The Washington herald., 1920-08-06
DIVIDEND
VS.. INCOME TAX
Internal Revenue Bureau
Makes Public Rulings
Under Court Decision.

The Bureau of Internal Revenue
yesterday made public it's rulings
under the decision Of the United
States Supreme Court in the case or
Eisner versus Macomber. affecting
the taxation OF stock dividends un-
der the income tax laws. The ruI-
ings cover questions which will
most frequently arise in determip-
ing how stock dividends are 70 be
determined and treated and dis
tinguished from other dividepds
They are as follows: Where a cor.
poration, being authorized so 10 do
by the laws Of the State in which
is Incorporated, transfers a portion
OF it's surplus 20 capital account, is
sues new stock representing the
amount of the surplus so trans
ferred and distributes the stock 50
issued TO Its stockholders such stock
is not income to the stoclholders
and the stockholders incur no liza
bility for Income tax by reason Of
its receipt
Where a corporation, being th.---
unto lawfully authorized, increases
its capital stock and simulta-
neously declares a cash dividend
its capital stock. and gives TO its
stockholders a real option either to
keep the money for their own or
to reinvest IL in the new shares
such dividend is a cash dividend and
is income TO the stockholders
whether they reinvest IL in the ne
shares or not.
where a corporation which IL
not permitted under the laws of the
State in which IL is incorporated 70
issue a stock dividend, increases its
capital stock and at the same time
declares a cash dividend under an
agreement with the stockholders 10
reinvest the money so received IN
the new issue Of capital stock. such
dividend is subject to tax as income
to the stockholder. q,
where a going corporation haV-
ing a surplus accumulated in part
prior to March /. 1913. and being
thereunto lawfully authorized
transfers TO its capital account q
portion Of its surplus. issues new
stock representing the amount -
transferred 10 the capital account
and then declares a dividend pay
able in part in cash and in part in
shares OF the new issue Of stock
that portion OF the dividend paid iu
cash will be deemed to have beer
paid out OF the surplus accumulate
since March ], 1913. and is subject
TO tax, but the portion OF the divi-
dend paid in stock will not be sub,
ject to tax as income.
"A dividend paid in stock OF an.
other corporation held as a part
Of the assets OF the corporation
paying the dividend is income TO the
stockholder al the time the same is
made available for distribution tc
the full amount Of the then marke,
value OF such stock. This ruling is
based upon the decision OF the SU-
preme Court OF the United States
in Peabody V. Eisner C247 o S. 547D
which was not modified by the case
Of Eisner Y. Macomber. II such
stock be subsequently sold by the
stockholder the difference between
its market value at date Of receip,
and the price for which IL is sold
is additional income or loss TO him
as the case may be.
The profit derived by a stock I
holder pom the sale Of stock re-
/ ceived as q dividend is income ~
! the stockholder and taxable as such
! even though the stock itself wa
| not income at the time OF its re
Ceipt by the stockholder. For th'
/ purpose OF determining the amount
/ OF gain or loss derived from th'
/ sale Of stock received as a dividend
/ or Of the stock with respect q
which such dividend was paid. th,
I cost OF each share Of stock Cpro
vided both the dividend stock an,
the stock with respect 70 which 6
is issued have the same rights an
preferences) is the auotient Of tn
cost Of the old stock Cor its fsi
market value as OF March l, 1913. 6
acquired prior TO that date) divideD
by the total number OF shares o
the old and new stock