Daily Kennebec journal. [microfilm reel] (Augusta, Me.) 1870-1975, 1922-12-19

earnings occurred they would be
liable for the surtaxes, but the
distribution might be postponed.
On the other hand, it would not
be desirable to compel corpora
tons Unfortunately to divide all
their earnings promptly. Every
growing business is constantly re-
curing more capital, and it is the
common practice. not only of cor
porations but of individuals and
partnerships, to allow a portion
of their earnings to remain in the
business each year for its develop
mept. The history of nearly every
important business will show that
it was built up in great degree by
so doing, and it would be serious
handicap upon the corporate form
of organization if It was not given
the privilege of building up by
this method. Moreover, it always
has been regarded as sound, con-
servative and praiseworthy policy
for a corporation to build up a
surplus account-representing sur
plus aSsets-over and above the
amount required to cover its obi
cations and outstanding capital
stock. The position OF the COR
poration as an industrial institu-
ton, as an employer of labor, as
borrower of money, as supporter
of trade, as a factor in many ways
in the regular life Of the commun-
ity, is strengthened by the policy.
1t appears that Congress took
these facts into consideration and
did not intend to interfere with
the normal and proper manage
ment of business. In order, how
ever, to provide against accumula-
tions of surplus" for which there
is not legitimate use, and which
there is good reason to believe are
held for the purpose of escaping
or postponing the application Of
the individual surtaxes of the Rev.
enue Act of 1921, section 22O, pro-
vides as follows:
That if any corporation, however created
or organized, is formed or availed of for the
purpose of preventing the imposition Of the
Surtdx upon It's stocknoIuerS or lnemDeIS
through the medium of permitting its gains
and profits to accumulate instead of being
divided or distributed, there shall be levied.
collected, and paid for each taxable year
upon the net income Of such corporation a
tax equal TO Is per centum of the amount
thereof, which shall be in addition to the tax
imposed by section $50 of this title.
The fact that any corporation is a mere
holding company, or that the gains and
profits are permitted to accumulate beyond
tte reasonable needs of the business. shall
be prima facie evidence of purpose to es-
cape the surtax; but the fact that the gains
and profits are in any case permitted to &C
cumulate and become surplus shall not be
construed as evidence Of a purpose to es-
cape the tax in such case unless the Com
missioner certifes that in his opinion such
accumulation IS unreasonable for the bay.
poses of the business.
Impossible to Distribute Invested
Surplus
If legislation is adopted for the
taxation of corporate surplus as
such, it is bound to have one of
two effects: 1t will either sacrifice
unjustly the interests of the stock
holders whose total incomes do not
make them properly subject to this
further levy, or it will force the
distribution of the surplus in cash..
which is practically impossible in4
the numerous cases where the sur-
plus has been accommodating for
many years, and is invested in
plant and working capital needed
in current operations. In either
case the legislation would cause
disaster. A tax levied upon sur
plus would be retroactive, reaching
back into what was left from tax
alton of all previous years. 1t does
not seem possible that Congress
will seriously consider such a pro-
posal, but evidently not a few
members of the next Congress arc
considering it.
Stock Dividends
Although in the case of a new
company surplus account is
sometimes started by the sale of
stock at a premium, corporation
surplus usually consists of un-
divided earnings. accumulated over
a term of years, and. as stated
above, does not exist in cash but
in the plant or working capital. 1t
buttresses and protects the regular
capital behind the issued stock,
preventing its impairment by I'M
expected losses. and this is one
reason why it is considered wise
policy to pay in a moderate surplus
with new capital.