Evening star., 1946-09-29
Tax Issue Emphasizes
Anomalous DC. Stotus
Legal Test by Banks Would
Throw Light on Situation
BIZ John w. THOMPSON Jr.


Counsel Vernon z. West that interest
from Government bonds bought by the,
banks since March 28, 1912, is taxable
by the city.
Although there are other arguments
involved a basic contention by Mr..
West is that the laws of 1902 and 1904
placing a gross earnings tax on local
banks are Federal tax acts and the
public debt act of 1912 specifically re-
moves the exemption of Government
bond interest from Federal tax levy.
The banks. on the other hand, take
| issue with the holding that the laws
taxing them, even though enacted by
Congress, are Federal tax acts, because
the levies are purely local in applica-
ton. Furthermore they produced a
statement from Secretary of the Treas
ury John w. Snyder that the intent
of the Treasury in sponsoring the ex-
emption removal language in the 1942
debt act was solely to make bond in
terest subject to the Federal income
tax.
Actually the language in question
''the United States or any instrumental
ity thereof" shall not have any ex-
emption, as such, and the loss from
the sale or other disposition of such
obligations shall not have any
special treatment, as such, under Fed
eral tax acts now or hereafter enacted"
For purposes of this language, the
~ on M, 70
session of the United States, the District
Of Columbia or any subdivision thereof
shall not be considered as an agency or
instrumentality of the United States"
An average citizen would perhaps be
justified in wondering why, if what the
Treasury officials say is true, they didn't
just say "the Federal income tax"
instead of Federal tax scts."
~
While it is difficult to believe that
Congress intended to single out the Dis
trict as an agency to join with the
national administration in taxing gov
ernment bond interest. under the cir
cumstances the corporation counsel may
have a good case for what he pra.o- e5
to do.
The case at hand is also another
Illustration of how the unique relation
ship of the District to the Federal Gov
ernment Is being constantly confused
rather than clarified in legislation.
In some instances, for example, the city
Is treated as State, but yet is not a
State. In some cases it is considered an
instrumentality or agency of the Nation
al Government In others it is not.
Recent years have seen a tendency to
consider the District on par With the
States In the various national financial
aid bills for highways, education, public
/ welfare and health Yet State rights,
such as electoral college representation,
are consplcuously absent. The. District
submits its annual budget to Congress
/ along with that of other Federal DEPART
ments as Government agency, vet for
purposes of the debt act just quoted, it
is not. FAjNRM -
Two solutions are obviously possible in
the event that the District asserts as Ms
omcial policy the right to tax the Federal
| bond interest OF. the banks One Is legal
appeal to. the Board of Tax Appeals and,
II necessary, from. that board to the
Court Of Appeals. This would be Nhe
longer and more expensive process both
to the banks and the District and would
seem the best chance Of the District to
make its Interpretation stick. The second
is for the banks to greet the next session
OF Congress with an amendment to the
| debt act stating specifically that it was
not the intent that the bonds be taxed
/ by the city. This would be the easy wav
If congressional sentiment is with the
bankers.
The American Red Gross, seeking ex-
emption from the District inheritance
tax on a bequest. tried both methods
| simultaneously toward the end of the
last session Of Congress and won the
relief law 1t sought long before any
legal action could have settled the issue.
| Actually If the case were to be left
to legal decision, it might throw SOME
additional light on whether Congress
acts for the District in a local or ma
tional capacity. 1t might also estab-
lish new concepts in the rights of the
Federal Government and States to tax
each other-something that is not ex-
pressly stated in the Constitution and
Is now resting solely on Supreme Court
decisions dating from McCulloch VS..
Maryland at the beginning of the last
! century,,
In the Riggs Bank case of 1929. on
which the bankers have indicated they
rely. for example, the Court of Appeals
in holding for the bank against an
attempted similar tax by the District
was impressed by the sweeping ex-
emptions Of such interest at that time.
The 1912 debt act has put new aspect
| on that.
The court was further impressed with
the fact that the particular tax in ques-
ton was being imposed on interest from
bonds that had been sold with the in
ducement that they were tax-free. This
would not apply in the current case,
inasmuch as the debt act served warn
| ing that purchases after a certain date
March 1s 1912 would no longer be
exempt. Mr.. West proposed to tax only
the purchases subsequent to that date.
Thus, If the legislation remains un-
amended and the collision of interests
ends up In court, there are interesting
implications in Federal-State and Fed
eral-District relationships to be de-
cided.
Half q House Onwurd!