The Revenue Bill of 1924

A Discussion of Its Bearing on the Lumber and Other Natural Resource Industrics, by Wilson Compton, Secrctary and Manager of thc National Lumbcr Manufacturers Association

Washington, June 5-In the words of Scnator Smoot, the finished revenue bill of 1924 is tlrc best that could be cxpccted in a presidential year. In other words, it was lncviable that it should be shaped with morc thought of political profit than econo- nic soundness. That being the general setting of the bill, lt should be a matter of congratulation to industry that Congress, when dealing with certain of the less spcctacular phases of the measure, has been governed by a gpirit of fairncss and justice which has even led it to correct some crrors in the designedly non-political proposals of the Treasury Department. It is not too much to say that some of the provisions of the bill that are of special intercst and concern to thc natural resource industries are superior to those of any of its predccessors since the income tax was made a feature of federal taxation.

The revenuc bill, formulated by Treasury Department experts, contained a novel provision covering the taxation of dividends, in conflict with the policy consistently heretofore pursued by Cong3ess of recognizing as propcrly tax cxempt distributions made by corporations and paid out of surplus accumulatcd by or capital invested in the corporation prior to March I, 1913.

This new provision imposed a limit upon such tax exempt distributions. Accordingly, the. amount which might bc received free of tax could not be greater than thc "cost" to the shareholder of the stock itself, or if he owned stock on March l, 1913, its "value" at t4a} time if grcater than the cost. This provision gave no regard to thc net assets. as such, of the corporation as of March l, 1913, as being tax exempt, notwithstanding the fact that the same corporation might at that timc have distributed all of its assets. in cash or in kind, to its shareholders wholly free of tax.

Furthermore, the bill treated "liquidation" as a sale of stock by the shareholder back to the corporation. The definition of liquidation, furthermore, was so broad as to make it permissible for the Treasury Department, in its administration, to hold, for example, that every time a timber owner cut a thousand feet of timber, he was "Iiquidating"- and when the profits therefrom were distributed to the sharcholders the process might bc construed as a purchase by the corpora- tion, back from its stockholders, of its own shares.

Under such circumstances the shareholder would be compelled, under the terms of the law, to 'sell" portions of his stock back to the corporation every time hc reccivcd dividends thereorl reprcsenting profits from lumbering operations. Conscquently, in the case of stocks in companics opcrating bcfore March l, 1913, if-and when such distributions paid out of surplus earned before that time were equal to the "cost" or "valuc" as of March 1, 1913" of thc stock itself (irrcspective of the net assets of the corporation) all subsequent distributions would then become subject to incomc tax in the handr of individual shareholders. Such were thc provisions of the bill as originally drawn.

Tax-payers interested in the depleting industries such as coal, mining, lumber and paper were, of course, especially intcrested in this provision, inasmuch as the inevitablc exhaustion of raw materials requircs the liquidation of operations and ordinarily the distribution of shareholders of all asets of the corporation. These provisions werc, however of direct interest to shareholdere in all corporations dating before March 1, 1913. Thesc intcrestcd industries contended that the corporation's capital paid in and surplus accumulated before March l, 1913, was pro- perly, under the terms of the law, capiAl and not incomc, and therefore not rightfully subject to taxation as income, irrespective of when, how, or to whom distributed for bringing to their attention a wood that rcpresents the ideal business,building combination of reasonable price, richness of (mahggan)r) finish, and toughneas under wearour TrailemarlTed

The House passed thc bill carrying thesc provisions, as formulated by Treasury experts, with an amendment providing that liquidating distributions paid but of s-urplus accumulated aftcr March l, 1913, be subject to taxation at surtax rates. and not, aa recommended by the Treasury Department, at the so-called "capital gain" ratt of twelve and one-half (l2l) per ceat. With this amendment thc bill went to the Senate.

4mendments adopted by the Senate gave definite and specific recognition to the principle of exemption from income taxation of "earnings or profits accumulated, or increase of value of property accrued, or capital invested before March 1, 1913." It also limited the meaning of "liquidation" in such manner as to confine its necessary application to disrtibutions, no of surplus, but bf "capital," as represented ordinarily by the par valuo of the capital stock. .It further provided that in the determination of the valul of stock in corporations as of March 1, 1913, "due regard" must be given to the value of the corporation's net assets at that time, the mani- fest purpose of the Senate Coinmittee in recommeading this amendmcnt being to per- mit the tax exempt return to shareholder-s of corporation stocks on March l, 1913, of the full amount of corporation's net assets which on that date could have becn distributed tax free.

The Senatc further amended thc llouse bill in such manner as to hold liouidatinc distributions representing surplus accumul lated aftcr March 1, 1923, as subject to the capital gain rate of twelve and one-half (l2l) per centum and not to surtax rates.

The confererrce committee of the House and Sepate accepted all of these amendments protecting the shareholders' tax exempt interest in the corporation's net assets as of March I, f913, except the specific inclusion of "capital paid in'-' before-March l, 1913.

The rejection of this Senate amendment is generally held not to afrect adverscly the substantive rights of tax-payers, but probably will involve the necessity of settling by troublesome litigation the question which Congress might have easily and simply settled by legislative declaration, namely, the right of the corporation to distributa taxfree. and the right of the shareholder to receive tax-free, distributions made out of original capital paid by shareholders into the corporation before March 1, 19f3.

Congress has now, by overwhelming vote, passed the bill with these provisions as out- lined. The President is expected to sign the

Hart-Wood Lumber Company Have Own Docks at San Pedro

The Southern California Division of the Hart-Wood Lumber Company, under the.dir,ection of Mr. T. B. Lawlence, has acquired dockage and storage facilities at San Pedro Harbor; and rvill, according to Mi. Lawrence, in the