turing companies. This will certainly be true if the bankers have their way regarding the form of the amendment to section 5219 of the United States Revised Statutes.* In this case the failure to increase the rate of the Emerson Act would also result in relieving the banks of a substantial portion of the taxes which they at present pay-taxes which are fair in amount and which occasion no complaint. It should be borne in mind also that a reduction in the rate of the real estate tax which would be made possible by the increased rate of the corporation income tax would be in itself a relief to businesses owning real estate.

The form of the tax.- No fundamental change seems desirable at this time in the form of the tax on the income of mercantile and manufacturing corporations. If the implications of one of the recent decisions of the Supreme Court of the United States are carried out in later decisions the State may find the "franchise" character of the tax an insufficient justification for the present practice of taxing such items as interest on federal securities, but this situation has not yet become urgent. Several relatively slight modifications appear desirable at this time.

66

Deduction of net losses of other taxable years.-At present the law (Section 208-3) specifically forbids the deduction of “ any losses sustained by the corporation in other fiscal years whether deducted by the government of the United States or not." In the new Revenue Act of 1921 the federal government takes a long step in the direction of wiping out the hard and fast line which has in the past been drawn between accounting periods. Within certain limitations, the new provision permits net losses incurred in one year to be offset against profits realized in succeeding years. This seems to the Committee to be an eminently fair provision and one which should be carried over into the State procedure. It recommends that the net loss provision of the Federal Revenue Act of 1921 be recognized in arriving at the net income of corporations taxed under Section 9a of the State Tax Law.‡

The apportionment of interstate income. The present rule of apportionment for dividing the net income of corporations

doing business in other states as well as in this State has been the object of sharp criticism, much of which, in the opinion of the Committee, is justified. The rule, now in use, divides the income on the basis of the relationship of the value of the corporation's property in New York to the value of its property everywhere, the precise character of the property entering into the formula being carefully defined.

The proper allocation of income from interstate income is one of the most difficult and complicated problems in the whole field of State income taxation. It is, moreover, highly important to the corporations that the allocation rules of the various states imposing income taxes be consistent and uniform in order that, in the aggregate, not more than 100 per cent of their income be subjected to taxation. It is important that the rules be just and equitable in order that not more of their income be taxed by a state which has high income tax rates than is properly attributable to that state. As the situation now stands there is a great lack of uniformity among the rules of the various states and an obvious lack of equity. Thus, under the present rules, a corporation manufacturing an article in Connecticut and selling it in North Dakota would be taxed upon its entire net income in both states, Connecticut taxing it all on the ground that the true source of the income is the factory and North Dakota taxing it all on the theory that the place of sale determines the true source.

As a practical matter, it is, of course, quite out of the question to attempt in individual cases to trace responsibility for profits to particular elements of a business organization or to the activities of particular agents of the business-to the superior quality of the equipment in the factory, for example, or to the cleverness of a particular purchasing agent or sales manager. Business profits cannot ordinarily be accurately traced back to their precise sources in the organization. On the whole the sound view to take is that the net income is the result of the functioning of the entire organization. The selection of merely one element such as property or sales as a basis for apportioning net income is inadequate because it involves the assumption that this element alone is responsible for the production of net income. What is

really needed is a comprehensive formula which includes all of the elements which contribute to the production of the income.

Although it is obvious that this is a problem which is not susceptible of a precise solution, the National Tax Association has considered it of sufficient importance to justify the appointment of a special committee. This committee has not yet completed its deliberations but its conclusions on the main issues involved constitute a most important contribution toward the solution of the difficulty. It offers a plan of apportionment and a formula which in the course of time may be expected to become standard among the states which impose income taxes on business profits. This proposal has been stated by the chairman of the committee in the following language:

First. Specifically allocate any and all income received from intangible properties owned by the taxpayer. (It is thought that in most cases income of this character lends itself easily to specifie allocation).

Second. When desired by the taxpayer and approved by the tax commission of the interested state, to allocate specifically the profits arising from business transacted in the state concerned. It is not uncommon to find, under present-day conditions, that taxpayers engaged in business in more than one state so conduct their books and records as to reflect accurately profits actually derived from business operations conducted at their various branches, and, if the taxpayer desires and the commission approves specific allocation under such circumstances, it is thought in all probability more accurate results will be obtained than through any fixed formula which may be adopted.

Third. In the event that the second option is not practical, then to apportion the income as follows:

First, divide the remaining income in two equal parts and appor tion the one-half thereof in accordance with physical properties. You will note that this excludes intangibles, including bills and accounts receivable.

Next, apportion the second half of the remaining income based on business activities. The cycle in any business measuring

* Mr. C. S. Lamb, of Pittsburgh, in a letter dated Oct. 13, 1921.

its business activity consists first of purchase; second, wages, salaries, etc. paid in work upon or development of goods so purchased; third, sales.

We, therefore, suggest that the business activities be measured by the sum of purchase, pay roll and sales, using, of course, in both cases as the numerator that which applies to the interested state, and as the denominator the total of the taxpayer wherever it may occur. There was objection in the committee to the adding together of the property and of the sales or any other factors representing business activities, as by so doing it was thought that too much weight would be thrown either to the one or to the other, depending upon whether the business transacted had a quick or a slow turnover. It was further felt that this formula has the advantage of presenting a fair division between manufacture and sales when both are conducted by the same company and that the fairness of such an arrangement would appeal to state legislatures and those interested in the tax problem,—in other words, that there is a fairly good, strong point for the adoption of this formula by states that may hereafter consider the adoption of a state income tax.

Fourth. Should a taxpayer feel that the application of the formula as set forth under "third" unfairly burdens him with taxation, upon application to the tax commission and a proper showing of such facts, the tax commission may make apportionment on any other basis that may seem to him fair and reasonable, with the proviso, however, that in no event shall the amount so determined be in excess of the amount developed by the formula. Fifth. That the right of appeal, to review de novo, by the courts shall not be denied the taxpayer.

It has been necessary for the committee to ccnsider this problem of apportionment in connection with the proposed tax on the income of unincorporated businesses as well as in connection. with the franchise tax on corporate income. It seems desirable that the apportionment formula be the same for both taxes. The committee later urges* that the plan as outlined above be adopted for the unincorporated business tax and it here recommends that

Cf. infra, p. 129.

the present apportionment formula in section 9a of the tax lar broadened so as to take into account the elements included in i plan suggested by the committee of the National Tax Association

The Taxes on Unincorporated Business

The present situation.- When the Emerson Act was passed in 1917, imposing an income tax on business profits, its scope was restricted to corporations doing business in the State. Business conducted by single proprietors or by partnerships continued to be taxed under the old general property tax. In other words, all businesses paid taxes on their real estate, but, whereas corporations paid a tax on their net income, unincorporated businesses paid a tax on their stock-in-trade. The personal income tax, passed in 1919, included within its scope the dividends of corporations, eve though such corporations were taxed on their income by the State. This clearly established the Emerson Act as a purely business tax. Profits of individuals in business by themselves or as partners were taxed merely at the personal income tax rates. Granting that real estate taxes should be placed in a separate category, the comparison then lies between the 42 per cent tax on the net income of corporations subject to the revised Emerson Act on the one hand and the tax on stock-in-trade of unincorporated businesses on the other.

*

The lack of correlation between stock owned and profits earned is fully appreciated by everyone familiar with the conditions of modern business so that the theoretical inadequacy of a tax on stock-in-trade as a measure of the tax-paying ability of business would be granted without argument. But in addition, according to the information received by the Committee, the tax on stockin-trade is wretchedly administered with the result that it is almost a dead letter on the statute book. Consequently unincorporated business as a whole escapes with practically no business tax whatever.

Effect of the federal taxes on business profits.-The Committee is fully aware that the present federal income tax operates in a capricious and inequitable manner as between the various types of business organization and that this complicates the

*Cf. supra, pp. 56-57.