business at the end of the taxable year, it would be necessary to distribute the entire amount or in default thereof subject the stockholders to surtax. If it be admitted that the earnings from July 1 to November 30, 1919, must be distributed, although part was legally accumulated, is it the intention of the law that the earnings accumulated during the preceding taxable year shall be likewise distributable even though it is admitted by all that at no time during such preceding taxable year was there any accumulation beyond the actual needs of the business? And if the surplus of the preceding taxable year must be distributed, does the law intend that the entire surplus earned since March I, 1913, must be distributed? The Treasury holds that the 1918 law does not apply to surplus accumulated prior to January 1, 1918; that if any surplus were improperly accumulated prior to that date the laws in force during the prior period are applicable thereto. In the case cited no prior law was violated; therefore the Treasury would rule that the cash in hand, representing surplus accumulated prior to January 1, 1918, has not been improperly accumulated. The author disagrees with the Treasury's interpretation of the law and is of the opinion that when accumulated surplus becomes available for distribution, the 1918 law can only be applied to the taxable years during which there is, in fact, an unlawful accumulation. In the case cited on June 30, 1919, there was no unlawful accumulation. At that date. every dollar of surplus was needed in the business. What was lawful on that date cannot be held to be unlawful by an ex post facto legislation. There is no indication in the language of the law that it was intended to be retroactive. On the contrary, the applicable sections of the law taken together clearly indicate that the penalty is to be restricted to the taxable year or years at the close of which there was an unlawful accumulation of profits. In fact the only authority whereby the tax can be imposed limits the penalty to the taxable year. These sections were the subject of long discussion and many amendments and if it had been intended that all accumulations, lawful and unlawful, after January 1, 1918, were to be divided or taxed when realized, provision would have been made therefor. Instead section 220, which imposes the penalty, prescribes a definite method of procedure, viz., "if any corporation . . . . is availed of for the purpose of preventing the imposition of the surtax its stockholders or members shall be subject to taxation . . . . in the manner as provided in subdivision (e) of section 218. . . . .' The section imposes a very high penalty and must therefore be strictly construed. No sections other than those mentioned can be invoked to increase the penalty. We turn to section 218 (e): "Personal service corporations shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. . ... We next ascertain how members of partnerships are taxed: section 218 (a) “. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. It is imperative that unlawful accumulations be taxed as if the stockholders were partners. The complications of such procedure are apparent when it is realized that corporations with thousands of stockholders may be held to have failed to distribute accumulated earnings. The problem is even more difficult when any change occurs in stock holdings. During the taxable year ending June 30, 1920, the provisions of the law are easily applied. An unlawful accumulation which may occur during such taxable year is adjusted as of the end of such taxable year. We then go back to June 30, 1919, for the next preceding taxable year. Was there, during any part of such taxable year, any unlawful accumulation? All admit that there was not. If not, how would it be possible to tax to the individual stockholders of the corporation, who were "of record" June 30, 1919, an unlawful accumulation "for the taxable year" when there was no unlawful accumulation at the end of or during such year? If partners render inaccurate returns such returns must be corrected, but no means are provided whereby transactions relating exclusively to a subsequent year of a partnership can affect returns for previous years. Sections 220 and 218 together are logical and workable when unlawful accumulations occur during a taxable year, but when no unlawful accumulation occurs during such year there is no machinery provided for the imposition of the tax. It is clear to the author that if any retroactive intention was in the minds of Congress it would have appeared in section 220 and the use of section 218 as the sole method of imposing the tax would have had to be changed. The Treasury admits that section 220 of the 1918 law is difficult to administer. In Notes on the Revenue Act of 1918 the Secretary of the Treasury says:* The corporate form of organization is now used or abused by wealthy individuals who incorporate their personal business and investments and thus escape surtaxes upon that amount of their income which is reinvested or saved. Section 220 provides a remedy for this abuse, but it can be applied only by a troublesome special procedure which will necessarily restrict its use to a comparatively small proportion of cases. 'Page 8. NON-RESIDENT ALIENS Under the 1913 law non-resident alien individuals and foreign corporations were taxed on their net income from all property owned and from every business, trade or profession carried on in the United States.1 Owing to the ambiguity of the term "property" there was considerable doubt as to the extent to which non-residents were taxable. The language of the act was construed by the Attorney-General of the United States to exempt non-resident aliens from tax on interest from securities of American corporations and on dividends from the stock of such corporations, on the ground that the property from which such income was derived was intangible and its situs, for the purpose of the income tax, was the domicile of the owner in the foreign country. The Treasury never fully recognized this conclusion of the Department of Justice, and when the Supreme Court of the United States upheld the constitutionality of the act in its decision in the case of Brushaber v. Union Pacific Railway Co.,2 decided January 24, 1916, the Treasury ruled that income accruing to non-resident aliens in the form of interest from bonds and dividends on the stock of domestic corporations was subject to the income tax imposed by the 1913 law (T. D. 2313). In the case of Emily R. DeGanay (a citizen and resident of France) v. Ephraim Lederer, Collector, (250 U. S. 376) to determine the taxability under the act of October 3, 1913, of income from stocks and bonds of United States corporations, and bonds and mortgages secured on property in Pennsylvania, the Supreme Court of the United States rendered a decision on June 9, 1919, in which it said: 'For former procedure in general, see end of this chapter. DECISION. In the case under consideration the stocks and bonds were those of corporations organized under the laws of the United States, and the bonds and mortgages were secured upon property in Pennsylvania. The certificates of stock, the bonds and mortgages were in the Pennsylvania Company's offices in Philadelphia. Not only is this so, but the stocks, bonds and mortgages were held under a power of attorney which gave authority to the agent to sell, assign, or transfer any of them, and to invest and reinvest the proceeds of such sales as it might deem best in the management of the business and affairs of the principal. It is difficult to conceive how property could be more completely localized in the United States. There can be no question of the power of Congress to tax the income from such securities. Thus situated and held, and with the authority given to the local agent over them, we think the income derived is clearly from property within the United States within the meaning of Congress as expressed in the statute under consideration. All discussion on the construction of the language of the act of 1913 was set at rest by the 1916 law, and the amendments of 1917 made no further change. The 1918 law explicitly taxes non-resident alien individuals and corporations organized under the laws of foreign countries on the entire net income from sources within the United States, including interest on bonds, notes or other interest-bearing obligations. of residents, corporate or otherwise, dividends from resident corporations and including all amounts received (whether paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. A citizen of a possession of the United States, who is not otherwise a citizen or a resident of the United Statesincluding only the states, the territories of Alaska and Hawaii, and the District of Columbia-is treated for the purpose of the 1918 law as if he were a non-resident alien individual. The power of Congress to tax income accruing to aliens is not generally questioned, but the wisdom of so doing has been the subject of much discussion and argument before Congress and before the officers charged with the duty of administering the law. The question becomes acute if the non-resident alien is liable in this country for our war-excess |