The New York herald., 1922-10-21
MELLON TO ENFORCE d.
STOCK TAX PAYMENT
Says There Will Be No LaxitycNr
in Invoking Section 220
Of Revenue Act.
HE REPLIES TO FREAR
Asserts Law Does Not Apply
to Specific Case of Stand :
ard Oil Of New Jersey. /.

ttai
WASHINGTON, Oct. 20.-Secretary Mel
Ion. replying tonight TO a letter from
Representative Frear (wis.). Republi-
can member OF the House Ways and
Means Committee, declared there has
been and will be no laxity on the part a
of the Treasury in invoking section 22o 4.
OF the last revenue act, which Mr.. Frear.xas
described as providing methods force
reaching the holders of surplus stock 3,
when held for the purpose OF evadnG. ~
taxation" ~
Mr. Frear referred to reports that the54 ,
Standard OH Company of New JerseyyH
would issue 400 per cent stock diyi-s.s-
dend and announced his intention of-.,t
leading fight to make income tax re- j.
turns public. in order, he said, to ~
close up escape sideways" grse,.
Mr. Mellon declared, however. wIthve4.
particular reference to the company h
mentioned by Mr.. Frear that section ~
22O had no relation to such dividendrls los
declarations He added that it would ,s.,
seem that Mr.. Frear was under misap- u
prehension concerning the situation as tor.
this so-called stock dividend. ,..t-
I'm the case of this company (Stand-, ,,s
ard Oil of New Jersey)," the letter COR r.4l
tinued. THE Commissioner of Internal ~
Revenue found no evidence OF the ac-
emulation Of surplus beyond the rea-
sonable needs of the business" ic3'
The Secretary also stated that it iss2e.
not practical in any active business to- ~
divide all the net earnings among the ~.
stockholders. If part of the earnings gl
were not put back in the business. he
said. there would be industrial
growth. 49,
you refer to section 220 and'qs
you ask" the Secretary's letter adds
ffxkyhp fIat~ 1fa tttta haa ft.x.
by this Department or considered in the7s.i
case or corporations, and whether il hass.a.
been considered In reaching the surplus
earnings held by the Standard Oil Com
pahy.' ocr
1T would seem that you are under az
misrepresentation concerning the stua 81,
tion as to this so-caied stock dividends ~
Taking for illustration the Standard Oih-Aa
Company of New Jersey TO which you s
refer, the holder of its stock after hos q
has received the new certificates or -.i
shares. has altogether no more than sr. z
he had before. and therefore. so far as I
the holder is concerned. there is no in
come to tax. This amply ex---2.
pressed by the Supreme Court in Eisner
VS.. Macomber (stock dividend easel.
Section 220 does not apply 10 the
situation relating 20 these stock in
creases. 1t provides that if any cor
poration Is formed or availed of for
the purpose of preventing the imposi- -
tion OF the surtax upon its stockholders ~
through the means OF permitting it's
gains and profits to accumulate. There -
shall be levied a tax of % per csht. Of =
the amount thereof in addition no the
other taxes imposed upon corporations.
but il further provides that the fact
that the gains and profits are permitted
to accumulate and become surplus shalls-
not be considered evidence OF the in+eHs
| tent TO escape the surtax. unless the 57s
! Commissioner of Internal Revenue ceres
/ tifies that In his opinion such accumu-sss ~
lation is unreasonable for the purposeSl'1
| of the business In every case. tnereon Y
! fore. IL is necessary under the statute N
that the Commissioner OF Internal Rev.
enue determine that the accumulation
OF the surplus is unreasonable for che
purposes of the business before it can
I he held that the corporation was :.
formed or availed OF for the purpose OF ~
evading the imposition of surtaxes. -.
The declaration of n stock dividend - Z,
Is not significant in connection with thia Z
section Il the statute, nor has II any,rr
relation TO determination by the COM -.
missioner under Section 220. The pri-
mary purpose of Section 220. is to reach
those corporations. the stock of which
is usually closely held. and the earnings, !
and profits OF which are accumulated /,
for the purpose of enabling the shares,
holders TO avoid the payment of SUR
taxes upon their dividends.
"As to the question Of the accumula--s =,
ton of surplus by the Standard OIL r-.
Company Of New Jersey out of past 4
profits this company ! believe. had = +,
over 100000. 600 of surplus which was,
accumulated before the passage OF thes d
Income Tax law in 1913, and the accu- *
mutations since that time have been ac-
cretions from earnings In addition to
dividends declared from year TO year.
but in all of these years the company ~
was subject 70 full taxes upon its earn
ings-some OF It under the excess profits
| and war taxes at the then high pre-. -
valing rates. sc1r
at is not practical in any active :
/ business to distribute all the net carnT-t
/ ings e. dividends TO the stockholders,
and II part OF the earnings were nobsl.
nut back into the business there would &
I he no progress or Industrial growth. In
| the case Of this company, the Commis
sjoner OF Internal Revenue has found' i
mo evidence of the accumulation of sur =
nlus bevond the reasonable needs of the
business
/ 81 have gone into this detail as u
tho Standard oil Company OF New Jerr~
sew as you make that company tha .
example. but the same principles apply.
generally. and 50 far as this Department. =,
/ Il concerned there viii be no laNity IT.,
i,vokinc the application OF Section 22J,.s
wherever there is any basis for 40 do-
ing"