as SEC. 1211. [5] "SEC. 31.15 (a) SEC. 2. (a) [2] Provided, That the term 'dividends '16 as That the term "dividends' 9917 used in this title shall be held to used in this title shall be held to mean any distribution made or mean any distribution made or ordered to be made by a corpo- ordered to be made by a corration, joint-stock company, asso-poration, joint-stock company, ciation, or insurance company, association, or insurance comout of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of the earnings or profits so distributed. pany, out of its earnings or Act of 1913. No statutory definition of "dividends. "'21 SEC. 31. "(b) Any distribution made to the shareholders or members of the corporation, joint-stock company, or association, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax per share. The other one-half of the issue and the cash received for the one-half which was sold were turned over to the old stockholders for their old stock. This amounted to their receiving five shares of the new stock worth $30 per share (of the par value of $50 per share) and $150 in cash for each old share of the par value of $100 per share, surrendered. The stockholders returned and paid an income tax under the Act of 1916 on the $150 in cash received but contended that there was no income resulting from the exchange of old shares for new. The net result was. that the old stockholders sold one-half of their holdings in the old stock to the third party for cash; but the exchange of the other one-half thereof for new stock did not constitute a sale. The same ends might have been achieved by an amendment of the articles of incorporation of the old corporation providing for an increase of the capital stock and the reduction of In such a the face value of its shares. case the increase in face value of the stock would have constituted a stock dividend to the stockholders and consequently would not have been taxable. Neither did the plan followed result in taxable income to the stockholders in so far as the exchange of old for new shares was concerned. The mere change for purposes of reorganization in the technical ownership of an enterprise under circumstances such as these, followed by issuance of new certificates, does not constitute gain separated from the original capital interest. Weiss (Col.) v. Stearn, and Weiss (Col.) v. White, (1924) 265 U. S. 242, affirming Id., (C. C. A., Sixth Cir. 1923) 285 Fed. 689. 17 (f) For additional cases on "dividends," see footnote No. 113, p. 78. 18 Sec. 234 (a) (10), p. 204. 21 For decisions involving dividends, including stock dividends, under the Act of 1913, see footnote No. 113, p. 78. * * 22 A stock dividend declared from surplus which acerued after March 1, 1913, was not income to the stockholder, and, hence, not taxable under the Act of 1916. "We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder but shows he has not realized or received any income in the transaction." A stockholder's interest in the corporation evidenced by surplus or stock dividends is capital. To the extent, therefore, that the Act of 1916 imposes a tax upon stock dividends without apportionment, it is unconstitutional. Eisner (Col.) v. Macomber, (1920) 252 U. S. 189; Walsh (Col.) v. Brewster, (1921) 255 U. S. 536, affirming Id., (D. C., D. Conn. 1920) 268 Fed. 207. 23 Sec. 218, p. 128. Act of 1924. or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.26 SEC. 201. (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202,29 but shall be recognized only to the extent provided in section. 203.30 In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) 31 the part of such distribution which is properly chargeable to capital account shall not be considered a distri since February 28, 1913; but be deemed to have been made any earnings or profits accumu- from earnings or profits accumulated or increase in value of lated since February 28, 1913, property accrued prior to March or, in the case of a personal 1, 1913, may be distributed ex- service corporation, from the empt from the tax after the most recently accumulated earnearnings and profits accumu- ings or profits; but any earnings lated since February 28, 1913, or profits accumulated prior to have been distributed. If any March 1, 1913, may be distribsuch tax-free distribution has uted in stock dividends or otherbeen made the distributee shall wise, exempt from the tax, after not be allowed as a deduction the earnings and profits accumufrom gross income any loss sus-lated since February 28, 1913, tained from the sale or other dis- have been distributed. position of his stock or shares. unless, and then only to the ex- 24 (a) The word "deemed" in Sec. 31 (b) of the Act of 1916, as amended by the Act of 1917, creates a conclusive presumption. Douglas v. Edwards (Col.), (C. C. A., Second Cir. 1924) 298 Fed. 229, affirming Id., (D. C., S. D. N. Y. 1922) 287 Fed. 919. 24 (b) The word "deemed" in Sec. 31 (b) of the Act of 1917 raises a conclusive presumption that dividends are paid from the most recently accumulated undivided profits or surplus; hence, a corporation may not declare by resolution that dividends are paid from earnings or profits accumulated in earlier years, if there are undistributed profits of later years available. Harder v. Irwin (Col.), (D. C., N. D. N. Y. 1923) 285 Fed. 402. SEC. 201. (c) [2] Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. 25 (a) The words "the most recently accumulated undivided profits or surplus" contained in Sec. 31 (b) of the Act of 1917, comprehend profits accumulated between the close of the preceding taxable year and the date of distribution as well as prior to the year in which the distribution is made. Harder v. Irwin (Col.), (D. C., N. D. N. Y. 1923) 285 Fed. 402. 25 (b) The words "the most recently accumulated undivided profits or surplus" in Sec. 31 (a) of the Act of 1916, as amended by the Act of 1917, were used in their technical accounting sense. They did not include current earnings which accrued between the first of the taxable year and the date of the distribution to have Act of 1917. years, shall be deemed been made from the most recently accumulated undivided profits or surplus,25 and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after28 the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen. of the dividend. Douglas v. Edwards (Col.), (C. C. A., Second Cir. 1924) 298 Fed. 229, reversing Id., (D. C., S. D. N. Y. 1922) 287 Fed. 919. Contra: Harder v. Irwin (Col.), (D. C., N. D. N. Y. 1923) 285 Fed. 402. 25 (c) The rights of parties can neither be established nor impaired by the bookkeeping methods employed nor by the names given to the various items. Douglas v. Edwards (Col.), (C. C. A., Second Cir. 1924) 298 Fed. 229. 26 Sec. 204, p. 28. 27 Sec. 202, p. 28. 28 While profits accumulated before March 1, 1913, could still be distributed tax free under the Act of 1917, such tax free distribution could be availed of only after distributions of earnings and profits accumulated since said date had been made. Douglas v. Edwards (Col.), (C. C. A., Seccnd Cir. 1924) 298 Fed. 229; Harder v. Irwin (Col.), (D. C., N. D. N. Y. 1923) 285 Fed. 402. 29 Sec. 202, p. 16. 30 Sec. 203, p. 18. 31 Reorganization defined, Sec. 203 (h) (1), p. 26. Act of 1924. Act of 1921. Act of 1918. bution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation. SEC. 201. (d) If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 204,32 and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this paragraph shall also apply to distributions from depletion reserves based on the discovery value of mines. SEC. 201. (f) A stock dividend shall not be subject to tax, but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. SEC. 201. (g) As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. 32 Sec. 204, p. 28. SEC. 201. (c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 33 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. SEC. 201. (c) [1] A dividend paid in stock of the corporation shall be considered income to the amount of the earnings or profits distributed. SEC. 201. (d) A stock dividend shall not be subject to tax but if after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and SEC. 201. (d) If any stock in such manner as to make the dividend (1) is received by a distribution and cancellation or taxpayer between January 1 and redemption essentially equiva- November 1, 1918, both dates inlent to the distribution of a clusive, or (2) is during such taxable dividend, the amount period bona fide authorized or received in redemption or cancel-declared, and entered on the lation of the stock shall be books of the corporation, and is treated as a taxable dividend to received by a taxpayer after Nothe extent of the earnings or profits accumulated by such corporation after February 28, 1913. SEC. 201. (e) For the purposes of this Act, a taxable distribution made by a corporation to its shareholders or members shall be included in the gross income of the distributees as of the date when the cash or other property is unqualifiedly made subject to their demands. vember 1, 1918, and before the expiration of thirty days after the passage of this Act, then such dividend shall, in the manner provided in section 206,34 be taxed to the recipient at the rates prescribed by law for the years. in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits. SEC. 201. (f) Any distribution made during the first sixty days. SEC. 201. (e) Any distribuof any taxable year shall be tion made during the first sixty deemed to have been made from days of any taxable year shall earnings or profits accumulated be deemed to have been made during preceding taxable years; from earnings or profits accumubut any distribution made dur-lated during preceding taxable 33 Sec. 202, p. 28. |