TAXATION: Surplus Penalties

Last week the Treasury Department had ample reason to be in high good humor. In the first eight months of 1934, it announced, it had dipped its long fingers into evasive U. S. pockets, plucked out $116,914,734 in delinquent taxes. That was $29,000,000 better than it had done in the same period last year. The extra $29,000,000 would pay all but $1,000,000 of its internal tax-collecting expenses for 1934. In expansive mood the Treasury revealed its latest move to overtake suspected tax dodgers.

A corporation may dispose of its net profits by: 1) paying dividends; 2) building up a surplus. On the portion it distributes in dividends the Federal Government collects a stiff surtax. On the portion which it puts aside for reasonable future needs or emergencies the Government lays no tax. An obvious corporate temptation is to avoid taxation by tucking the fattest possible share of profits into surplus. Almost irresistible is this temptation if the corporation also happens to be a personal holding company.

But if the Government believes that a corporation has, in a given year, laid up a bigger surplus than it “reasonably” needs, simply to dodge taxes, it may punish the concern by a penalty of 25% to 35% on its net income for the year. Last week the Treasury revealed that it had levied such penalties on some 100 U. S. corporations. Prime targets on its lists were personal holding companies. Most famed was Fisher & Co.. holding company of Detroit’s six Fisher brothers (automobile bodies), down for $17,199,797 for alleged evasions in 1929 and 1930. Others and penalties assessed: Rands, Inc. (W. C. Rands of Detroit’s Motor Products Corp.), $1,047,999; San Francisco’s Matson Securities Co., $874,377: Delaware-Olmstead Co., $1,464,877; Cinemagnate William DeMille, $100,788.

A series of legal wrangles was in prospect before the Treasury could count these sums into its vaults. By last week nearly half the penalized corporations had filed vigorous denials of wrongdoing. Some were prepared to contest the Treasury’s power in court where the best defense would be to prove that the surpluses were accumulated to meet the reasonable future needs of the defendant corporations. Though there was much talk to the effect that this Treasury tax drive on surpluses was just one more manifestation of the New Deal’s hostility toward corporate thrift, the prediction was freely made in Washington that many a corporation would, in self-defense, declare extra dividends out of overdeveloped surpluses before Congress meets in January to write a new tax law.