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24 Taxes 649 (1946)
Give Section 109 a Transfusion

handle is hein.journals/taxtm24 and id is 667 raw text is: GIVE SECTION 109 By SEYMOUR S. BERDON A TRANSFUSION A discussion of the Western Hemisphere Trade Corporations section by Mr. Berdon, a Certified Public Accountant of New York C ONFUSED SEMANTICS are a major cause of confused legislation. The symp- toms are akin to atrophy: a piece of law is written to carry out a specific legislative interest, yet the way that interest is ex- pressed causes the operation of that partic- ular piece of law to falter and stumble and get nowhere. It is one of the most difficult jobs of a legislator to phrase law in such a way that it reflects legislative intent with clarity and exactness. To use understandable language free from ambiguities seems to be an art rarely brought to perfection. But it is not even sufficient ,to find the words which in their natural meaning seem to express what is meant. Words used in legal phraseology have connotations aside from their literary meaning; they have a history: their appearance in prior laws and regulations and their interpretation by ju- dicial decisions and administrative rulings affixes special shades of meaning. To use a word without regard to its legal history often leads to a distortion of the intent with which it is used. An example is the enactment about Western Hemisphere Trade Corporations. This is the designation for a domestic corporation all of whose business is done in any country or countries in North, Central, or South America, or in the West Indies, or in Newfoundland, as defined by Section 109 of the Internal Rev- enue Code. That provision was added to the law by the 1942 Revenue Act, which by amend- ment of Section 15 (b) of the Internal Rev- enue Code exempted Western Hemisphere Trade Corporations from surtax (in addition, Section 727 (g) provides an exemption from excess profits tax). The intent of that legis- lation is obvious, namely, to assist domestic corporations in their competitive fight with foreign interests in the Western Hemisphere, outside the United States. Yet what have been the practical workings of this section ? Give Section 109 a Transfusion The following analysis of the law tries to show the difficulties which a corporation is likely to encounter in its attempt to comply, not with the generous spirit, but with the niggardly letter of the law. Conditions for Exemption from Surtax The tax advantage (exemption from sur- tax) is dependent upon the fulfillment of two conditions: 1. Ninety-five per cent or more of the gross income of such domestic corporation for the three-year period immediately pre- ceding the close of the taxable year (or for such part of such period during which the corporation was in existence) must be de- rived from sources other than sources within the United States; 2. Ninety per cent or more of its gross income for such period or such part thereof must be derived from the active conduct of a trade or business. The first of these two conditions is the object of this analysis. It states that ninety- five per cent of the gross income must be derived from sources other than sources within the United States. Section 119 of the Internal Revenue Code defines the meaning of the phrase sources within the United States. It says (subdivision (e)) that gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, shall be treated as derived partly from sources within and partly from sources without the United States. This means that a manufacturing corpora- tion cannot reasonably qualify itself to take advantage of and comply with the law as it stands, because a considerable part of its

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