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and surtaxes reduced, so that capital will not be inert and idle but will be willing to step out and take its chances in the world again, paying heed to the needs of national industry and our national resources and pouring itself into them. The moment you stop initiative in individual investment, you strike at the heart of national prosperity.

Our country has become what it is largely because great rewards have been offered to capital for its investment. It may always be that capital to an extent will be over-rewarded. You must over-reward capital so that it can lay up against contingencies which are largely unexpected, in order that it may advance conservatively and use its best efforts in the upbuilding of industry. The moment you stagnate capital by high surtaxes, you stop the development of national prosperity.

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A 1st B 2nd C 3rd D 4th E 5th F 5th

April 24, 1917 Sept. 24, 1917 April 4, 1918 July 9, 1918 Mar. 3, 1919 Mar. 3, 1919

June 15, 1917 Nov. 15, 1917 May 9, 1918 Oct. 24, 1918 May 20, 1919 May 20, 1919

372% 4 % 474% 474% 334% 434%

June and Dec. May and Nov. Mar. and Sept. April and Oct. June and Dec. June and Dec.

1932/1947 1927/1942 none/1928 1933/1938 1922/1923 1922/1923

and Victory Notes

By EDWARD H. MOERAN

CONVERSIONS

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1st 3125 2nd 4s 3rd 4448 4th 4445 Victory 334s Victory 4345

1st 3Y2s into rate of 2nd Loan
(1st 3Y2s into rate of 3rd Loan
1st 4s into rate of 3rd Loan
1st 312s into rate of 4th Loan
2nd 4s into rate of 3rd Loan
Victory 334s into Victory 434s
Victory 434s into Victory 3345

4 %
444%
414%
414%
474

June and Dec.
June and Dec.
June and Dec.
June and Dec.
May and Nov.
June and Dec.
June and Dec.

1932/1947
1932/1947
1932/1947
1932/1947
1927/1942
1922/1923
1922/1923

1st 4s
1st 4943
1st 4/4s
1st-2nd, 4745
2nd 4745
Victory 4845
Victory 3345

May 15, 1918
Nov. 9, 1918
Unexpired
April 24, 1919
Unexpired
Unexpired
Unexpired

432%

334%

NOTES RE CONVERSIONS:

1st 4s and 2nd 4s were convertible into the rate (if higher) of the next subsequent issue; there are, therefore, no 1st 4s con: verted into 1st-2nd 4/4s, nor are there any 2nd 2nd 4445.

The privilege of converting 1st 4s and 2nd 4s into 1st 4/4s and 2nd 4/4s, respectively, originally expired Nov. 9, 1918, but the privilege was reopened Mar. 7, 1919, and is still in force.

The 3728 may still be converted into long term bonds of higher rate subsequent to the 5th loan it issued prior to the termination of the war.

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*

Tax Exemptions
All of above issues exempt from federal normal income tax, state

taxes (except estate or inheritance taxes) and local taxes.
All of above issues qualify as admissible assets for purposes of

invested capital.
None of above issues exempt from estate or inheritance taxes

(federal or state).
A E and M full exemption from federal income surtaxes and

profits taxes.
F and L no exemption from federal income surtaxes and profits

taxes.
B C D G H J and K-limited exemption from federal income

surtaxes and profits taxes as follows:
Aggregate of B C D G H J and K (also treasury

certificates of indebtedness and war savings
certificates)

$ 5,000
Aggregate of B C D G H J and K re interest after
Jan. 1, 1919, until 5 years after termination

30,000
** Aggregate of BCDGH J and K re interest after

Jan. 1, 1919, conditional upon original sub-
scription to and continued holding at date of
tax return of 1/3 as many notes of Victory
loan and extending through life of Victory
loan

20,000
Aggregate of B C G H and K re interest after Jan.

I, 1918, until 2 years after termination of war,
conditional upon original subscription to and
continued holding at date of tax return of 2/3
as many bonds of 4th Liberty loan. ...

45,000
Until 2 years after termination of war..

30,000 Until 2 years after termination of war... 30,000

**

of war

***

*** D. *** J.

Total maximum exemption from federal

income surtaxes and profits taxes.... $160,000

* By virtue of ad Liberty bond act Sept. 24, 1917.
** By virtue of 2d Victory Liberty loan act March 3, 1919.
*** By virtue of supplement to ad Liberty bond act Sept. 24, 1918.

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Summary of Tax ExemptionsLiberty Bonds and Victory Notes
Notes re Tax Exemptions.

The above exemption of $5,000 marked * should not be confused with the exemption from federal income surtaxes and profits taxes of $5,000 bonds of the War Finance Corporation by virtue of war finance corporation act of April 5, 1918.

In New York state it is held by the taxing authorities that interest from United States obligations may not be excluded in computing corporation franchise taxes based upon net income or gross earnings, on the theory that the latter are not the things taxed but merely the measures of the tax. On the same theory the principal of or interest from United States obligations may not be excluded in computing "fair market value” or "capitalized net earnings" for purposes of the federal capital-stock tax.

In a decision of the court of appeals of the state of New York handed down November 23, 1920, in the case of The People of the State of New York on the relation of Alpha Portland Cement Co. (a foreign corporation), Respondent, vs. Walter H. Knapp and others, Appellants, dealing with certain phases of the New York state franchise tax, the opinion of Justice J. Cardozo contains the following statement :

"I think, therefore, that in substance, though not in form, in tendency, though not in name, this tax is equivalent to a tax upon relator's income.”

How far reaching the court's conclusion with respect to this particular point may prove to be remains to be seen.

The Journal of Accountancy

Published monthly for the American Institute of Accountants by
The RONALD PRESS COMPANY, 20 Vesey Street, New York, N. Y.
Thomas Conyngton, president; L. G. Henderson, secretary;

Hugh R. Conyngton, treasurer

A. P. RICHARDSON

Editor

EDITORIAL

Classification of Profits on Investments The January issue of THE JOURNAL OF ACCOUNTANCY contained an editorial entitled Classification of Profits on Investments, which seems to have aroused a good deal of interest and some opposition. Among the adverse comments received is a letter from John Bauer, who for many years has been an occasional and valued contributor to THE JOURNAL OF ACCOUNTANCY.

So that the matter may have full discussion we reproduce the substance of Mr. Bauer's letter herewith:

The leading editorial of the January number of The JOURNAL OF ACCOUNTANCY took a position opposed to the recent decision in the case of Brewster v. Walsh by the federal district court of Connecticut, holding that profits realized from the sale of investments or capital assets are not income and, therefore, are not taxable under the sixteenth amendment of the constitution.

The decision raises fundamental issues which should be thoroughly discussed in their various economic, accounting and legal aspects before a final determination is made by the supreme court of the United States. The issues are such as naturally to call forth uncompromising opinion in favor of or against the decision, and it is hardly safe to say what position the economists and accountants in general would take. I do believe, however, that the editorial brushed aside rather ungenerously the opposing opinion which might favor the decision. I doubt whether there is a single economist who approaches the problem from the standpoint that "whatever is spent is ipso facto income,” but there is a large group of economists who would consider the decision to square with sound economic principle.

The question at issue is, of course, one of economic fact and should be decided on that basis. As a nation, we decided upon a federal income tax and amended the constitution for that purpose. Any tax, therefore, authorized by congress should be limited to income and should not be levied on any other basis. The question, therefore, is: What is income? Is there a fundamental distinction between capital and income? Is increase in capital value income?

The economists who are in accord with the Brewster decision base their position upon the fundamental relation of capital and income. They

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