The legislation proposed by President Roosevelt in his message of March 3, 1936, to prevent automatic avoidance of taxation by non-distribution of corporate profits, does not represent a new and previously unheard of system of taxation. It embraces, on the contrary, the gist of proposals made by various individuals and organizations extending back as far as the year 1864 when Congress passed, a Revenue Act providing that "gains and profits of all companies, whether incorporated or partnership . . . shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise." The Revenue Acts since 1913 have also attempted to deal with the closely related problem of purposeful evasion of surtax by the accumulation of surplus beyond the reasonable-needs of the business. ln July 1917, a bill was submitted to the Senate by its Finance Committee containing a section suggested by Senator Jones of New Mexico which levied in addition to normal income tax an additional 15 per cent tax on undistributed net income exempting, however, undistributed profits used for the maintenance of reserves required by law and 20 per cent of net income directly engaged in the production or distribution of commodities or in banking. This bill was sent back to the committee and altered. A subsequent amendment proposed a flat 10 per cent tax on the amount of undistributed net income retained, but this was modified to apply only to income not retained for actual employment in the reasonable needs of the business.
John B. Martin Jr.,
TAXATION OF UNDISTRIBUTED CORPORATE PROFITS,
Mich. L. Rev.
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