New-York tribune., 1922-12-01

profits are IN any case permitted TO
accumulate and become surplus shall
not Re construed o. evidence Of a pur-
nose 10 escape as evidence the Commis-
rioner ccrti es that sucf accumulation
j. unreasonable for the purposes OF
the business.
Tax II Conditional
Under the terms Of this provision
the tax on undistributed surplus at
tachcs only under certa n conditions
namely. that the accumulation u be-
yond the reasonable needs Of the busi.
ness. What the reasonable needs
the business are depends entirely upon
the particular corporation. IL wouid
not be possible 20 enumernte briehy
all the ways In which "a ms and prohts
Of corporation may be accumulated
'or the reasonable needs OF the ousi-
ness. Un'igtr.brted income - properly
accumulated II invested IN increased
inv,ntor.es or additions 10 plant rea'
sonably needed. Likewise, IL II prop
erlv accumulated II retained for WORK
ing ca-itnl rea~ ircd By the business, o,
4 placed 90 the credit OF a nhns
fund for the purpose Of retiring bonds
.-sred BY the corporation In accord
Ance with contract obligations.
The purpose cf this section needs
no comisent. a. Il Is clearly stated
in the language Of the law. II Is 10
imposc a tax on the income Of a cor
poration which accumulhtes income IN
o~cers OF the needs Of the business
in order b prevent the imposition OF
the surtax. 4 certihcation Of this fact
bv tho { mmisri3ncr Of Internal Rev
cnuc, as prescribed by the statute, Is
made prima facie evidence Of an IN
tent TO oscspe surtax but may be re-
butted by evidence showing that the
accumulation is reasonable. How many
7 corr ,rat. ons can be reached under this
section? I think thc answer IS clear;
/ only those eases intended by Congress,
namely. IN Sc which have accumulated
, income rurposcly TO eyade taxation
there.f In the hands Of the shnrehold.
4 erg. These cases are exceptional and
4 this Is borne out by the fact that 50 Tar
as il knowa no assessments have been
made under this or similar provisions
under earlier laws.
What hes been said with respect tc
/ Section 22O shows merely the scope
/ Of It's application. Assuming that thi
/ section Of the law may be enforced
/ against corporation. how would its
/ application be affected by the issuance
/ OF stock dividend? The tax IS on The
net income, II there have been un-
\ feas- nabie Gccumulstiors. A stock
I dividend Us not distribution OF Ia
come within TIC meaning Of the tax
/ law and its issuance, therefore, would
! rot seem 10 have any effect on the tax
I Of c-rpor"tion otherwise amenable
/ 20 Section 220.
Und,s:rIbuted Surplus Tax UnSound
The trend Of future tax legislation
is .ubtful. OF the proposed taxes that
most feared by corporations at the
present time seems 70 be tax on uu-
/ distributed surplus. No very definite
statement appears 10 have been made
! by It's proponents as 10 the form IL will
take, but any tax which forces the
distribution Of profits is subject TO
very serious economic objections.
In many industries profits huctuate.
Some years may show large profits;
others, losses. The average may be
but air return on the capital. a safe
portion of which is paid in dividends
TO stockholders. Again. many corpora
tions are bound TO devote consider
able portion OF their income each year
% the liquidation Of indebtedness. A
heavy tax on undistributed income
would be actually destructive in these
cases. Then, again. the success Of
young and grywing business depends
argely upon a conservative policy in
the distribution Of earnings. A forced
distribution Of income might be ruin
Gus 20 the development Of such con-
Germs. These are but few cases
which would argue against such tax.
and others could be enumerated. OF
course, many OF these difficulties might
be remedied, but to attempt 70 do so
would make a most complicated Law
and in the end We should probably
have p provision no broader in scope
or more effective th7n the existing
Section 220. Unquestionably there Is
.neq.al.ty in the existing tax on cor
porations. II. however. taN on un-
distributed earnings is the only re-
dress, the remedy may be far more
yiciO"s then the defect
Il is claimed that the possibility Of a
tax on surplus has prompted the dee
laratiCn Of stock dividends. What ef-
feet would q stock dividend have on
such a taxi II Congress should impose
a tax on undistributed income ard pro
vide that capitalization Of such income
would exclude IL from the taxable sur
plus. stock dividend would be very