Honorable John Among deductions Act the of 1936 W, were Hanes “ from 2» adjusted losses arising net income from the sale allowed under or exchange the Revenue of capital assets, disallowed by Section 117(4) of the Revenue Act of 1936. In . Other words, the difference between the $2,000.00 eapital net loss limitation and the amount actually sustained was allowed to reduce the adjusted net income for the purpose of figuring the surtax. There was also allowed a6 @ deduction in computing undistributed adjusted net income 20% of the adjusted net income. the i937 Revenue 1935 and 1939 Revenue phase of the law The of in Act Acts eliminated remain the both of game, insefar these @¢limination of porations coming within sonal holding companies have this and the particular is concerned. the provision, effective 1936, of allowing corporations to receive the excese of the {2,000.00 limitation has worked a6 4 pesult deductions as under to bulld Revenue Act benefit of capital losses a real hardship upon cor- this classification. Since the have, of necessity, distributed not been able the up a Surplus year 1934 all pertheir earnings and account. When a cor- poration sustains an excess of non-deductible capital losses over the $2,000.09 limitation this difference is applied to reduce surplus and although there may be taxable income this reduction can have the effect of reducing earned esurplue to the extent that a part, or possibly all of the dividends paid, are not taxable in the hands of the recipients, the stockholders, with the result that a dividend paid credit is not allowable anc the personal holding company surtax is assessed. it would seem fair that the law should be changed to allow personal holding companies the benefit of these excess losses inasmuch as under the 1939 Revenue Act they are the only class of corporations still subject to the $2,000.00 capital net loss limitation. (Effective after the year 1939). The effect of not being able to receive the benefit of these losses, for dividend paid eredit purposes, is that personal holding companies may find themselves, due to circumstances entirely beyond their control, in the position of paying a large tax, or in fact, the whole of the tax paid upon their Title 14 net income, when, as a matter of she an actual loss has been sustained Cirsult or logs by the company. Another serious problem has arisen as an outcome of a recent Court of Appeale decision wherein the court decided that the gain to a corporation arising through non-taxable or non-recognized transactione for income tax purposes must, nevertheless, be used in deter- mining whether or not dividends are paid out of earnings acecwaulated since March 1, 1913. The court decided that the words “earnings or prefite* are words in comson use and are to be given their plain, ordinary and commonly understood meaning in considering earnings or profits. It was alee stated that Congress was aware of the distinction between net income and taxable net income and the provision that certain gaine or profits should not be recognized in computing taxable income shows that Congress realized that as commonly understood they were nevertheless gains or profits.