Evening star., 1925-11-06
j. STALLS TOMOVE
TOFREE EARNINGS
Rumored Treasury Decided
to Force Distribution
of SurpIuSes.
r. the Consolidated Press.

r.. the Consolidated Prese.
No new regula tionS or rulings have
been made by the Internal Revenue
Bureau affecting the distribution of
accumulated surpluses of corpora
tionS. Rumors that the Treasury had
decided to force distributions of divi-
dends in many eases have been cur
rent for several days hut thus far
they can be traced only to the SEN
sitiveness of some individual con
Germs rather than To any change IN
policA here.
The Treasury Department is still
following the spirit of the existing
revenue act-section 220-in determin-
ing whether business is holding too
much of "A surplus and is really do
ing SO to evade the payment of sur
taxes by individuals.
Present Tax, l2I4 Per Cent.
Corporations pay a tax Of l2l2 per
cent on new income and the remain
der may he distributed in the form
of dividends or held in the business
for future use. Should it be dis
tributed to individual shareholders
the latter do not pay normal TAX,
but they are subject To SurtaNeS AT
the present high rates. Thinking
that some day the SurtaN rates would
come doWn-aS indeed seems very
probable now under the proposed new
law-some concerns may have &C
cumulated unreasonahly large sums
in the last two years and may feel
il desirahl hereafter to distribute
such surpluseS in the form Of divi-
dends
This helated distribution. however.
comes under the scrutiny nf the
Treasury. which reserves the right to
criticize the distribution and insist il
could have been made in previous
years, thus suhjectins the individual
taxpayer TO higher rates.
The regulation by which the Treas
ury is beng guided says.
An aCcumula ton of gains and
profits is unreasonable if il is not re-
qured for the purposes of the buSi-
ness. considering all the CirCumStan
of the case. II is not intended, how
ever. TO penaii1e reasonable accumula-
tions of surplus for the needs of the
business. No attempt can he made to
enumerate all the ways in which
gains and profits of Il corporation may
he accumulated for the reasonable
needs of the business.
Distributions Considered.
Distributions made by corporation
shortly after the close OF its taxable
year shall he taken into consideration
in determining the reaSonahlcneSS of
the amount Of earnings and profits
of the corporation retained by il for
the year in question. tndistrihuted
income iS properly accumulated ii
invested in increased inventories; OF
additions 10 plant reasonably needed
hy the business.
II is properly accumulated if re
tanned for working capital required
by the business or in accordance with
contract obligations placed to The
credit of a sinking fund for the pur-
pose of retiring bonds issued by the
corporation.
In the case Of the banking insti-
tuition. the business of which is 10 re
ceiVe and loan money. using capital,
surplus and deposits for that purpose.
undistrihuted income actually repre-
sented by loans or reasonably re-
tired by future loans is not accumu-
lated beyond the reasonable needs Of
the business. The nature Of the in
vestment of gains and profits is inn
material if they are not in fact needed
in the business.
1t is an unreasonable aCcumula ton
OF gains and profits by corporations
with the purpose Of enabling their
shareholders to escape surtaXes on
such gains and profits. which subjects
such corporations TO the additional tax
imposed by Section 220 (which amounts
to 30 per cent? The financial condi-
tion OF the corporation AT the close
OF the taxable year in question the
amer in which its funds are invested
at that date, determines the unredSon-
ableneSS of the accumulation.
Latest figures available for The wear
1923 show that all the corporations
which reported a net income tOtalrd
net earnings Of SS.32f .529, ,l34. upon
which they paid a corporation tax of
t93I .106. 79S. This leaves net addi-
tion to surplus of S73S4 .i22 336 OF
This sum they distributed cash divi-
dends amounting to S3.S20.619.642
Stock dividends amounted to S7ST, ,l61.-
lo2. This means that n surplus of
f2.716 .633 So. or about &c per cent of
the net income was held in American
corpora tionS. Some economists have
insisted that any distribution of half
the earnings is easonable. so il would
appear that in 1923 American corpora
tions kept we'll within the spirit Of
the law. The question. however. turns
upon what individual businesses did.
as each case must stand on its merits.
D. l..
iCOpvrr-ht 1929