Evening star., 1936-03-08
BY CHARLES F. SPEARE.
Special Dispatch to The Star.

corporation credit.
A logical argument against 1t is that
it takes from company its backlog
of reserves, which it should, as a
careful trustee, build up for just
such a period of depression as this
country has been passing through.
1T. & T. Policy Cited.
The most forceful illustration OF
the value of such a policy is that of
the American Telephone & Telegraph
Co., which has paid SO share in
dividends without interruption, though
taking s140,00O,000 from its reserves
to do this. Obviously, such per-
formance has been stabiliztng in
fluence in many directions. Other
corporations have unquestlonably
withheld from their shareholders a
portion of the profits to which they
were entitled and for the purpose
of making the income tax situation
easier for their wealthy and control
ling shareholders. A case frequently
cited is that of the Allied Chemical
& Dye Co.
There are other considerations to
be taken into account in the event
that the new law is supported by
Congress. Dividends of corporations
are now exempt from the normal tax.
The effect of this in past years has
been to build up large body of small
shareholders to whom this exemption
is of vital concern. An important
element in this group are the holders
of preferred ShareS-notably those of
the public utilities. They will have
nothing to gain by the proposed
measure and will lose the benefit of
their income represented by dividends.
There is no point in their switching
to bonds, for they now have more re-
turn on their stocks than they could
obtain on mortgages or debentures Of
relative quality.
Adjustments Expected.
1t is quite probable that some ease
ment of the tax percentages on un-
distributed profits will be made as a
concession to those who affirm, with
reason, that the present ratios are too
high and will jeopardize the standing
of the paying corporation.
In that event the estimated income
from the new tax of 1000 000,0 900
cannot be realized Other adjust
ments will be required to cover the
deficiencies caused by the cancella-
ton of processing taxes and the added
demands of the soldiers bonus.
If the theory of give and take is
consistently carried through, this
would mean a revision of the brackets
now relating to corporation income
and capital stock taxes and to the
excess profits tax which realize to the
Treasury about 0O0,000,00O a year.
There are two types of temptation
that face the corporation with sub
stantial undistributed profits. One is
represented by the concern whose
management considers its policies to
be none of the business of the rank
and file of its shareholders.
1t may use its free balances, as it
did in 1929, in the call loan market
or it may give employment to them
in buying up competing properties, or
for other kinds of expansion.
Mistakes Often Costly.
In any case it does not consult the
majority owners, and not infrequently,
commits mistakes of judgment that
are costly. If it distributed its profits
to such an extent that it would be
compelled to borrow from the stock
holders when expansion was contem-
plated, this occasion would give the
latter opportunity to vote as they felt
the proposal warranted and from
passive objectors become a vital ele-
ment in management.
The second type of temptation is
that more frequently faced, and
yielded to, by the corporation of only
moderate financial strength whose
controlling stockholders - frequently
the banking interest identified with
them-urge higher dividends both for
the income they provide and the effect
they produce on the market prices
of stocks. For instance, in the late
20's many of the railroads were pay
ing high dividends. They could not
afford the 6, and per cent rates
on common or capital stocks to which
they committed themselves. Had they
paid half the average of that period
the amount saved for reserves would
not have spared them the subsequent
collapse in their credit. Perhaps they
might have deferred somewhat longer
their visits to the r. F. c.
Tax Not Retroactive.
There have been suggestions in the
movements of certain common stocks
in the second half of this week that
spectators had their eye on the "equi-
ties" of corporations known to possess
large capital assets.
The proposed tax, as generally un-
derstood, is on the profits of one year
and would first apply to those of 1885.
It is not in any manner retroactive.
(Ccpyright. 1885. by North American
Newspaper Alliance, Inc.)