Income Technique

Commissioner of Internal Revenue Helvering, brand new appointee from Kansas, last week broadcast some news. He said that citizens were rushing to pay past income taxes which they had avoided by "stock sales which were fictitious in fact and not bona fide transactions." With as much threat as reassurance he added: "In cases where the facts are disclosed voluntarily the disposition of the bureau will be to refrain from prosecutions." Two human examples served as scareheads for the alarm. One was Thomas S. Lamont, son of famed Thomas W., like his father a Morgan partner. His income tax deductions were laid bare last week by Prosecutor Pecora before the Senate Banking & Currency Committee. The other, Charles E. Mitchell, resigned head of Manhattan's National City Bank, was on trial (for the fourth week) for tax evasion. Morgan Lawyer John William Davis pointed out to the Senators: "It is a settled principle of law that a taxpayer is entitled to resort to any legal method available to lessen the amount of his tax liability. ... A sale by a husband to his wife is just as legal ... as a sale to any other person."* Well has this been known to the business world and on it grew up a year's end technique of selling depreciated securities to establish tax losses. Any businessman could find out the technique by going to his lawyer. What young Lamont did in the last two days of December 1930 was to sell several blocks of stock establishing a loss of $114,807. Unlike Mr. Mitchell he did not sell them by simply writing a letter to his wife, nor did he forget the use of transfer stamps and other formalities. About half of his losses were established by selling shares either through stock exchanges on which they were listed or at public auction. His wife simultaneously purchased the same number of shares that he sold, borrowing the money from him and giving him her note. The remainder of his shares (most of which were hard to sell publicly) he sold directly to his wife, again taking her note. Both had accounts with J. P. Morgan & Co. and the payments between them were made by simple transfers on the Morgan books. In the following April, fearing prices would go down, he repurchased the stocks from her at the same price and she paid off her note. He calculated his and his wife's tax savings by the private sale as slightly over $2,000. Mr. Pecora calculating on the public and private sales estimated the amount at over $20,000. Last week Mr. Mitchell, on trial for having dispensed with like formalities, took the stand to maintain that his sale to his wife was bona fide, that he bought back the 18,300 bank shares at the price she paid in order to save her fortune from being wiped out. One other wrinkle in Mr. Mitchell's tax-avoidance technique had to do with a bonus from the National City Co. In July 1929 he drew $666,666 from the bank as part of his annual bonus from the management fund. In December of that year the directors voted that there would be no bonuses for 1929. The Mitchell bonus (and similar bonuses to other officers) was declared advance against future bonuses (that is, loans, instead of payments). But the company, instead of carrying the $666,666 on its books, wrote it down to $1. Moreover, in 1931 Mr. Mitchell's salary was boosted from $100,000 to $200,000 and he was not required to pay back any of his "advance." On the stand Mr. Mitchell stoutly maintained that this was equitable, since he had sunk his entire fortune in bolstering up the bank during the crash, therefore had a moral if not a legal claim on the bank's generosity.

*In a State such as New York where a married woman enjoys all rights of contract.

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