New-York tribune., 1922-12-01
Says "MeTons"
Are Not Cut
To Evade Tax
Undistributed Surplus Or
d'nariIy Free From Levy,
Declares Assistant Treas
urer of Guaranty Trust
No Gain to Stakeholder
Any Future Legislation
Against Undivided Prof.
its Is Called Unsound
By Morris F. Frey

Assistant Treasurer, Guaranty Trast
Company Of New York
Much interest has recently been
shown in the declaration Of stock div
idends by corporations. Persistent
effort is made to attribute these dis-
tributions in stock TO their effect upon
taxation. 1t may be that some Of the
later distributions have been prompted
By the belief or misbelief that such
dividends may prevent the imposition
Of heavy taxes under the present law
or give relief from certain forms Of
taxes which have been proposed for
future Legislation, and this attitude
has no doubt been encouraged oy the
fact that the probab impending def
cit for the current year Of over S,OO,-
00o, 900, and the possibility Of increased
expenses due to new legislation may
make necessary the imposition Of new
taxes.
In considering the relation Of stock
dividends 10 taxation, aside from any
other consideration for their issuance,
the question should be looked at from
two viewpoints: First, their effect
With respect to the present tax law
and, second. their effect with respect
70 future legislation.
Not Distribution
Under the present tax .sw the recip-
lent OF stock dividend is not taxable
unless the stock is sold at profit The
Sup. eme Court, in the case of Eisner
agt. Mseomber, settled this question
holding that a stock dividend really
takes nothing from the property Of the
corporation and adds nothing 20 the
J holdings of the stockho.der, and that,
/ consequently, such distribution does
not constitute income. So, from the
standpoint Of the shareholder. his tax
abe status is unchanged by an in
crease In the number of shares which
he owns by his receipt Of stock divi-
dend. Likewise, with respect 10 exist
ing Federal taxes, il wou d appear that
the is no advantage or disadvantage
resulting 10 the corporation from the
issuance Of stock dividends.
Some confusion seems TO have arisen
in regard to the application Of Section
220 OF the revenue act Of 1921, which,
under certain conditions, imposes tax
on undistributed surplus. This section
provides that Il any corporation IS
formed or availed Of for the purpose
Of peventing the imposition Of the
surtax upon its stockholders or mem
oers through the medium OF permitting
it's gains or profits TO accumulate, in
s.ead Of being divided or distributed,
there shall be collected for each tax .
bic year upon the net income Of such
corporation a tax Of 20 per cent in ad-
dition to the regular income tax. BY
agreement with the Commissioner Of
Internal Revenue, in lieu Of this tax
the shareholders Of such corporat on
may pay tax upon their distributive
shares of the net income Of the corpo-
ration for the taxab. year in the same
manner as a membe. Of q partnership.
This section specifically pro- ides
that the fact that the corporation IS a
mere holding company, or that gains
and profits are permitted TO accumulate
beyond the reasonable needs Of the
business shall be prima facie evidence
Of a purpose to escape the surtax, but
/ that the fact that such gains and