Evening star., 1952-06-19

/ JAMES M. lands
Author Of transit report.
ferred $500,000 from this reserve
to earned surplus. representing
over-accruals from 1933-1939. No
further transfers from this reserve
have since been made.
The largest distortions of both
net operating income and net
income came as a result of two
incidents, the first, the financing
Of the company's debt in 1945,
and the second a refund of taxes
occurring in 1916. In 1945, Capt.
tai Transit Co. refunded a series
Of outstanding obligations by the
issuance of $12,500,O00 bonds at
40 due in 1864. together with
five year bank loan of $4,000, 900.
Prior to that time, it had built
up sinking fund reserves of $155,-1
$50 and a debt retirement reserve
of SOCIAL. Appropriations for
these reserves had been made di-
Irectly from earned surplus. The
costs of this refinancing, as of
December 81, 1945, amounted to
1892 ,238. of which 85.58o or $762,-
1863 could be treated as a deduc-
tion for income tax purposes. In
1945. this $762,863 was charged
against operating income as
taxes" on the theory that taxes
would be greater by exactly that
amount. This had the effect of
reducing an expense that would
otherwise have been amortized
over subsequent years, which
charges in turn would annually
be deductible for tax purposes. To
that extent net operating income
as reported by the company for
that year was distorted. Distor-
tion OF a reverse nature would
also occur in subsequent years
since expenses that would other
wise be deductible had all been
charged in the year 1945. With
the financing concluded, the ac-
cumulation of $656,361 in the
debt retirement and sinking fund
reserves was released and credited
to earned surplus.
X
During 1912 to 1945, Capital
Transit Co. was required by the
war needs to expand it's facilities.
At the close of the war period and
because of the heavy excess profits
taxes that Capital Transit Co. with
its increased business had to pay
during those years, the company
/ took advantage Of its right to
amortize its emergency facilities in
an accelerated manner and re-
ceived tax refunds for the years
1912 to 1914 amounting to 81, 1872
ISL. For the year 1945, it also ac-
crued taxes on basis that did not
take into account accelerated
amortization, thus increasing the
provision for taxes for that year
charged against operating revenues
by 1864 ,580-a sum never actually
paid to the Federal Government.
The tax refunds for the years 1912
to 1914 and this unpaid but accrued
tax OF 1945, totalling $3,427,331,
would represent an enormous in
crease over the net operating in
come reported to the Public Utlli-
ties Commission during those
years.
AS a result of the above prac-
tices. as well as certain others
which need not be detailed as their
total impact is not so great, the
reported total net income carried
into earned surplus from 1912 toI
1916 was greatly understated,
whereas the actual rate of return
earned by the company certainly
until 1916 was munificent, despite
the increased taxes of those years.
Meanwhile, the management of
the company pursued an extremely
conservative dividend policy.
Chairman Flanagan in his letter
of January 8. 1852, to Congress-
man Crawford says the rate of re-
turn earned by the Capital Transit
Co. in 1942-45 was respectively
rs, 6.5, 6.7. and So per cent-a
presumably reasonable rate of re-
turn. The actual rate of return
for those years was l1.6, 11.O, 99I
and Ill per cent-a very high
rate Of return. The actual rate of
retnrn has since dropped to 3.4I
and 4.6 per cent in 1949 and 1850.
Profits have been made BY
officers and directors in Capital
Transit Co. stock. It has generally
not been in-and-out trading, butt
number of directors of the
Wolfson group and their asso-
ciates sold substantial portions of
1.-THE stock originally acquired by
them.
No figures are available on the
extent Of speculation by members
of the public in Capital Transit
Co. stock However, the action of
the Interstate Commerce Commits
Ision and the Public Utilities Com
mission in permitting a stock
split up in 1851 on a four-to-one
basis has been unfortunate. No
conceivable good could come from
that action. whereas it has def
nitely contributed to further spec
ulation in the stock.
i Unfortunately, most of what
Ican be recommended now is in
the nature of locking the barn
door after the horse has been
!. stolen. It seems impossible now to
iroeaufl1re oil ~ fha ovcocc aoro