BY CHARLES F. REINHARDT Partner, Los Angeles Office
Presented before the Seventh Annual University of Denver Tax Institute — September 1957
Recently I attended a dinner where the guests were certified public accountants. The face of the dinner menu represented a Federal income tax return for reporting income received during the year ended December 31, 1914. The net income so reported was subject to a normal tax of one per cent after deduction of the personal exemption. The net income in excess of $20,000 and not in excess of $50,000 was subject to an additional or super tax of one per cent. At such rates, an individual having net income of $50,000 was required to pay a tax of about $800.
We have come a long way since 1914 in many areas and whether we have made progress is for you to decide. In the field of income taxation we have experienced a great increase in rates. These rates have become so high and their application to members of the population so broad that everywhere one goes he hears people talk of deductions and capital gains. Everyone is striving to treat his income, to the extent possible, as a long-term capital gain.
The high tax rates applicable to individual incomes seem to me to result in greater use of the corporate form in conducting business. Under the corporate form of operation the corporation's net income is subject to a tax rate presently not in excess of 52 per cent and, subject to certain limitations, the net income can be accumulated in the business. Some of our largest so-called growth corporations clearly indicate what can be accomplished in this area and each one of us, in his own practice, can recall small-sized clients who have been able to build up substantial equities by operating policies calling for retaining earnings in the business.
The earnings thus retained in the business may be distributed in three general ways. One method consists of distributing such earnings as ordinary dividends but it is not pertinent to this paper. A second method consists of completely liquidating the corporation by distributing all its property in exchange for its stock. A third method consists of redeeming a portion of the outstanding stock and continuing the business by the company.