On the other hand, it would not be desirable to compel corporations indiscriminately to divide all their earnings promptly. Every growing business is constantly requiring more capital, and it is the common practice, not only of corporations, but of individuals and partnerships, to allow a portion of their earnings to remain in the business each year for its development. The history of nearly every important business will show that it was built up in great degree by so doing, and it would be a serious handicap upon the corporate form of organization if it was not given the privilege of building up by this method. Moreover, it always has been regarded as sound, conservative and praiseworthy policy for a corporation to build up a surplus account-representing surplus assets-over and above the amount required to cover its obligations and outstanding capital stock. The position of the corporation as an industrial institution, as an employer of labor, as a borrower of money, as a supporter of trade, as a factor in many ways in the regular life of the community, is strengthened by the policy.

It appears that Congress took these facts into consideration and did not intend to interfere with the normal and proper management of business. In order, however, to provide against accumulations of "surplus" for which there is no legitimate use, and which there is good reason to believe are held for the purpose of escaping or postponing the application of the individual surtaxes of the Revenue Act of 1921, section 220, provides as follows:

"That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the

amount thereof, which shall be in addition to the tax imposed by section 230 of this title. ***"

The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the purposes of the business.

If legislation is adopted for the taxation of corporate surplus as such, it is bound to have one of two effects: it will either sacrifice unjustly the interests of the stockholders whose total incomes do not make them properly subject to this further levy, or it will force the distribution of the surplus in cash, which is practically impossible in the numerous cases where the surplus has been accumulating for many years, and is invested in plant and working capital needed in current operations. In either case the legislation would cause disaster. A tax levied upon surplus would be retroactive, reaching back into what was left from taxation of all previous years. It does not seem possible that Congress will seriously consider such a proposal, but evidently not a few members of the next Congress are considering it.

Although in the case of a new company a surplus account is sometimes started by the sale of stock at a premium, a corporation surplus usually consists of undivided earnings, accumulated over a term of years, and, as stated above does not exist in cash but in the plant or working capital. It buttresses and protects the regular capital behind the issued stock, preventing its impairment by unexpected losses, and this is one reason why it is considered wise policy to pay in a moderate surplus with new capital.