The Washington herald., 1921-12-01
TAXLAW SECTION
SAID TO VIOLATE
{; PURPOSE OF ACT
Small Stockholders Able
To Evade> Surtax on
Dividend.
HELPS LARGE CLASS
Incomes Under $4,000 Find
Exemption Under
Section 201.
HELPS LARGE CLASS

NEW YORK. Nov. 3o.-Not every
section of the new income tax law
designed in the nature OF a penalty
or to counteract an evasion of tax
liability accomplished its object. in
the opinion of leading bankers. In
fact It may be quite the reverse.
For example, there Is Section 2o1
I'D relating to stock dividends.
After providing that stock divi-
dends shall not be taxable, tho Sec
tion goes on to say that II, after the
distribution Of a stock dividend. a
corporation proceeds to cancel or
redeem its stock "at such time and
in such manner as to make the dis
tributfon and cancellation or re-
demption essentially equivalent TO
the distribution of a taxable divi-
deni." the amount so received in
redemption or cancellation of his
stock by a stockholder shall be
treated as a taxable dividend, to the
extent OF the earnings or profits
accumulated by the corporation
since March 1, 1913.
One Instance of Failure.
This section was evidently de-
signed to guard against the issu-
ance of a stock dividend by a COM
pany, followed by redemption and
cancellation, ty which the stock
holder receives the value OF all or
part Of his stock, instead of issu-
ing a straight cash dividend which
would be taxable. The new law says
that such an operation. IL interpret
ed under the construction of the
phrase at such time and in such a
manner" is a roundabout way of
distributing cash to the stockholder
and will result III a taxable divi-
dend. But in many cases this is
what the stockholders themselve,
would have desired.
A dividend is subject only to sur
tax. being exempt from normal tax.
And the surtax begins with net in
comes of $500. Therefore that large
body of taxpayers whose income
not being over $4,000. does no,
brihg them into the surtax class,
will not have to pay tax on the
disposition of their stock in re-
demption or cancellation by the
corporation.
On the other hand. il this pro-
and the 1918 act still applied, these
taxpayers would have tax to pay.
For example: Assume A, with net
income OF $4,000, holds 100 shares
of a corporation bought at 65, or
$500 representing his Investment
(sfter March l. 1870. He receives
a so per cent stock dividend, after
which the stock sells at 80, and
thus has $50 shares represented by
his $500 investment, with a pres
ent market value of $4,000. Later
cat such time and in such a man
ner) the company redeems or can
cells 25 shares of AS stock at its
market value, paying $4,000 for it
Escapes Tax and surta1.
The 1921 law says this Is a tax
able dividend to A, which means
that A pays nothing in tax on it.
since his income is $4,000 (s4.0OO
plus this $4,000 received for his 25
shares) and he is not in the surtax
class which pays tax on dividends
. But IL the 1918 act procedure were
applied to his operation. without
this new provision. A would have a
tax to pay computed as follows;
The cancellation or redemption OF
the 25 shares for $4,000 would con-
stitute sale or othr disposition
for income tax purposes. The
basis for computing gain OF
loss on this disposition would be
obtained by dividing his $50 shares
into the original Investment of So
500 giving s43 as the basis per
share, or SLOTS for 25 of them
Then. on receiving $4,000 for the
25 shares in redemption or cancella-
tion, he would realize a profit fig
ured as the difference between 81
o75 and $4,000 or 1925 which, added
to $4,000. would give A an income
Of s4,925 subject to normal tax. in
stead of only $4,000 and the $4,000
entirely exempt as the section OF
the 1921 law permits