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PREFATORY.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., January 9, 1900. The following rulings of this office under the war-revenue act were originally published in the weekly Treasury Decisions during the

year 1899.

A similar compilation of rulings for the year 1898 was found to be so useful to the Service and the public generally that large editions were called for and distributed. It is believed that the present compilation will be found equally important, bringing, as it does, the rulings up to the latest dates.

For convenience of reference, the original numbering has been retained. Rulings which have been revoked are omitted.

G. W. WILSON, Commissioner.

5

DECISIONS UNDER WAR-REVENUE ACT.

BANKS AND BANKERS.

(See also DECISIONS 12, p. 70; 20544, p. 46; 20648, p. 77; 21895, p. 84; 21708, p. 85.)

(20645.)

Special tax-Bank.

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Sums deposited by so-called special depositors, who receive as interest part of the

earnings of the bank, are considered part of the working capital of a bank and are to be included in the returns to which the special tax of $2 on each $1,000 thereof is to be reckoned.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., January 27, 1899. SIR: Your letter of the 16th instant is received, relative to the liability to special tax of the Plymouth Guaranty Savings Bank, of Plymouth, N. H., on the $100,000 of capital advanced by certain depositors, stating that the bank terms as “special depositors" those who advance said $100,000; that the method employed by this bank is similar to that employed by the Portsmouth Trust and Guaranty Company, which from the report of the bank examiners of the State of New Hampshire, is in substance as follows:

Certain individuals advance $100,000 to the bank to be a guaranty fund. This takes the place of the guaranty fund of 5 per cent of the total deposits which is demanded by State law. The depositors are guarantied interest at the rate of 34 per cent. Whatever of earnings over and above this interest rate there may be is divided among those who have advanced $100,000. I find that in the past year the depositors received interest at the rate of 34 per cent, and that those who advanced this $100,000 received interest at the rate of 6 per cent upon the total amount.

In reply, you are advised that I am of the opinion that this $100,000 is clearly a part of the working capital of the bank, and that it is subject to the special tax of $2 on each $1,000 thereof. Respectfully, yours,

N. B. SCOTT, Commissioner. Mr. JAMES A. WOOD,

Collector Internal Revenue, Portsmouth, N. H.

(20681.)

Special tax-Banks.

Opinion of the Attorney-General in regard to undivided profits.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., February 7, 1899. The appended opinion of the honorable Attorney-General is hereby promulgated for the information and guidance of internal-revenue officers and other persons interested. Any rulings of this office conflicting therewith are modified to conform thereto.

G. W. WILSON, Acting Commissioner.

DEPARTMENT OF JUSTICE,

Washington, D. C., February 4, 1899. The SECRETARY OF THE TREASURY.

SIR: In your letter of October 1, 1898, which I have the honor to acknowledge, you submit the following questions for my opinion:

(1) Are the undivided profits of a national bank to be excluded in all cases from the capital and surplus in estimating the amount of special tax required to be paid by the bank under section 2 of the warrevenue act?

(2) Are the undivided profits of a State bank to be excluded in all cases froin the capital and surplus in estimating the amount of special tax required to be paid by the bank under that section?

(3) Are the undivided profits of private banks or bankers to be excluded in all cases from the capital and surplus in estimating the amount of special tax required to be paid by the bank or bankers under that section?

(4) What is the construction that should be given to the following language in paragraph 1 of that section, namely, “the amount of such annual tax shall in all cases be computed on the basis of the capital and surplus for the preceding fiscal year?”

The provision of law under which these questions arise is the following portion of section 2 of the act of June 13, 1898:

SEC. 2. That from and after July first, eighteen hundred and ninety-eight, special taxes shall be, and hereby are, imposed annually as follows, that is to say:

“One. Bankers using or employing a capital not exceeding the sum of twenty-five thousand dollars shall pay fifty dollars; when using or employing a capital exceeding twenty-five thousand dollars, for every additional thousand dollars in excess of twenty-five thousand dollars, two dollars, and in estimating capital surplus shall be included. The amount of such annual tax shall in all cases be computed on the basis of the capital and surplus for the preceding fiscal year.”

I think that I can more readily answer the first three questions by giving my opinion as to what should be included for taxation than by undertaking to determine what should be excluded.

*

The purpose of the law is, undoubtedly, to levy an annual tax upon the business of banks and bankers, and in order to make uniformity, to apply the tax to the amount of capital employed, together with such surplus funds of the bank as are used in carrying on the business, and which, combined with the capital, constitute the basis of banking operations.

The national banking act provides for the maintenance by national banks of what is called a “surplus,” which is required to be set apart by the directors of the bank from the net profits until it shall reach an amount equal to 20 per cent of the capital stock. This surplus thus constituted becomes by law, in effect, a part of the bank's capital, and this 20 per cent is the minimum amount of surplus to be maintained by a national bank. I do not conceive, however, that the amount of the capital with this surplus added would make the limit to which the taxing power is authorized to go in every instance in estimating the amount upon which the bank should be assessed. I understand the term “surplus” as applied to banks to have a broader meaning, and it should be construed to include not only that set apart as the minimum surplus, but also such amount as has been set apart by à vote of the directors, or other authorized action of the bank, to strengthen the capital, and is thus held out by the bank in its dealings with the public as a part of its banking capital. The capital of a bank, together with the surplus so set apart and used in conjunction therewith as the basis of its business transactions and its banking operations, constitutes the security upon which customers rely and which induces the public to deal with it.

I may present the matter more clearly by an illustration as follows:

A national bank with a capital stock of $200,000 is required by law to set apart from its net profits and to maintain a surplus of $40,000. The lowest estimate for taxation under the war-revenue act upon such bank would be upon $240,000. But if this bank, by the action of its directors, should set apart $100,000 more of the bank's funds to be used as a part of its banking capital, this latter amount would have to be added to the amount for taxation.

The same principle would apply to State and other banks, and, whilst there may be no State laws requiring the maintenance of a surplus on the part of State banks, yet such banks are taxable upon the amount of their capital, together with such additional surplus or funds belonging to them as may be set apart either by law or by the action of the bank authorities and used in carrying on the general business of the bank.

The undivided profits of a bank are not surplus, and can not be estimated under the law in question as a part of the bank surplus. Mr. Justice Swain, in delivering the opinion of the Supreme Court in Rubber Company v. Goodyear (9 Wall., 788), says:

“Profit is the gain made upon any business or investment when both the receipts and payments are taken into account.”

This is the generally accepted definition of the term “profits.”

So, then, if profits are to be made the basis of taxation, it might be necessary to settle the affairs of a bank before the amount subject to taxation could be ascertained. The solvency of its loans, the shrinkage of securities, depreciation in values, and all other losses would have to be taken into account before the estimate as to profits could be made.

The undivided profits of a bank signify the amount of money on hand out of which dividends may be declared, and such profits may be

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