being a mercantile and manufacturing tax, and nothing more, it should not reach out to the holding company in the event that it is not so engaged, because your subsidiary companies, which are operated under your holding company, would be subjected to your business tax, and having been taxed once, why should they be taxed again, unless they are directly in business?

MR. TOBIN: I have in mind where such a holding company would be deemed a mercantile and manufacturing corporation and taxed under the laws of New York, that is, it would be classified as such, and not in any other way. They would be paying their taxes under that particular article of the tax law, so you would be forced, because of that classification, to treat them as a mercantile and manufacturing corporation, and you would be called upon to make proper apportionment of taxes.

MR. LAMB: We have not undertaken to meet the peculiar statutes of different states. We are trying to model a clause here that if uniformly adopted would work fairly among the states. It was hardly within the province of the committee to meet the peculiar statutes that may exist in forty-eight different states.

MR. W. S. ELLIOTT of Illinois: May I ask Mr. Tobin, the case you present, whether they are the chain stores, where the head company is one company and the branches are others?

MR. TOBIN: I have that in mind, sir, yes, where they hold them selves out as the parent company, in carrying on the business with these different subsidiaries.

MR. ELLIOTT: Doesn't that do away with the necessity of apportionment? Our rule deals with the case of one company, a general store, conducted by one company, where you have in one trading profit combined the wholesale profit and retail profit, but if you have separate corporations you don't come under this rule at all.

MR. TOBIN: That would be true, sir, but they hold themselves out as a mercantile and manufacturing corporation and get away from the provisions of the statute which exempts holding companies from that particular article of the tax law, and it is in a great measure a subterfuge to beat the statute.

MR. ELLIOTT: I don't see why, under that organization, your head company would not show on its books the profit of the centralized wholesaling business in purchasing, and the local branches the retailing profit, which is exactly what we want. Now, if they are in a situation by which they don't show that, then they come under this remedial provision under the model law.

CAPTAIN WHITE: There is another question involved here that has not been clearly brought out, and that is the allocation of profits.

due to the factories that exist in different states. For instance, take Norton of Worcester, Massachusetts, which does a very large manufacturing business, part of which-the finishing business—is conducted in Massachusetts; other parts are conducted in Pennsylvania and New York. Now, if New York adopts a law in regard to the allocation of profits and Pennsylvania does not, New York is going to profit by the benefit that has been received from that company doing its manufacturing operations in Pennsylvania. If you can arrange for distribution according to the manufacturing activities, you can probably do something that the managers of the corporations will be thankful to you for, because they find it somewhat difficult.

CHAIRMAN WHITNEY: Is Dr. Adams in the room? We should like to hear from him if he is here. Dr. Adams, we are discussing the report of the committee on apportionment between taxes on interstate mercantile and manufacturing companies. Some one has suggested that you are thoroughly familiar with this topic, and we should like to hear from you. Of course you were not here when the report was read, but I believe you are familiar with it, and in addition to that you are serving on a committee of the United States Chamber of Commerce, that has the same subject in hand, and we should like to have the benefit of your experience and advice.

DR. THOMAS S. ADAMS: Mr. Chairman and gentlemen: It is a great imposition on the audience, and somewhat of a problem to myself to talk helpfully on this subject which I have not heard discussed.

I have in the past given a great deal of thought to this problem, and for just about three minutes I might mention some of the larger aspects as they exhibit themselves to me. I want to emphasize, first of all, the obvious point which Mr. Holcomb made this morning, that it is much more important to get some rule than to get any particular rule. For many years in this association, when I was fortunate enough to be able to attend regularly, I tried to get the association to bring pressure to bear upon the state tax commissions, upon the legislatures of this country, and particularly upon the interstate commerce commission and the federal trade commission, to get under way some movement that would popularize a rule. I still think the association made a great mistake that it did not get behind those things actively at that time. I recall going to the commissioner of corporations, before the federal trade bureau was established, at a time when the commissioner of corporations not the federal trade commission- was giving very considerable attention to taxation, and I remember going to the interstate commerce commission, on my own initiative, and

saying something like this to those gentlemen-I think it was true then and I think it is true today-that the time was arriving, and was here in fact, when the business interests of this country and the public utilities of this country were going to be very unjustly treated, because of the absence of a uniform method of allocating income and properties to the various state jurisdictions. Now, I said: "This is more or less of a new problem to the states; if we can get your backing, have a scientific and careful study, and have one rule, the chances are that most of the jurisdictions in the country will accept it. Now, won't you give enough time and study to these two subjects to suggest some rule?" I nearly had the trade commission on the hook at one time, but the interstate commerce commission never even nibbled at it.

Now then I think there is a lot in what I am saying. As a rule, I don't believe that this association should take part in any very active propaganda, but here is a legitimate exception to that rule. Everybody knows that we and our successors for one hundred years are not going to settle this problem of allocating with scientific accuracy. I doubt if it has an absolutely correct answer. I have given this subject a great deal of thought and I don't believe there is any one-hundred-per-cent correct answer. Any uniform rule is better than the existing situation. Now, let us get a rule, and then all get behind it and try to get that one rule adopted.

The second thing I want to state is derived from my own experience, and it is this: I don't believe that the one rule is going to consist in the application of the Massachusetts formula. This is the point I want to make-I may not be stating it well-Massachusetts has a method by which, as you know, income is divided into three parts. One is distributed in accordance with tangible property, another in accordance with sales, and the other in accordance with payroll. There is a lot of sense behind it, but it has to my mind one essential defect. I don't believe you ought to divide your income in three separate departments, because in many instances the elements in accordance with which you apportion sales, property or payroll are sometimes so unimportant that they are not fitted to control one-third of the distribution. In other words, you are going to have a company that has no property, sometimes, and if it has no property it is a sin and a shame to assume a one-third control in accordance with this element of which it has none. That one thing is, it seems to me, desirable to avoid.

And then the third requisite of this allocation process is that it should be suggested by a committee in touch with various sections of the country, with their necessarily differing interests, so that the formula shall be in its result something in the nature of a compromise.

I finish what I have to say on this subject with the earnest hope

that this body and association will urge the committee to drive forward this investigation; that we will get a formula, and then for once in our lives, for the avoidance of multiple taxation we will begin a campaign for the adoption of that formula. I think there is almost a solemn duty incumbent upon every man in the organization, unless he can see some special fundamental objection, to urge the adoption of that rule in his own particular state, because it is to my mind a sin and a shame that under the various public utility taxes, methods of dividing the income or the properties are productive of such differing results and applications that if all states in the Union used it, you would find allocated to the various states in the country four or five times as much income as the corporation had or three or four times as much property.

CHAIRMAN WHITNEY: We are very much indebted to you, Dr. Adams.

MR. OSCAR LESER of Maryland: May I ask Dr. Adams a question? Dr. Adams, don't you think it would be in the power of the federal government to enact legislation that would help out?

DR. ADAMS: I don't know about the power, but I feel that when this question is in its making, when the adoption of apportionment processes are just taking place, if the trade commission, with respect to ordinary commercial corporations, and the interstate commerce commission, with respect to public utilities, would, after careful study, come out with a formula, four states out of five would accept it. So far as the federal government is concerned, moral leadership is required, and I think moral leadership and the careful sifting of the facts would have secured for us virtual uniformity and practice in the country if they had done that ten years ago.

CHAIRMAN WHITNEY: Gentlemen, it is now 3: 30, and that was the hour when I announced that we would take up the next topic on the program for this session. For the first time this conference has upon its program the matter of the valuation of capital stock for assessment purposes under the federal act. Mr. Fred T. Field of Massachusetts was to be here, but on account of the critical illness of his father it was impossible for him to come. We have, however, fortunately secured the co-operation of the United States Treasury Department in permitting Mr. Charles A. Drake, chief of the capital stock tax division, to be with us today, and he will address us on the subject of the capital stock tax-Mr. Drake.

MR. CHARLES A. DRAKE, of the United States Treasury Department.

THE FEDERAL CAPITAL STOCK TAX

CHARLES A. DRAKE

Chief, Capital Stock Tax Division, Internal Revenue Bureau

I have been asked to outline in a general way the policies of the bureau of internal revenue in the administration of the federal capital stock tax law. I appreciate this opportunity and my remarks will be generalized and confined to the federal capital stock tax, as, due to distinctions in the provisions of the different state laws, the problems are not necessarily the same.

The federal capital stock tax is an excise tax, imposed upon corporations for the privilege of doing business, and in the case of domestic corporations the tax is measured by the fair average value of the capital stock.

The question of doing business requires the most careful analysis and numerous border line cases arise which are difficult to decide. The position of the bureau is now quite definitely established by the latest supreme court decisions, and unless a corporation's activities are limited or reduced to the mere naked ownership or possession of property and the receipt and distribution of income, it will, in all probability, be regarded as doing business and held liable for the tax.

The law itself is not ambiguous, intricate, or hard to interpret if approached in a spirit of fairness. The law does not define "capital stock" or "fair average value" and is silent as to a method for the determination of the latter. Nor does the present law differ materially from the preceding acts, but in recent years there has occurred some change in opinion or interpretation as to what constitutes "capital stock" and the proper method of estimating its fair average value.

Many argue that the capital stock is the share stock, but the bureau contends that there is a difference, at least for the purpose of this tax, between the capital stock of a corporation and the share stock in the hands of the stockholders, and that the market is only one factor in determining fair value.

The decision of the district court for the southern district of New York, in the case of the Central Union Trust Company, sustains the views and policy now in force. The court holds that the significance to be accorded the words "capital stock" depends upon the character of the statute levying the tax, and that the words employed by Congress indicate an appraisal of the value of the capital stock, by considering various factors of value, by the exercise of judgment rather than by an auditor's exact determination of the value of the net worth of the tangible assets taken from the corporation books of account.

Capital stock, therefore, may be said to represent the entire busi