Evening star., 1922-10-21
|4)OPER CENT STOCK
| DIVIDEND TAX FREE
Secretary Mellon Answers
Query on Standard Oil
Company Stock.

The Standard Oil Company of New
Jersey shows no evidence. Of the
accumulation Of surplus beyond the
! reasonable needs Of the business"
Furthermore. in the past the company
| has been subject to full taxes upon
It's earnings" as a consequence OF
which there Is nothing further for
the government to tax in connection
with the reported 400 per cent stock
dividend, Secretary Mellon yesterday
wrote Representative Frear, republi-
| can. Wisconsin.
The letter was in answer to a Ques-
tion by the Wisconsin member. who
asked II the government in the case
OF Standard Oil COMPANY, had in
voked section 220 Of the revenue act
OF 1921. which. he said. provides
methods for reaching holders OF sur
plus stock when for the purpose OF
escaping taxation"
Secretary Melons Reply.
Mr. Mellon declared. with particu-
toned by Mr.. Frear. that section ego
had no relation to such dividend de.
clarations. He added that "it would
seem" that MIR. Frear was under a
misapprehension concerning the sit
uatton as to this so-called stoek
dividend"
I'm the case of this company tS;and-
ard OIL Company of New Jersey" the
letter continued. "the commissioner OF
internal revenue found no evidence
OF the accum ulation of surplus beyond
the reasonable needs of the business.
The Treasury Secretary also sta ed
that lit Is not practical in any active
business to divide all of the net earn
ings among the stockholders. II part
OF the earnings were not put back In
the business. he declared. there would
be no inductrial growth.
You refer 10 section 2s0
and you ask" the Secretary's letter
continues. whether this statute has
been invoked by this department or
considered In the case of any corpora
sidered In reaching the surplus earn
ings held by the Standard Oil Com
pany.
Sees MisapprehemsiOn Of Facts.
Il: would seem that you are under
misapprehension concerning the
situation as to this so-called stock
dividend. Taking for illustration the
Standard Oil Company Of New Jersey
to which you refer. the holder Of Its
certificates or shares has altogether
no more than he had before and there
fore. SO far as the holder is concerned.
there Is no income to tax. This was
aptly expressed by the Supreme Court
In Eisner VS.. Macumber tstock divi-
dend case).
Section o2o does not apply to the
situation relating to these stock in
creases. 1t provides that II any cor
noration is formed or ayailed of for
the purpose OF preventing the i'm I'M.
stockholders through the means of
permitting its gains end profits to
accumulate. there shall be levied a
tax of % per cent OF the amount
thereof In addition to the other taxes
further provides that the fact that
the gains and profits ars permit ted
to accumulate and become surplus
shall not be considered evidence OF
less the commissioner Of internal
revenue certif1es that in his opinion
such accumulation is unreasonable
for the purposes Of the business. In
every case. therefore. IT is neces-
missioner of internal revenue deter
mine that the accumulation OF the
SURPLUS Is unreasonable for the pur-
poses of the business before 1t can
be held that the corporation was
Of evadin4 the imposition of sur
taxes.
Only Reasonable Reserve.
The declaration of a stock dividend
Is not significant In connection with this
section Of the statutes. nor has 1t any
relation to a determination BY the COM
missioner. under section "2O. The
primary purpose OF section Zze Is 70 70
which is usually closely held and the
earnings and profits Of which are ac-
cumulated for the purpose OF enabling
the shareholders to avoid the payment
of surtaxes upon their dividends.
''As to the question OF the accumuia,
ton OF surplus by the Standard OIL
Company Of New Jersey out Of past
profits. this company. believe. had over
5000, 100000 OF surplus which was ac-
cumulated before the passage OF the In
come tax Law in 1918. and the accum-
ulations 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 to full taxes upon Its earn
inss-some Of it under the excess profits
and war taxes at the then high prevail
ing rates. 1t is not practical in any
earnings in dividends to the etockhold-
ers, and II part of the earnings were
not put back into the business there
would, be no progress or industrial
growth. In the case Of this company
the commissioner OF internal revenue
has found no evidence OF the accuinula-
ton Of surplus beyond the reasonable
needs Of the business.
IT have gone into this detail as to the
Standard OIL Company of New Jersey
as you make this company the example.
but the same principles apply generally,
and 30 far as this department is con-
cerned. there will be no laxity in invok-
Mig the application 81 section 22o
wherever there is any basis for so
doing"
EUROPE'S GRAIN DEMAND