Gains & Losses

Unintentionally John Pierpont Morgan & Partners did the U. S. Government a good turn by paying no income tax in 1931 and 1932. Disclosure of their non-taxability before the Senate Banking & Currency Committee (see p. 51) started not only a hot dither of excitement in the Press (see p. 38). but also a tax reform movement by a startled Congress. Plugging the leak in the law promised to net the Treasury millions of dollars of additional revenue, spread the burden of Federal taxation more evenly over the land.sb

Rather than Banker Morgan & Partners the real target of the tax uproar was seen to be the capital gains & losses provision of the Revenue Act. For the House of Morgan that provision came into play for tax reduction purposes when on Jan. 2. 1931 S. Parker Gilbert was about to be taken into the partnership. As usual, the old partners sold the business to the new partners by a revaluation of assets which showed a capital loss of $21,000,000. By apportioning this among the partners, they were all legally able to show the Treasury that their income was less than their capital losses and so they owed the Government nothing. Because capital losses in excess of net income could then be carried over two calendar years for the same purpose./- Mr. Gilbert was admitted not as of Dec. 31, 1930 but as of Jan. 2, 1931 which gave the House of Morgan an additional year (through 1933) in which to apply any unused part of their $21,000,000 losses against taxable income.

The House last week was in the act of increasing taxes to finance President Roosevelt's industrial recovery-public works program. The House's measure upped normal tax rates from 4% and 8% to 6% and 10%, slapped them on dividends, raised the gasoline levy from 1-c- to

1 3/4-c- per gal. In addition the 1932 excise taxes on automobiles, radios, mechanical refrigerators, jewelry, furs, cosmetics, soft drinks, etc. etc. were extended for an additional year to July i, 1935. Total tax: $700,000,000. The capital gains & losses back-door was unnoticed until the Morgan story broke.

Then, with much excitement, the House pushed the back-door a little shut before passing the whole bill (323-to-76) and sending it to the Senate. Adopted was an amendment which would wipe out all capital loss carry-over from one year to the next. If in one year John P. Taxpayer has a total income of $20,000 and capital losses of $30,000. he would still pay no tax for that year. But his additional $10,000 loss would do him no good the next. If he were deliberately selling depreciated securities to establish a loss for tax purposes, nothing would prevent him from limiting his sales to an even $20,000 loss and saving his other $10,000 loss to be realized by sale the following year. Had such a limitation been in effect when Mr. Gilbert was made a Morgan Partner, the firm would either have had to hold him outside for another year or confine its $21,000,000 loss to 1931 incomes.

The Senate Finance Committee rolled up its sleeves to perform a major operation this week on the House tax bill. In prospect were a cut in the proposed normal tax rates and a boost in the surtax rates, which the House had not touched. Possible, too, was outright repeal of the capital gains & losses section, despite the fact that a rising stock market might soon make this two-edged provision once more the Treasury money-maker it was before the 1929 stock crash.

sbIn 1931 income taxes were paid by 1,450,000 citizens out of a U. S. population of 122.000,000. /-The 1932 Revenue Act reduced the carry-over period to one year.

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