividends.
The exemption granted F. H. A.
regulated corporations thus does not
conflict with the principle of the
undistributed profits tax because in
retiring the debt the corporation is
actually distributing funds
Penalties Held Unfair.
Since the Government through the
Federal Housing Administration re-
stricts housing corporations from pay
ing out their full earnings. it would
be unfair to penalize them on their
undistributed surpluses, the admins
traitor said.
The new Revenue Act provides that
all corporations earning less than
S25, 1000 shall be subject to an ascend.
ing scale of taxes beginning at 1914
per cent on the first $4,000 of net
taxable income, rising to IA per cent
on the next $4,000, and reaching Is
per cent on the next $4,000. Housing
corporations operating under F. H. A.
regulations in this income class are
subject to the same tax schedule as
other corporations.
For general business corporations
showing net taxable income in excess
of $4,000, however, the act provides
that basic tax of 10 per cent shall
be levied tentatively against net in
come. Against this tax of 10 per
cent the corporation may credit ~
per cent Of all dividends paid. Thus
corporation earning more than $25,-
600 will pay net tax of 10 per cent
on its income if it pays no dividends,
but If it pays out all of its net income
in dividends 1t will pay q net tax Of
only l61a per cent.
An F. H. A.-reguIated corporation
with earnings in excess Of $4,000 is
subjected by the new law to an effec-
tive tax rate of 1917 per cent. In the
case Of such corporation, the
tentative tax of 19 per cent on the
net income is credited with 21a per
cent of the net income rather than
212 per cent of the amount of divi-
dends paid. The corporation thereby
obtains the advantage of dividend
payments up to the full amount of
its net income, whether it pays divi-
dends or not.
The new act also provides that cor
porations earning slightly more than
S25,000 have the option of paying
$3,525 tax on the first $4,000, plus
an assessment at the rate of 80 per
cent on all income in excess of $25.-
600. The limit of the advantage Of
this option for an F. H. A. regulated
corporation is reached at a net in
come of approximately $28,S70.
~ INor-