The New York herald., 1922-12-03
Big STOCK DIVIDENDS 4
RESULT OF HYSTERIA
Financial Interests Per-
turbed by New Ruling
Against Trust Funds.
FEAR FOR THE FUTURE
Mark Eisner Shows How
Congress Could Make
Retroactive Levy.
COMPANIES CAN'T ESCAPE
Supreme Court Has Still to
Decide Whether Excise May
Work Backward.
COMPANIES CAN'T ESCAPE

the ruling or the solicitor or the In
ternal Revenue Department on No
vember 20, under which the bene-
ficiaries of trusts receiving stock divi
dends are required to pay income tax
on those dividends to the extent of
their fair market value at tho time of
the disbursements.
The ruling followed tho capitaliza-
ton OF surpluses and the declaration
OF stock dividends by long list of
corporations whose hysteria was
caused largely by belief that the 200
per cent. stock dividend declared early
in the fall by the Gulf OIL Corporation,
which is dominated by the family to
which the Secretary Of the Treasury.
Mr.. Mellon. belongs, was the result Of
inside information concerning future
tax legislation.
The Importance attached to the rul-
ing of November 20 has caused the
country's large financial interests to
send their tax attorneys to Washington
to obtain official Interpretation OF the
order. The effort to get its exact mean
ing eventually may take the entire sub
ject of stock dividends again before
the United States Supreme Court.
Perhaps Corporations DO Not
Know"
The following construction was placed
on the ruling by Mark Eisner. formerly
collector of internal revenue for the
Third district of New York:
There is little doubt that IL this rul-
ing is sustained by the courts large
tax liability will be established on in
sufficiently important to prevent the
declaration of stock dividends in the
first instance. While it may be true
that some corporations may have valid
reasons for stock distributions, II is
equally true that other corporations are
laying themselves open to osinvestigation
and scrutiny and are accomplishing
nothing of value to them by such decla-
rations.
Nothing in the history OF taxation
recently has occasioned more loose talk
and thought than the surplus situation.
There has been a tremendous amount
of guessing as to the reasons why large
corporations have declared stock divi-
dends, without serious thought to the
fact that perhaps these corporations
themselves are doing nothing but guess
ing Certain Il Is that most of the divi-
dends would not have been declared
with reference to existing law. and
many have been declared to avoid pos
sible future legislation. the exact nature
of which no one is in position to
divine.
This much. however, can be accepted
- tat, 4Arc
with radical tendencies are going to go
cunning after any corporations they will
probably center their attack first on
those concerns which. by the hasty dec
laration of stock dividends have indi-
Gated that they are afraid OF something.
IN other words they have made shining
marks of themselves for radical inves-
tigation and attack.
"Great Contagious Hysterin."
TO the calm observer there Is n great
deal OF contagious hysteria In what has
been going on. First of all. Section 220
OF tho Act OF 1921. dealing with unneces-
sary surpluses. Is but q reiteration of
the declaration contained In prior rcve-
nue. acts. IL IL to all intents and pur-
poses unavoidable. and the most active
Commissioner OF Internal Revenue would
find II almost impossible to collect any
tax for the Government so fas an en-
forcing that section is concerned.
80 rdiiculously worded is. this section
that a man might place all his dividend
paying stocks I'm a holding company and
allow the dividends 20 accumulate with
out paying n dollar OF tax to the Govern
ment. because Section 22o adds a penal
tax only to the net income OF corpora
tfons coming within its provisions; and
- ,t H.
deduction of dividends received from
other corporations In order to arrive at
the net income. and consequently n
corporation has no income other than
dividends of other corporations. II will
have no net INCOME within the law on
which 10 levy either the 12h per cent.
tax or the penal tax OF rs per cent.
so II seems that everything that is
now being done IS with reference TO the
future. II II quite apparent that under
tho Constitution OF the United States
Congress cannot tax surplus by any d.
rect tax, except by apportionment. which
II physically impossible. Hence corpora
tions have nothing TO fear on that score
All discussions of this subject Il vain
and ~ can be stated with every degree
OF positiveness that there viii be no d.
rect tax on surpluses.
INK nttEht bc retroactive.
Suppose Congress should resort TO
method OF taxing stock dividends, which
seems TO bo In favor with some tax at
rorneys; namely, 20 tax- a corporation.
on the privilege OF declaring and paying
stock dividends, on tho theory of an
excise tax. Corporations which have
Just declared stock dividends will only
escape a retroactive tax IL the Supreme
Court holds In cases now pending that
Congress cannot paes retroactive ex-
else tax and the declaration of a stock
dividend now will be unavailing II the
court should not 30 hold
Suppose Congress should retroac-
lively levy an additional income tax
on corporations for a number OF years
past, where an undue accumulation OF
surplus has manifested itself The dec
aration OF stock dividends now would
not help "a corporation any.
Another thing worth considering IS
The fact that the language OF the Su-
Dreme Court in the stock dividend cases
3 being interpreted by the Treasury
Department In a number OF cases in
avor OF the Government and against
he taxpayer with seeming ground fer
Justification.