The news scimitar. (Memphis, Tenn.) 1907-1926, 1920-03-19
Public Discussion
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3 STOCK DIVIDEND EXEMPTIONS 3
ACKNOWLEDGEMENTS


To The News Scimitar:
Your leading editorial in this after
Moons paper under the caption "A
Travesty," Is based upon premises so
erroneous, and the conclusions expressed
| are therefore so misleading that l am
sure you will be glad to have your at
| tention called thereto,
You state 1.-THE decision of the supreme
| court has relieved the individuals, great
and small, of payment Of taxes on stock
dividends and passed the burden to
| those who have no profits, no dividends
and no surplus, The tax is taken off
the dividends OF one man and added TO
| the cost of another's meat and bread, y
This statement, together with others
which occur In following paragraphs as
| to the effect this decision will have upon
the excess profits tax to be paid by
corporations convinCes me that YOU
have entirely misunderstood the courts
decision.
The court held that a stock dividend
was merely bookkeeping adjustment,
This, ! think, can be made entirely
clear, II we keep in mind the differ
ence between stock dividend and a
dividend on stocks A great many peo-
pie use the two expressions synony-
mously and there seems to be much con-
fusion in the public mind regarding
them.
dividend on stocks is a payment
from the surplus earnings of the cor
poratlon. 1t Is paid in cash.
stock dividend is merely CONVEX
sion of the surplus into stock, lncreas-
ing the outstanding stock and decreas-
ing the surplus As the supreme court
stated, this is merely a bookkeeping ud-
justment. 1t has no effect whatever
upon the excess profits tax, 1t Is of no
advantage to the recipient unless he
sells It. To illustrate: | know Of a
Il,
the cotton business as factors 1t bad
a capital stock OF $685. 600 AMI a surplus
of the same amount. on this capital
stock 1t paid II dividend of 20 per cent,
or S26, 600. This corporation made
money SO fast that 1t converted It's on
tire surplus into stock. 1t did this by
issuing the stockholders additional stock
to the amount of Sl25,00O. The capital
stock was therefore Increased from
$l25, 900 to $3.50, 900 on which n divi-
dend of 10 per cent was paid. This, too,
amounted to S25, 1000.
This stock dividend, however will not
have the slightest effect upon the eX-
| cess profits which this corporation must
pay to the government, Excess profits
are figured upon the invested capital.
The invested capital is the difference
between the assets and undivided
profits. When this corporation had
Sl25,00C capital and $4,000 surplus, 1t
amounts In figuring it's excess profits.
When the surplus was wiped out by be-
ing converted into capital stock the
corporation In figuring its excess profits
was allowed S per cent on exactly the
same amount 1t used In figuring its
profits before the stock dividend was
issued.
The injustice Of taxing stock dividends
becomes Immediately apparent when we
now consider tho amount of excess
profits which that corporation paid to
the government. We will assume that
It's earnings for 1918 were $l00 600. The
invested capital, as we have seen at
stock and half surplus, The exemption
Of s per cent plus S., 900 gave the cor
poration credit OF 600 in figuring
its excess profits Using the 1919 basis
for figuring excess profits as the 1915
basis Ia rather complicated, the corpora
ton paid TO the government, tho fol-
lowing tax:
on 20 per cent OF In
vested capital 80. $50, 100000
Less exemption OF :. 100000
Balance subject to
tax at 20 per cent s.7, 900. oo--t $4,000
Over 20 per cent Of
invested capital. $50. 000.Ua
Subject to taH al
10 per cent..... ........., s9,OOo 90
Yo's! excess psOS. ..
It's YAK ..s.,s s.ssCsssss S.o'tVoNo
" 1919 sae Foue stockholders ~ this
corporation seCeiScd the stock dividend
! OF bl2b, 600. enc OF these stockholders
| holds SO pes cent OF the capital stock.
| His share OF the stock dividend, there
| fore IS so ner cent OF 100000. II the
| court had held that stock dividends were
| taxable, the surtaN RlOne on this dlvi-
| dend would be ~ per cent or S23,5lQ,
to say Nothing Of Inc ! PER cent eddi-
| tlonal for the normal tax In other
words the recipient OF this stock would
| have to pay t23,540 IN taxes for book
keeping entry which did not yield him n
cent in casa, but merely gave him a
stoca certificate 10 evidence the fact
that tho surplus funds OF tho corpora
| ton stood In his name and not that OF
the corporation,
! To follow tho effect Of this ,SaShPep-
| ing entry through into 1919, we find
that In figuring the excess profits tax
| for that year tho government Las lost
nothing for the invested capital remains
| the same.
| IN conclusion pern@ me to say that
| there has @ever been devised n better
scheme for taxlns money frora those
who know how TO make II and using II
| for the public benefit thar she present
| income, excess profits and inheritance
4 taxes OF the United States government.
For ten years l was an ardent slngle