LOOPHOLES AND TAX DODGERS

...The gimmick is "or permanently set aside...

...A different problem is posed...

...It is when the loophole is used for tax-dodging purposes by bold profit-takers, almost always in the higher income brackets, that Congress is likely to get angry, and swear a vendetta on the poachers...

...Ever since the percentage depletion provision was written into the revenue statute in 1928, . many authorities have called it perhaps our biggest loophole...

...No one wants to be precise about this figure, any more than the little Dutch boy who stuck his finger in the dike prefaced it by a cold calculation of how many million or billion gallons of water would otherwise escape...

...The effect of this is to skip at least one estate tax on the property...

...It's an awfully touchy subject—where to draw the line...

...From 1937 to 1945, when Little stepped out and was succeeded by three other trustees— two of them directors of Textron or its affiliates—this Charities trust had total net earnings of $500,000...

...All insurance companies had enough deductions to take care of the taxes...

...By September of 1948 is was worth more than $4,500,000...

...But just to be scientific about it—in case Congress asks why they think hiring such-and-such a number of revenuers best would pay off the Government—they are making a thorough study of 160,000 carefully chosen income tax returns, looking for trends in carelessness...

...Congressional and executive department sources say they cannot find any basis for this estimate, any reason for either doubting or affirming it...

...In October of 1948 it was worth about $1,000,000...

...It is suggested that only future issue of such bonds be subject to the Federal levy...

...The law," a Bureau of Internal Revenue Man says, very carefully, "is wide open...

...Half of more than $15 billion worth of state and local securities won't expire before 1955, and it would be at least 1970 before 90% would have run out...

...Tobey, an emotional little man who is mostly tabbed as a member of the tiny Republican liberal wing in Congress, had hastened to the old home state in September of 1948 to see if he couldn't persuade Textron, Inc., a big textile combine, not to close its mills in Nashua, N. H., thus throwing some 3,500 workers out of jobs...

...In this last category, the Treasury department has a precedent on which to move in, if it (and Congress, ultimately) care to...

...Sen...

...which recently bought the Macy store in San Francisco and promptly rented it back to Macy's...

...And if, through manipulations of trustees having the greatest possible latitude, the trustees wake up some day to find the trust doesn't have any more income, the beneficiary has no recourse...

...But money-wise it is important enough...

...These have now dwindled to Guam, the Panama Canal Zone, and Puerto Rico...

...but should the Government win, the result hardly will be to plumb the bottoms of legal tax technicalities...

...The effect of this is to hold down the tax of a big-time stock or commodity market speculator to 25%— when, if his take from the trading were regarded as regular income, it would be subject to a maximum tax of 77...

...Probably it wouldn't pay the Government to provide enough help to check every return—especially since 93.78% of all of them are made by persons with less than $5,-000 incomes, even if they do only pay 44.42% of all individual income taxes...

...Noah Mason, the arch-conservative Illinois Republican, says that tax-exempt corporations and other organizations do an annual business of $50 billion that should certainly be taxed...

...But Wiggins' gambit looks much less speculative and daring to Washington officials than do any attempts to settle on a total of how much the Government is losing through Federal income tax loopholes...

...Nobody knows how much more revenue the removal would bring the Government...

...It is granting the Bureau of Internal Revenue money to hire enough agents to check thoroughly the income tax returns it now gets...

...The idea is to compensate these entrepreneurs for the dwindling away of their stock in trade...

...What about inter-corporate dividends, in which one corporation pays another a dividend but pays a net tax of only 5.7...

...The United States says it is...

...This time the assessor is Stanley H. Rut-tenberg, research director for the CIO, and one of the few persons in and around government who has made more than a half-hearted attempt at a definitive study of tax law loopholes...

...But of course it has failed so far to generate any real wave of enthusiasm for this from Congressmen, who have intimate political associations with state and local politicians...

...By terms of a law passed after World War I to aid American businessmen in the Philippines who were being given competitive fits by British and German business men, Federal income taxes are not levied in certain American possessions...

...Another was the Rhode Island Charities Trust, formed with a contribution of $500 by Textron's president, Royal Little, as sole trustee...

...There remains a big loophole which is not in the law at all, but in the penny-wise, pound-foolish mind of Congress at appropriation-time...

...but this is a tedious, long-term approach for a department seeking ready cash...

...It is a loophole that not very many taxpayers are big enough financial operators to use...

...For several years ago the U. S. Supreme Court upheld the validity of a federal excise tax on mineral water produced and sold from state-owned sources at Saratoga Springs, N. Y. What about plugging the corporate practice of giving highly favored employes stock at low prices, so that they can sell same at capital gains tax prices (25%), instead of on straight income tax rates (up to 77...

...But he was able to observe when the first session of the 81st Congress ended that despite the grumblers, more money than he had asked for was appropriated...

...but at the same time, it doesn't say "positively...

...This procedure may, with skillful drafting of the trust instrument, be extended so that trust property is subject to estate tax only once in every 100 years" (instead of once in every generation of 20 to 30 years...

...It has never paid an income tax...

...When we come to estate and gift taxes, we have "the largest single loophole in the law...

...For instance...

...And small as it is, their re-check field pays an extra, psychological bonus, they feel, in keeping another big chunk of taxpayers alive to their responsibilities —alive to the consequences of carelessness...

...Treasury Under-Secretary A.L.M...

...But the facts are that the farmer-cooperatives are exempt from income taxes—along with a long list of labor organizations, and literary, library, scientific, research, educational, and charitable institutions— because Congress wanted them to be, and because it strongly suspects that the voters want them exempted too...

...Many of them undoubtedly are small-fry in stature and financing and/or nontax-dodging in nature...

...Congress and the Treasury Department both shy away from it...

...Recently the nation's big insurance companies, which had paid no Federal income taxes for three years, agreed with a House Ways and Means sub-committee headed by Rep...

...Operators of sulphur mines get to deduct 23%, metal mines 15%, and so on down to coal at 5...

...Where does it stand on taxing state-owned retail liquor stores...

...That proposition can be expected to remain steadfast in 1950, even though Congress sees the government faced with a prospective deficit of $4 billion or more...

...It never paid any income tax...

...Tobey discovered that Textron was taking advantage of a provision in the income tax laws that trusts which "have paid to or permanently set aside" all their net income for charity or education need pay no income taxes...

...The problem gets touchier in its broader ramifications—are the loopholes Congress embroidered in the nation's tax structure really benefiting only those they were intended for, and in the right way...

...Although the ability to enjoy the income is, in effect, virtual ownership, no estate tax is imposed on the life tenant for the value of the life estate," he says...

...One of Textron's educational trusts, for instance, is for the benefit of Massachusetts Institute of Technology...

...The profits to the Government from this activity naturally are great, primarily because the Federal 3-percenters focus their attention on the high-bracket returns that promise the highest results...

...What should the government do about tapping the profits of foreign corporations...

...But there is a way of increasing government revenues perhaps beyond the point of just wiping out the predicted red ink, although that is a very moot question...

...Last year there were bi-partisan grumbles from Capitol Hill over the size of President Truman's recommended budget...

...Some Treasury and Internal Revenue officials feel that a 15% reexamination would be the most remunerative...

...Treasury officials hold—and industrialists who do not manage mineral property business are generally agreed—-that this is a manifest inequity, and should be removed...

...Another highly controversial "loophole" is the capital gains tax provision...

...Great Britain, for instance, says that money realized by selling a capital asset is not income for tax purposes...

...He and Treasury people also see eye-to-eye on lowering the exemptions ($30,000 for gifts, $60,000 for the estate tax, and $3,000 annual "exclusion" of gifts made to as many persons as the donor wishes...

...But when is it education, and when is it business for profit...

...and one over which both legislative and executive branches of government are extremely sensitive...

...They regard it as a brilliant guess...

...He agrees with Treasury officials who want to "integrate" estate and gift taxes, so that gifts made before death will be included in the gross estate and used to determine the total death taxes...

...Wiggins told a Congressional committee that he thought another billion dollars could be scraped up in this manner...

...The suit was inevitably contested...

...IV How much money they could recover for the Treasury with how many more revenue agents is a question that is completely up in the air...

...The size of the guess depends to a large extent on what the guesser chooses to call a tax loophole...

...How much the Government could get that it is now not able to collect, if this legal seepage were stopped, is anyone's guess—the range going from $500 million to more than $5 billion...

...hospitals, foundations"—35,-000 to 40,000 of them...

...II Referring again, for a moment, to educational trusts, the government recently filed an experimental tax suit against the Mueller Macaroni Co., which was reorganized a few years ago under a charter devoting its net profits to New York University, and claiming tax exemption...

...Charles H. Tobey, New Hampshire Republican, at the last session of Congress...

...Under its benignity, oil and gas companies are allowed to deduct annually 271/2% of their gross income for tax purposes...

...And "MIT, until that date at least, had never, in the 11 years of the trust's existence, received any payments, accounting, or audit of the books...

...It is by plugging the loopholes in existing tax laws, to stop leakage of government income...

...Nor was the Treasury Department (or Ruttenberg) ever reconciled to the 1948 income tax reduction act relating to community property—and specifically to terms by which a widow gets half her husband's property tax-free—let alone the "loophole" by which husband and wife can now split a husband's income and reduce the income tax rate by no little bit...

...What does the Government do about Yale University's tax-exempt trust "Connecticut Boola, Inc...

...There seems to be small reason to anticipate a reversal of form, and a wise, selective, pro bono publico wave of economizing from Congress' second session...

...should go into the spaghetti business itself...

...As a sort of extra added bonus on his Nashua, N. H., investigation, Tobey found out that Textron's Little was doing some tax-ducking in Puerto Rico, too, again entirely legally...

...For suppose N.Y.U...

...They point out that the factory owner who buys a machine calculated to last for 20 years can only deduct one-twentieth of its cost per year for 20 years, and nothing beyond that—but the oil or gas operator continues to get his 27}^% "compensation" in the form of a tax deduction from the Government long after he has recovered the cost of his original investment...

...He is really shooting at farm cooperatives, and with typical partisan fervor blames the loss of this income to the Government on "the Treasury's loose and liberal regulations...

...In 1945-46-47 its beneficiary, the Providence, R. I., Community Chest, received $85,-000 from the trust—or $55,000 less than the trustees and a Providence bank were paid...

...For instance, 1945 statistics show that 35% of the income reported by taxpayers scraping along with incomes of between $300,000 and $1,000,-000 a year came from the sale or exchange of capital assets...

...There are many other tax loopholes, depending always on who does the calling...

...It was an amicable, but strictly stop-gap settlement...

...The Treasury Department and Bureau of Internal Revenue have two books with 566 solid pages of names of similar tax-exempt "literary, library, scientific, research, educational, or charitable organizations...

...It was and is legal...

...But what Treasury and Internal Revenue Bureau know about the operations in this suspiciously secretive field, is almost nothing...

...That is, it assesses a maximum tax of 25% on the sale of, say, stocks and bonds if they have been held for more than six months before being sold...

...The remedy most frequently suggested to stop this revenue leakage is to double the rate to 50%, and to make the speculator hang onto his holdings for one year—or maybe have a lower tax rate but require two-year possession—before he could sell them and get a capital gain credit from the tax agent...

...Did they really mean to make all the loopholes...

...A major example is the contention that corporations, which in the aggregate continue to show enormous earnings, should be subjected again to excess profits taxes and an increase of pain in the undisturbed corporate profits department...

...Little, or his hand-picked operators of a half-dozen such trusts, blandly admitted that Textron and its affiliates and subsidiaries were using these charitable and educational trusts to buy and sell securities—often on unsecured promissory notes...

...III Always with its eye on the main chance, which is increasing the Federal Government's revenue, the Treasury department would like to do something about levying a tax on state and local government securities...

...And Congress may be expected to work out some more solid scale of tax values for your insurance company and mine...

...But its unfairness seems patent to Treasury officials...

...Such is the explanation for the roar raised by Sen...

...What had happened was this: after a decade or two of trying to work out a tax ratio that would give the Government its due and still protect the enormous reserves for policyholders that the insurance men require, the Treasury worked out an arbitrary tax schedule that was just too low...

...Currently the Bureau can check only about 3% of all returns...

...A couple of years ago...

...And what they can do about finding out apparently depends, the law being what it now is, almost entirely on some member of Congress getting angry enough to hold a public hearing, as Tobey did...

...He fulminates at a current tolerance in the law for "life estates," by which a man may put his property in trust and provide for his wife (or anyone else) to have the income from it for life, the income (or property) to go to their children (or someone else again) at his wife's (or someone else's) death...

...It exempts educational organizations period...

...As long as the trust's net income is "set aside" for the beneficiary, it need never be paid...

...Walter A. Lynch, New York Democrat, to cough up $90 million, on a new tax basis, for 1947-48-49...

...Or are they letting big tax-dodging fish get away from paying their fair share of the costs of government...