The
Volume XXI
Green
Bag
December, 1909
Number 12
The United States Corporation Tax Act of 1909 By Henry V. Poor, of the New York City Bar
SECTION 38 of the Act of Congress of August 5, 1909,1 provides that corporations doing business in the United States "shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by" such corporations "equivalent to one per centum upon the entire net income over and above five thousand dollars" re ceived by them "from all sources" dur ing the year.2 The Constitution re quires that "direct taxes" shall be ap portioned among the states in proportion to the census,3 while the only provision in respect to "duties, imposts and excises" is that they shall be uniform throughout the United States .4 There is no provision in the Act of 1909 that the tax shall be apportioned as required by the Constitution in the case of direct taxes, so that if the tax imposed by Section 38 is "direct" in the constitu tional sense and not, as the act recites, '"An Act to provide revenue, equalize duties and encourage the industries of the United States, and for other purposes," approved August 5, 1909.
- The Act provides that the net income shall be
ascertained Dy deducting from the gross amount of income received within the year from all sources, (1) operating expenses, rentals and franchise payments; (2) losses not covered by insurance, depreciation, etc; (3) interest upon the bonded or other indebtedness to an amount of such indebted ness not exceeding the paid-up capital stock; (4) taxes; and (5) dividends upon stock of other •Art.corporations I, sec. 2, cl.subject 3; sec. to 9, the cl. 4.tax. 4Art. I, sec. 8, cl. 1.
an excise, that section must be regarded as unconstitutional. In the Income Tax cases5 the Supreme Court held that the income tax imposed by Sections 27 to 37 of the Act of August 15, 1894,6 so far as t bore upon the income from real estate and from invested personal property, was a direct tax which was unconsti tutional because not apportioned accord ing to representation,7 and that the Act was also unconstitutional so far as it affected the income from municipal bonds, because of the lack of power on the part of the federal government to tax the obligations of the states or of their instrumentalities. In view of the lPollock v. Farmers' Loan &0 Trust Co., 157 U. S 429, 158 U. S. 601; Hyde v. Continental Trust Co., 157 U. S. 654, 158 U. S. 601. "28 Stat, at L. 509. 'Section 27 of the Act of 1894 provided that there should be assessed "upon the gains, profits and in come" of individual citizens of and residents within the United States, over and above four thousand dollars, a tax of two per centum per annum ' 'whether said gains, profits or income be derived from any kind of property, rents, interest, dividends or salaries, or from any profession, trade, employ ment or vocation ... or from any other source whatever," and a like tax "upon the gains, profits and income from all property owned and of every business, trade or profession carried on in the United States by persons residing without the United States." 28 Stat, at L. 553. Section 32 provided for "a tax of two per centum annually on the net profits or income above actual operating and business expenses, including expenses for mate rials purchased for manufacture or bought for resale, losses and interest on bonded and other indebtedness" of all corporations doing business for profit in the United States. 28 Stat, at L. 556
