VI DIVIDENDS Cash dividends. Profits distributed from earnings accumulated or accrued prior to March 1, 1913. Liquidating dividends. Property dividends. Stock dividends. Profits of corporations taxable to stockholders. CASH dividends from domestic corporations are subject to individual surtax only. While included in the gross income of corporations, they are also included among the deductions and are thus non-taxable to corporations. They are taxable to the individual at the surtax rates prevailing at the time of their receipt ("unqualifiedly made subject to their demands"; Sec. 201(e)), despite the fact they may have been paid from profits earned in prior years. The fact that a portion of the dividend consists of non-taxable income received by the corporation does not affect its status when received by the individual stockholder (Art. 1542 and Sec. 201). The following points covering exempt dividends should be noted: (a) Before it may be said that a dividend has been paid from profits accruing prior to March 1, 1913 (and therefore exempt), all earnings since that date must be exhausted, including those accruing up to the date the dividend was paid (Art. 1542 and Sec. 201(b)). In the 1921 law specific mention is made of "increases in value of property accrued prior to March 1, 1913" (in addition to prior operating earnings), which may also be distributed tax-free, providing all subsequent earnings have been distributed, as described on page 60. This provision was added as a result of Lynch v. Hornby (247 U. S. 339; decided June 3, 1918) wherein it was held that under the Revenue Act of 1913 the realization after March 1, 1913, of increases in the value of capital assets accruing prior to March 1, 1913, was "income in the ordinary sense of the word" and that income to the stockholder could be regarded by Congress as taxable to him when received. In connection with the applicability of such tax-free dividends to losses on subsequent sales of stock see page 60. (b) Liquidating dividends have already been referred to.1 It was the intention of Congress in the 1921 act to tax that portion of liquidating dividends which represents a distribution of profits and to apply the balance in reduction of the cost or March 1, 1913, value of the stock (Sec. 201(c) and Art. 1545). But the significance of Section 201 (c) and Article 1544 is not altogether clear. Primarily intended by Congress to be applicable to distributions in liquidation," it has since been denied as having any reference to liquidating dividends. Nevertheless, in view of the understanding at the time the law was passed, it would seem to refer to any or all of the following: 1. Liquidating dividends 2. Dividends from appreciation since March 1, 1913 4. Payments in reduction of outstanding stock 5. Distributions from depreciation or depletion re serves The last-named source of a cash or property distribution is specifically discussed in the regulations (Art. 1546), although not mentioned in the law. On the stockholder's books the distribution should be credited to the cost of the stock for tax purposes unless paid from the excess of the reserve based on the value at March 1, 1913, over the reserve based on cost, in which case the distribution is applied only in reduction of a loss subsequently arising from the sale of the stock. 1 See page 61. 2 See conference report on H. R. 8245, dated November 19, 1921, amendment No. 20, p. 16. |