Windfalls' Windfall

Even before Congress began its FHA investigation, the Internal Revenue Service started looking into the matter of windfall profits on housing projects. BIR was not concerned about possible violations of FHA laws; it questioned whether windfall profiteers could call profits capital gains, taxable at only 25%, instead of straight income subject to taxes as high as 91%. In a test case, BIR protested the 1948 and 1949 tax returns of Long Island Builders Alfred and George Gross, Lawrence Morton and their families.

To finance the Glen Oaks Village apartment development in Queens, New York City, Gross & Co. got bank loans totaling $24 million under Section 608 (since expired) of the National Housing Act. When it turned out that the development actually cost only $20 million to build, Gross & Co. pocketed the $4,000,000 difference plus $2,000,000 from profits on land and connected projects. On their income-tax reports, they put down the $6,000,000 in windfall profits, paid capital-gains taxes.

BIR held that windfall profits should have been declared as dividends taxable at income rates, and sued for $3,000,000.

In Washington last week, the 16-man U.S. Tax Court unanimously turned down BIR's test suit. Wrote Judge Norman O. Tietjens for the court: "We are not unaware that the propriety of this action has elsewhere been questioned. However, the question of propriety or impropriety of the [profit] distributions is not raised in these proceedings and we do not pass upon it ... Taxpayers have the right so to arrange their affairs that their taxes shall be as low as possible, and the tax consequences flow from what they did rather than what they might have done."

At week's end, Federal Housing Administration Commissioner Norman P. Mason, who is negotiating to get some of the windfall money back from some 6,500 other building projects, said that he would keep right on trying. BIR. which has 1,400 other suits pending to reclaim an estimated $1.5 billion in taxes on similar building profits, plans to appeal the Tax Court decision. But its chances look bleak.

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