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Rent received other than in cash.-An owner of property must return for taxation all income therefrom, whether received in cash or the equivalent of cash. Many farms are leased under agreements which provide that the lessor shall receive as rental a portion of the crops. The lessor must return for taxation the fair value, less all expenses incurred, of the commodities received, even if consumed or disposed of by gift.

No taxable income accrues where corporations, through book entries, have charged rental to construction accounts and credited an income account. (C. B. 4, 276; O. D. 811.)

Houses, etc., occupied by rent-free tenants.-It may be that neither cash nor produce is collected from the occupants of houses, farms, etc., but its equivalent is realized by the owner in a different form (see page 307). A taxpayer may own a garage large enough to accommodate the family of a chauffeur. The wages paid to the chauffeur in such a case will usually be less than if he were obliged to live elsewhere and pay rent. Whether the chauffeur realizes income to the extent of the rental value of the quarters is questionable, in view of the decision in Jones v. U. S. (60 Ct. Cls. 562). (See page 307.)

The rental value of a dwelling house furnished to a minister of the gospel as part of his compensation is not to be included in taxable income. [See section 213 (b-11), and comment on page 227.]

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This chapter deals with all types of distributions by corporations and with stock dividends, which, in a legal sense (in federal practice), are not distributions at all. The law assigns a restricted meaning to the term "dividend," excluding from it certain distributions which are ordinarily called dividends. In this chapter the term "statutory dividend" will be used to indicate distributions which fall within the technical definition given in the law.

The material presented in this chapter has been arranged in accordance with the following three-fold classification:

(1) Statutory dividends. These include the great bulk of the dividends ordinarily received-those declared from earnings or profits accumulated since the federal income tax has been in effect. Such dividends when received by individuals are subject to both normal and surtaxes, unless they come from a corporation which is subject to the corporation normal tax, in which case they are subject merely to surtaxes. When received by corporations they are subject to the corporation tax, unless they have already been subjected to this tax in the hands of the corporation making the distribution. In certain special cases statutory dividends are entirely exempt.

(2) Distributions other than statutory dividends. The distributions which fall outside the definition of statutory dividends are not subject to tax directly as dividends but nevertheless reduce the basis for determining gains or losses when the property is realized upon, and in certain cases result in gains which are taxable at both normal and surtax rates or at the capital gain rate of 122 per cent.

(3) Stock dividends. The Supreme Court has held that stock. dividends are not distributions at all. They are not taxable when received, nor does their receipt operate to reduce the base for determining gains or losses on the entire holding. The old base is merely redistributed among the new and old certificates of stock.

Dividends on stocks sold between dividend dates.

REGULATION. In the case of stock sold between dividend dates, the entire amount of the dividend is income to the vendee and must be reported in his gross income when the dividend becomes due and payable. The amount advanced by the vendee to the vendor in contemplation of the next dividend payment is an investment of capital and may not be claimed as a deduction from gross income. .... (Art. 31.)

The foregoing may be sound where the additional payment is not made with specific reference to the contemplated dividend. Where a certain price is fixed for the stock, however, and an additional amount

is paid specifically for the right to the dividend, it would seem that the amount so paid should be deducted from the next dividend received.

Dividends distinguished from certain other kinds of income. The word "dividend" is often carelessly used. Therefore, the recipient of a dividend (or what purports to be a dividend) from an unusual source should ascertain the particulars before reporting it for taxation.

"DIVIDENDS" ON INSURANCE POLICIES.-Section 213 (b-2) exempts from the tax amounts received under insurance policies, unless such amounts (including so-called dividends theretofore received) exceed the aggregate premiums paid.1 (See page 211 et seq.) Therefore until the aggregate of the dividends received exceeds the aggregate of the premiums paid, no part of such dividends is taxable. EXCESSIVE SALARIES TREATED AS DIVIDENDS.—

REGULATION. in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be a distribution of earnings or profits, the excessive payments will be treated as a dividend, and will thus be exempt from the normal tax in the hands of the recipient. . . .. (Art. 107.)

For a discussion of excessive compensation, see Chapter 30.

PROPERTY PURCHASED AT LESS THAN FAIR VALUE.-The Treasury holds (see page 310) that when property is purchased from a corporation by a stockholder or employee at less than its fair market value, the purchaser receives income equal to the difference between such fair market value and the purchase price. In the ruling such difference was held to be a dividend to the stockholder if a corporation has a surplus from which such dividend can be paid. (Ruling to Miss Bertha Holmes, Washington, D. C., signed by D. H. Blair, Commissioner, dated March 30, 1923.)

INTEREST ON DEPOSITS IN MUTUAL SAVINGS BANK NOT DIVIDENDS. -Interest on deposits in a mutual savings bank which has no capital stock is not a dividend within the meaning of section 201, although in effect a distribution of profits. (C. B. I-2, 148; I. T. 1461.)

WITHDRAWALS MAY BE LOANS, NOT DIVIDENDS.-Mere withdrawals by stockholders do not constitute dividends unless no reasonable doubt exists regarding the purpose of the withdrawals.

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[Former Procedure] See Income Tax Procedure, 1926, page 1022.

In Bettens's Appeal [2 B. T. A. 535 (A)] the taxpayer during the years 1917 to 1920 withdrew various amounts from a corporation in which he owned about half the stock, in addition to dividends. which were paid in 1918 and 1921. The advances were repaid in full in 1922 and 1923. The Commissioner treated the advances as dividends, but was overruled by the Board.

In Ryan's Appeal [2 B. T. A. 1130 (A)] an owner of 82 per cent of the stock of a company withdrew large sums of money during 1919, 1920 and 1921 in excess of dividend credits. No interest was charged on the withdrawals but the indebtedness was acknowledged. Again the Board overruled the Commissioner's contention that the sums withdrawn represented a distribution of the nature of a dividend. On the other hand, in Chattanooga Bank v. Brewer [9 F. (2d) 982] certain withdrawals were held on the facts to have been dividends. Two individuals owned all the corporate stock; the withdrawals were frequently made on the same dates, and were proportional to stock holdings. In the following year, the amount of these advances was formally declared as a dividend. The court held the shareholders were taxable on the dividend in the year in which the withdrawals occurred.

DISTRIBUTION MAY BE RENT-NOT DIVIDEND.-In one case it was held (In re General Film Corporation, 274 Fed. 903) that a distribution of net profits in excess of a specified dividend made to stockholders and others, not in proportion to stock holdings, was rent and not a dividend.

LOCAL TAXES ON BANK STOCK NOT EQUIVALENT OF DIVIDENDS.2— In addition to the cash dividends the owners of some bank stocks have local taxes paid for their account by the bank. The amount of such payments is deductible by the bank [section 234 (a-3); see also C. B. I-1, 11; I. T. 1300; and Chapter 32] and is neither to be reported as income nor taken as a deduction by the stockholder [section 214 (a-3-D)].

Right to SUBSCRIBE TO STOCK NOT A DIVIDEND.-A corporation transferred part of its assets to a subsidiary company and acquired all of its capital stock. It then gave its stockholders the right to purchase the subsidiary company stock at a certain figure. The Treasury held this was not a distribution. (C. B. II-1, 54; I. T. 1545.)

'[Former Procedure] See Income Tax Procedure, 1921, pages 760-761.

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