TENTATIVE September 13, 1939. MEMORANDUM Ri: SURTAXES ON PERSONAL HOLDING COMPANIBS: The first surtax on personal holding companies was that imposed by Section 351 of the 1934 Act which provided that upon the undistributed adjusted net income of every personal holding company a sur- tax of 30% of the amount of such income not in excess of $100,000.00, plus 40% of the amount thereof in excess of $100,000.00 would be levied. The reason for the enactment of this law, contained in an extract from the Ways and Means Comnittee report, is quoted as follows: "Perhaps the most prevalent form of tax avoidance practiced by individuals with large incomes is the scheme of the “incorporated pocket book". That is, an individual forms a corporation and exchanges for its stock his personal holdings in stock, bonds, or other income-producing property. By this means the income from the property pays corporation tax, but no surtax is paid by the individual if the income is not distributed*. buted The 1936 net income adjusted varying rates Act changed the rate of tax applicable covering all amounts in excess from 8% to 487. The Revenue Act of 1937 provided that adjusted income not in excess of $2,000.00 would be amounts in excess of $2,000.00 at 75%. of to undistri- $2,000.00 with all undistributed taxed at 65% and all Under all revenue acts the surtax on personal holding companies has been in addition to the tax imposed on ordinary business corporations. While the general purpose of the tax is to reach corporations which are formed or availed of to prevent the imposition of a surtex upon the shareholders thereof, the law makes no exception for bona fide business corporations which happen to come within the definition of a personal holding company. The income to be distributed by personal holding companies is net income, as defined in Title 1 of the various revenue acts, less certain deductions, arriving at a total termed "adjusted net income". There are fore arriving certain at deductions from undistributed computed. Among the deductions Revenue Act of 1936 were losses capital assets, disallowed by adjusted adjusted net net income income which upon are which made the be- tax Section 117(d) of the Revenue Act of 1936. in other words, the difference between the $2,000.00 capital 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 as a deduction in computing undistributed adjusted net in- come 20% of the adjusted The 1937 is from adjusted net income allowed under arising from the sale or exchange of net income. Revenue Act SCHOLEFIELD, CERTIFIED eliminated WELLS PUBLIC & BAXTER ACCOUNTANTS both of these deductions the