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part of 1922. It has been suggested that if large surpluses invested in assets not needed in the business were wiped out by stock dividends, the Treasury would not find any surplus to which the penalties of section 220 could be applied. The suggestion assumes that the Treasury would deem a stock dividend to be a distribution and would hold that there is no surplus undistributed; it ignored the Solicitor's Opinion published October 2, 1922, (C. B. I-2, 4; Sol. Op. 144) in which he referred to the decision of the United States Supreme Court that a stock dividend is not a distribution. (Eisner v. Macomber, 252 U. S. 189.) The penalty is upon accumulation beyond the reasonable needs of the business. It is ridiculous to argue that the declaration of a stock dividend-not a distribution-which perpetuates accumulation, will be held to free corporations from the provisions of the law.

This opinion finds corroboration in the action of the Board of Tax Appeals in Wilson's Appeal (3 B. T. A. 957).

Retirement of preferred stock.-The retirement or purchase of preferred stock would be a proper use of surplus earnings and would not be deemed to be a method of preventing the imposition of the surtax.4

Reduction of common stock.

RULING. Inasmuch as a retirement of capital stock would indicate that additional capital was not required, any retirement of common stock, leaving the surplus stand, would be regarded by this office as making the corporation one coming within the provisions of Section 220 of the Revenue Act of 1918. (C. B. 2, 25; O. D. 360.)

The purchase of common stock for the treasury or the retirement of common stock, with a consequent reduction of the aggregate stock outstanding or a reduction of the par value of each share, cannot in itself be deemed to be a method of preventing the imposition of the surtax. But if the common stock were purchased pro rata from stockholders at a large premium, it might be held that such purchase is in effect a distribution of surplus. If the surplus

A ruling which directly related to this point was rendered under the 1916 law, as amended by the Act of October 3, 1917.

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RULING. ...(a) The earnings of a corporation used to purchase preferred stock for cancellation are retained for employment in the reasonable requirements of the business, and are therefore not taxable." (T. D. 2570, November 6, 1917.)

earned since March 1, 1913, had not been distributed, it could scarcely be claimed that the premium paid is a distribution of capital surplus or surplus accumulated prior to March 1, 1913.

There may be exceptional cases in which the retirement of common stock would be deemed to be prima facie evidence that earnings were unlawfully accumulated. [See discussion of section 201 (g), page 659.]

Can proceeds of sale of capital assets be reinvested without subjecting stockholders to surtax?-Article 352, quoted on page 1152, states that "a radical change of business when a considerable surplus has been accumulated may afford evidence of a purpose to escape the surtax." Corporations sometimes sell all or part of their capital assets and receive in payment cash or marketable securities. The question arises, whether or not a corporation may invest or reinvest the proceeds of sale without subjecting the corporation to the 50 per cent tax.

If a corporation is in the automobile manufacturing business or holds stocks in other corporations which are in that business and sells its manufacturing business or automobile stocks for cash, and soon thereafter reinvests the proceeds in other automobile stocks or resumes the manufacture of automobiles, such a transaction does not constitute a radical change of business and its stockholders could not be taxed. If the corporation sells its assets and purchases general investment securities with the proceeds, such procedure involves a radical change in the business and it would be difficult to maintain that the accumulated surplus is held for the reasonable needs of the business.

If corporation sells capital assets or accumulates funds in excess of its needs, how much of surplus must be divided?— If it is obvious, or if it is admitted by a corporation, that cash or marketable securities in hand are in excess of the needs of the business, the question arises as to what part of the accumulated surplus must be distributed. Unless the Treasury is able to deprive directors of all power to exercise judgment regarding dividends, it would seem that in any event only a reasonable part of the earnings need be distributed. As with other interpretations of a penalty clause, the facts in each case will govern.

Effect of tax on earnings.5-The 50 per cent tax is not inclusive. It is a penalty. Its effect is shown below:

(1) The 50 per cent tax is in addition to the regular 131⁄2 per

cent tax.

(2) When what remains of the income (i. e. 361⁄2 per cent) is distributed, it is subject to surtax in the hands of the stockholders.

(3) If the stockholders are in the 20 per cent surtax bracket, the government will get in the aggregate 70.8 per cent of the corporate earnings.

Corporations must furnish statement on request.

LAW. Section 220. .. (c) When requested by the Commissioner, or any collector, every corporation shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each.

'[Former Procedure] For a discussion of the attitude of the Treasury in enforcing the penalty clauses in former laws see Income Tax Procedure, 1926, pages 1618-1620.

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All individuals residing in the United States, whether citizens or not, and all corporations maintaining an office or place of business in the United States, whether organized under the laws of the United States (domestic corporations) or of foreign countries (foreign corporations), are subject to the income tax. Though non-resident alien individuals and corporations are outside the jurisdiction of the United States so far as their persons are concerned they are taxable on all income derived from sources within the United States, with certain exceptions. In the case of periodical income the normal tax is collected by withholding it at the source.

This chapter deals with the law and regulations which define the rates of tax, the classes of income, the exemptions and deductions allowed, and the method of collection of the tax on the incomes of non-resident aliens derived from sources within the United States.2 It is therefore of interest particularly to two classes of persons: the non-resident alien himself who is in receipt of income from United States sources, and the payer of such income, who is compelled to withhold and pay the tax thereon.

Rates of tax for non-resident alien individuals.—

LAW. Section 210. (a) In lieu of the tax imposed by section 210 of the Revenue Act of 1924, there shall be levied, collected, and paid for each taxable year upon the net income of every individual (except as provided in subdivision (b) of this section) a normal tax of 5 per centum of the amount of the net income in excess of the credits provided in section 216, except that in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 12 per centum, and upon the next $4,000 of such excess amount shall be 3 per centum;

(b) In lieu of the tax imposed by subdivision (a), there shall be levied, collected, and paid for each taxable year upon the net income

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Section 217 for individuals. Section 233 (b) makes the classification (section 217) also applicable to the gross income of foreign corporations, except foreign insurance companies subject to the tax imposed by sections 243 and 246. For former procedure, see Income Tax Procedure, 1924, page 1320 et seq.

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