Corporate tax

“ The corporation tax is a just and equitable excise measure, which it is hoped will produce a sufficient amount to prevent a deficit, and which, incidentally, will secure valuable statistics and information concerning the many corporations of the country, and will constitute an important step toward that degree of publicity and regulation which the tendency in corporate enterprises in the last twenty years has shown to be necessary. ”

“ The adoption of the taxing act, as recommended by the commission, may therefore be taken, as appellant contends, to evidence a definite and specific legislative purpose to levy a new type of franchise tax, measured by corporate net income, including the tax exempt income from federal and state bonds. ”

“ As this brief summary indicates, the legislative history of the accumulated earnings tax demonstrates a continuing concern with the use of the corporate form to avoid income tax on a corporation's shareholders. Numerous methods were employed to prevent this practice, all of which proved unsatisfactory in one way or another. Two conclusions can be drawn from Congress' efforts. First, Congress recognized the tremendous difficulty of ascertaining the purpose of corporate accumulations. Second, it saw that accumulation was often necessary for legitimate and reasonable business purposes. ”

“ We take it to be simply a tax on the privilege of being a corporation,-on the primary corporate franchise granted by the state. The authority of the state to tax this privilege, or franchise, has always been recognized, and it is well settled that a tax of this sort is not necessarily rendered invalid because it is measured by capital stock which in part may represent property not subject to the state's taxing power. ”

“ It was held that the tax was not upon the capital stock of the company, nor upon any bonds of the United States composing a part of that stock, but upon the corporate franchise or business of the company, and that reference was only made to its capital stock and dividends for the purpose of determining the amount of the tax to be exacted each year. And the court said: 'The validity of the tax can in no way be dependent upon the mode which the state may deem fit to adopt in fixing the amount for any year which it will exact for the franchise. ”

“ The thing taxed is not the mere dealing in merchandise, in which the actual transactions may be the same, whether conducted by individuals or corporations, but the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals. ”

“ And we added: 'Shares of corporate stock may be taxed at the domicile of the shareholder and also at that of the corporation which the taxing state has created and controls; and income may be taxed both by the state where it is earned and by the state of the recipient's domicile. Protection, benefit, and power over the subject matter are not confined to either state.' 307 U.S. page 368, 59 S.Ct. ”

“ The normal tax will doubtless be successful in reaching the large amount of income earned or created by enterprises conducted under the corporate form of organization, much of which would probably escape assessment under a direct personal income tax. ”

“ At the outset appellant contends that the tax, although stated in the Taxing Act to be on corporate franchises, is in reality a tax on income, and as such falls within the class of taxes which concededly may not be directly imposed on federal instrumentalities. ”

“ In the case of corporate income and dividends attributable to business done outside the state and received by stockholders of domestic corporations, the stockholders are taxed, and not the corporation. ”

“ A tax such as that sought to be imposed upon the company by the appellees is a tax upon the corporation within the meaning of the prohibition of its charter, because it is compelled to become surety for taxes nominally imposed upon its stockholders, and is made liable primarily for their payment,-a payment which, in the first instance, must be made out of the corporate property, without other recourse than an action against individual stockh lders to recover the amounts advanced on their account. ”

“ An includable element of the 'invested capital' is the 'accumulated earnings and profits as of the beginning of such taxable year.' § 718. It thus appears that by this method Congress intended, with minor exceptions not here relevant, to impose the excess profits tax on all annual net income in excess of 8% of a corporation's working capital, including its accumulated profits. ”

“ As compared with the company deriving its income only from taxable sources, the enterprise with the same total amount of investment income derived partly from exempt and partly from taxable sources would pay more tax per dollar of taxable gross income, i.e., taxable income before deduction for the reserve. ”

“ Prior to 1934, as now, personal holding companies were liable for the regular corporation income taxes under Title I of the Revenue Acts and they, like all other corporations, were subject to additional tax upon an accumulation of profits where there was present a purpose of avoiding surtaxes upon shareholders. ”

“ It will not, I believe, be gainsaid that there are thousands of relatively small or moderate size corporations doing exclusively interstate business spread over several States. To subject these corporations to a separate income tax in each of these States means that they will have to keep books, make returns, store records, and engage legal counsel, all to meet the divers and variegated tax laws of forty-nine States, with their different times for filing returns, different tax structures, different modes for determining 'net income,' and different, often conflicting, formulas of apportionment. ”

“ But the person occupying the property or conducting the enterprise, and paying the assessment in the first instance, is authorized and required to deduct the tax from the income as it is distributed among the persons entitled to share in it either as proprietors, landlords, creditors, or employees. Under the English system, an industrial corporation, for instance, pays the income tax upon its gross earnings and then deducts it from the dividends, interest, salaries, and rents as these payments are made. ”

“ Respecting other moneyed capital, trust companies, by § 188, are subjected to an annual franchise tax 'equal to 1 per centum, on the amount of its capital stock, surplus, and undivided profits.' The practical burden of such a tax (which of course falls eventually upon the stockholder) is presumably not materially different from the burden of a tax at the same rate, imposed upon the individual stockholder on a valuation of his shares, arrived at by taking into consideration the same elements of capital stock, surplus, and undivided profits. ”

“ Whether issued capital stock of foreign corporations may be made the basis of a franchise or license tax at a flat rate per share when apportioned to the property and business of the corporation within the state, and whether the taxing act may discriminate by placing in one class corporations having par value stock and in another corporations having stock without par value. ”

“ The advantages that seem to be brought out most clearly are: First, taxation. The organization tax is considerably lower than that of most of the States, while the annual tax is fixed upon the amount of capital paid in, so that it is an absolutely certain quantity and can be determined by anyone, thus leaving no opportunity for corruption on the part of either the corporation itself or of State officials. The rate of the tax is moderate, and decreases as the amount of capital increases. ”

“ Subsequently to this act being passed-within the fifteen years, and the annual profits not yet exceeding eight per cent-the legislature of the State passed an act taxing the franchise of the road.
'The only way in which the property of this company could be reached for taxation at all, was after the limitation of the fifteen years had expired. The legislature was then at liberty to tax the individual shares of the stockholders, whenever their annual profits exceeded eight per cent. When a statute limits a thing to be done in a particular mode, it includes a negative of any other mode. ”

“ The position of the government is sound. A corporation cannot claim to have accumulated any net income in any year until provision is made for taxes accrued, based on net income for the same year.
The reasonableness of the regulation is further shown by the fact that 'invested capital' was merely a legislative definition of an element in the formula prescribed for computation of excess profits tax. Congress might have expressly declared that taxes should be excluded from invested capital. ”

“ The oddities in tax consequences that emerge from the tax provisions here controlling appear to be inherent in the present tax pattern. For a corporation is taxed if it sells all its physical properties and distributes the cash proceeds as liquidating dividends, yet is not taxed if that property is distributed in kind and is then sold by the shareholders. ”

“ Corporations are allowed to make certain deductions from gross income, including amounts paid for personal services of officers and employes and other ordinary expenses paid out of income in the maintenance and operation of business and property, including a reasonable allowance for depreciation, losses not compensated for by insurance or otherwise, taxes, etc. These need not be further mentioned, beyond saying that the intent and necessary effect of the act is to tax not gross receipts but net income ”