be made to the State Tax Commission, the italicized words shown at the end of the following paragraph:

"2. The amount of its net income for its preceding fiscal or the preceding calendar year as shown in the last return of annual net income made by it to the United States treasury department, and if the corporation shall claim that such return is inaccurate, the amount claimed by it to be the net income for such period."

The amendments of 1919.-While the 1918 amendments were designed to make the law constitutional, the amendments of 1919 were intended to clarify the construction placed upon Section 209. Under the former section many corporations contended that the net income upon which "the corporation was required to pay a tax to the United States" meant the total net income returned to the Treasury Department, less the excess profits tax. The Legislature of 1919, therefore, inserted the word "entire" before the words "net income" in the several places where they occurred in the statute, and in Section 208 of the new law, under the heading of "Definitions," added the new paragraph defining net incomes,

supra.

The excess profits deduction.-The confusion that had arisen in relation to the construction of the statute was largely due to the fact that the original New York law provided that the tax be based on the net income "upon which such corporation is required to pay a tax to the United States." Both the federal income tax and the federal excess profits tax are based on a report of "net income on which corporations are required to pay a tax to the United States." In the case of the federal income tax, the excess profits tax is deducted before calculating the amount upon which the corporation is required to pay a tax to the United States. This is done in accordance with Section 29 of the federal income tax law of September 8th, 1916, as amended by the act of October 3d, 1917, which reads as follows:

In assessing income tax, the net income embraced in the return shall also be credited with the amount of any excess profits tax imposed by act of Congress and assessed for the same calendar or fiscal year upon the taxpayer.

The excess profits tax, however, is determined on the whole amount of net income returned by the corporation. The state tax commission has made a ruling that the net income which the New York law required to be returned as the basis of the tax, is the "total net income required by answer No. 8 in form No. 1031, of the federal corporation income tax return, from which the excess profits tax has not been deducted."

The corporations' contention.-Attorneys representing corporations, which, under this ruling, would be obliged to pay heavy taxes on their entire net income including the charge represented by the excess profits tax, objected to this decision of the state tax department on the ground that it was not a fair construction of the statute. They contended that at the time the state income tax law was passed on June 4th, 1917, it was the intention of the New York Legislature to create a tax burden falling equally upon all corporations directly proportionate to their net income or profits. The tax was to be paid by each corporation "upon the basis of its net income for its fiscal or calendar year next preceding, as hereinafter provided, upon which income such corporation is required to pay a tax to the United States." Although the word "income" was not repeated before the word "tax," it was the income tax of the United States to which the statute had reference and to no other tax. They argued that the federal law of September 8th, 1916, provided that in arriving at the net income, the federal income tax should be deducted; that there was at that time no excess profits tax payable to the federal government; that the federal act of October 3d, 1917, was passed and amended the income tax act of 1916, by providing for an excess profits tax in addition to the income tax; that the amended federal act provided that in arriving at the taxable net income the income tax should not be deducted, but that the excess profits tax should be deducted. That the federal tax therefore ceased to be imposed upon the same net income; that in order to continue the imposition of the New York tax upon an equal (net income) basis, the state law was amended so that the corporation might report its actual net income, viz., the income after

the deduction of the excess profits tax. This was the true net income on which the corporation paid a tax to the United States. To carry out this purpose, the New York amendment was to be "construed as having been in effect

original enactment of the New York law."

as of the date of the Hence federal income state law, and excess

taxes were to be deducted under the 1917 profits taxes were to be deducted under the 1918 New York law. This in each case would result in net income from the corporation's standpoint.

Massachusetts and Connecticut laws.-Two recent decisions of sister states, on this question, are worthy of notice. The first is the opinion of the Attorney-General of Connecticut, dated March 1st, 1918, in relation to the Connecticut income tax law of 1915, and the other is a decision of the Supreme Court of Massachusetts, in American Printing Co. v. Commonwealth of Massachusetts, construing the net income tax on corporations, reported in 120 N. E. 686. Both decisions permit a deduction of the excess profits tax. The Massachusetts income tax law is almost identical with the Connecticut law and the Connecticut law is similar in language to the New York law. In both cases it was required that every corporation should render to the tax commission "a true copy of the last return made to the collector of internal revenue, of the annual net income and such other information as may be requested by the United States treasury department for the purpose of ascertaining the total amount of net income taxable under the United States income tax act; the net income of such corporation after making the deduction authorized." "The laws of each of these states requires a tabulation of all the particulars by which the United States arrives at the net income subject to the tax, and appropriates it as part of its own method of computing the net income. No opportunity for correction or change is permitted either by the corporation or by the tax commission of those states. The treasury department ruling is binding on that point. The main points of difference are: (1) that the Massachusetts and Connecticut laws are income tax laws and based on net income; (2) that

the wording of the Massachusetts and Connecticut acts is essentially different, being based on "net income taxable under the United States income tax act." (3) The New York law uses the result of the federal return as far as the total net income is concerned, for the purpose of information and assessment, but reserves to itself the right to ascertain what is net income in case of inaccuracy or error, while the Connecticut and Massachusetts laws leave no discretion in the tax commissioner but oblige him to accept the net income as determined under the federal rules and regulations.

The State's Contention.-The New York Legislature adopted as the basis for the franchise tax on manufacturing and mercantile corporations the figure "reported" as "net income" to the federal government in the returns made to that government, subject to correction by the State Tax Commission for inaccuracies or errors which could have been corrected by the federal authorities themselves.

The definition of "net income" for purposes of this state franchise tax is found in Sections 211 and 214, which explain the provisions of Section 209. "Net income" means "entire net income" of the corporation.

The sole purpose of the state legislation of 1918 amending Article 9-a so as to make the net income, taxable under the state law, "presumably" the same as the net income taxed by the United States and permitting corrections by the state tax commission for fraud, evasion or errors, was not to require the state tax commission to accept in every instance as a matter of law the figure showing the net income reported to the United States by deducting the income taxes paid and crediting the excess profits taxes paid to the federal government, but simply to protect the constitutionality of our statute by making the assessment of net income under the state law a proceeding separate from the assessment of net income under the federal laws.

The amendments of 1918 did not cut away the basis of assessment. The state franchise tax was still to be computed on the "net income" of the corporation for the "preceding" year as "re

turned" to the federal government. Errors or inaccuracies of fact could be changed (such changes as the federal administrative authorities themselves could make), but the underlying method of arriving at net income found in the federal laws which set forth specifically the deductions permitted from gross income, was still retained by the state law. Whatever was "net income" and was reported as such under federal laws was basically the "net income" under the state law.

The state was not taxing income at all, but was assessing a state franchise privilege by a single tax on the value of the exercise of the corporate franchise within the state for the previous year, with no concern of the amount of tax a corporation had paid to the federal government whose jurisdiction to tax was a matter wholly apart from the state's right to tax that corporation.

The court's ruling.-The issue was finally presented to the Appellate Division of the Third Department, in People ex rel. Barcalo Manufacturing Company v. Knapp and People ex rel. American Broom & Brush Company v. Knapp, et al., etc., in April, 1919, and decided in favor of the State. Justice Woodward saying in the opinion of the Court:

"The rule seems entirely simple. The presumption is that the 'entire net income' returned by the corporation to the United States treasury department is the real net income of the corporation. If the corporation, in its return to the State, finds that it has erroneously stated any fact in its report to the United States it is privileged to state the amount claimed by it to be the net income, and the state tax commission is authorized to make corrections for 'fraud, evasion or errors' so that the actual 'entire net income' for the year involved shall be made to appear, and upon this basis the tax of 3 per cent. is imposed for the privilege of exercising corporate franchises in this

state.

"In the cases now before us, the state tax commissioners have followed the statute literally; they have taken the 'entire net income' of the corporations involved, as returned to the United States treasury department, and no questions of fraud or evasion are involved. The relators contend, not that there is anything wrong with their returns to the United States, but that in some manner the United States statutes operate to change the law as it appears from a literal read