Evening star., 1946-09-25
Bankers Warn
West Tax RuIinq
Is Not Legal
See Court Rejection
Of D. G. PIon to Tax
U. S. Bond Interest

". ,. OOHQ INTEREST
District bankers today warned the
Commissioners that the courts. will
not uphold a ruling by Corporation
Counsel Vernon E. West permitting
the city to tax the interest from
Federal bonds purchased by the
banks since enactment of the Fed
eral Debt Act of 1912.
Before group of more than 20
representatives of city financial in
stitutions meeting with the city
heads at the District Building, Mel
son T. Harrison, general counsel Of
the District Bankers Association,
branded the West opinion "a bolt
out of the blue without congress
sional justification.
He denounced it as purely bu-
reaucratic Interpretation" which
would not stand the test of court
challenge.
Opinion on "GrOss Earnings"
Mr. Vests finding in connection
with taxing Federal bond interest
formed part of a general legal
opinion defining for local banks the
term gross earnings" on which they
are taxed by acts of 1902 and 1904.
Little or no objection was raised
by the bankers to the other phases
Of the opinion outlining what is
and is not deductible from gross re-
ceipts to arrive at gross earnings,
Whether the District can tax the
interests from Federal bonds bought
since March %, 1912, appears to hinge
on whether Congress in passing the
Gross Earnings Tax Act of 1902 and
1904 affecting District banks, was
enacting a Federal Tax Act within
the meaning of the new public debt
act.
Harrison Supported by Fleming.
Mr. Harrison contended that it did
not and that while the legislation
was by national body it was for
purely local application.
He was supported by Robert "
Fleming, president of Riggs Ma
tional Bank, who produced a letter
from Secretary of the Treasury
Snyder indicating the intent of the
national debt act was to make in
terest from Federal bonds subject
only to the Federal income tax.
Both Mr.. Fleming and Mr.. Hart
son referred to similar case decided
by the Court of Appeals in 1929 in
favor of the Riggs Bank. Mr. Hart
son held this decision was still the
law, until something better than
the corporation counsel has been
able to dig up" is found.
Cites Bank Failures.
Mr.. Fleming told the Commits
soiners studies had revealed that
most bank failures occurred in States
which taxed banks the heaviest.
He warned that banks must not
be prevented by excessive taxation
from building up their capital
through earnings or from attracting
new capital from investors.
Strong bank capitalize empha-
sized, "is necessary TO public in
terest."
Mr.. Vests case appeared to be
based on the contention that ne
District bank tax acts are Federal
legislation in a Federal jurisdiction.
Since the new debt act removes
the exemption on interest from
Federal bonds with reference to Fed
eral tax acts, he argued the District
can levy on such interest.
West Defines Gross Earnings"
While Mr.. West held the income
from such Federal securities cannot
be deducted by the banks from their
gross receipts in determining their
gross earnings" on which they
are taxed by Federal statutes here,
he declared that interest from
State, county and municipal obliga-
tions cannot be constitutionally
taxed under such Federally imposed
gross earnings levy.
Generally speaking, he said, gross
earnings" within the meaning of
the statutes is gross receipts" and
hence none of the expense items
normally deducted in arriving at
met income" can be deducted by
the banks.
Included in the list of nondeducti-
bles are capital gains, premiums
by mortgages on loan insurance
issued by the Federal Housing
Administration, and amortizations
of premiums on bonds and other
holdings purchased by banks at a
premium.
Except for interest on State,
county and municipal securities, the
only allowable deduction indicated
by Mr.. West was for capital outlay
for tangible commodities furnished
bank customers without charge as
a part of the bank services.