The foregoing holds true for scrip payment of interest. (Reg. 33 Rev., Art. 4.)

[Page 271.]

Dividends from Reserves for Depreciation or Depletion. A reserve set up out of gross receipts and maintained by a corporation for the purpose of making good any loss or wasting of capital assets on account of depreciation or depletion is not to be considered a part of the earned surplus of the company, but a reserve for the return or liquidation of capital. A dividend paid from such reserve will be considered a liquidating dividend and will not constitute taxable income to the stockholder except to the extent that the amount so received is in excess of the capital actually invested by the stockholder in the shares of stock held by him, and with respect to which the distribution was made. (Reg. 33 Rev., Art. 4.)

[Page 272.]

Dividends Paid in Equivalent of Cash. Dividends declared by a corporation and paid with securities in which the surplus of the corporation has been invested, regardless of the character of such securities, is to be accounted for as a dividend for income tax purposes by the recipients of same to the extent that it represents a distribution of surplus accrued to the corporation since March 1, 1913. (Reg. 33 Rev., Art. 4.)

[Page 274.]

Stock Dividends. The United States Supreme Court on January 7, 1918, in deciding the case of Towne v. Eisner, held that stock dividends were not taxable. The opinion reads in part as follows: "Notwithstand

· man.

ing the thoughtful discussion that the case received below we can not doubt that the dividend was capital as well for the purpose of the Income Tax Law as for the distribution between tenant for life and remainderWhat was said by this Court upon the latter question is equally true for the former. 'A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. Its property is not diminished and their interests are not increased. * * The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.' Gibbons v. Mahon, 136 U. S. 549, 559, 560. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan County v. United States, 169 U. S. 255, 261. If the plaintiff gained any small advantage by the change it certainly was not an advantage of $417,450, the sum upon which he was taxed. It is alleged and admitted that he received no more in the way of dividends and that his old and new certificates together are worth only what the old ones were worth before. If the sum had been carried from surplus to capital account without a corresponding issue of stock certificates, which there was nothing in the nature of things to prevent, we do not suppose that any one would contend that the plaintiff had received an accession to his income. Presumably his certificate would have the same value as before. Again if certificates for $1,000 par were split up in ten certificates, each for $100, we presume that no one would call the new

certificates income. What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." Notwithstanding the broad language in this opinion, the Treasury Department has declared that since only the language of the 1913 Law and not the language of the 1916 Law was before the Court in this case, it does not necessarily follow that stock dividends are not taxable under the provisions of the 1916 Law and the 1917 Law. Since the 1916 Law contains an express provision taxing stock dividends, the Treasury Department will continue to be governed by this express provision and will assess the tax on such dividends unless and until the Supreme Court holds otherwise. The taxpayers against whom a tax is assessed on such dividends should exercise care in paying the tax under protest and duress in order to protect their rights to recovery. Where stock dividends are reported in the annual return of net income care should be taken that they are segregated from cash dividends and that it be clearly shown either on the return or on a rider attached to the return that the dividend was paid in stock and that the amount is reported not as an admission of liability for tax thereon, but out of courtesy for the Commissioner of Internal Revenue and in order to avoid the imposition of penalties for an alleged false or fraudulent return.

Stock Dividends Resulting from Revaluation of Assets. Stock dividends declared from a surplus created from the revaluation of capital assets or a value placed upon trademark, good will, etc., do not represent a distribution of earnings or profits subject to tax in the hands of the recipient shareholder. The entire

proceeds derived by a shareholder from the sale of such stock is income subject to both the normal and additional tax and shall be accounted for in the shareholder's return rendered for the year in which sold. (Reg. 33 Rev., Art. 4.)

CHAPTER 25

INCOME FROM MISCELLANEOUS SOURCES

[Page 281.]

Building and Loan Associations. Amount credited to shareholders of building and loan associations, when title to such credit passes to the shareholder at the time of the credit, has a taxable status for the normal and additional tax as for the year of the credit. Where the amount of such accumulations does not become available to the shareholder until the maturity of a share, the amount of a share in excess of the aggregate amount paid in by the shareholder is income to be accounted for as for the year of the maturity of the share for both the normal and additional tax. (Reg. 33 Rev., Art. 4.)

[Page 281.]

Damages. When a corporation as a result of suit or otherwise secures payment for damages which it may have sustained, and the amount of such payment is in excess of an amount necessary to make good the damage or damaged property, the amount of such excess shall be considered and returned as income for the year in which received. If the entire or an estimated amount of the damage shall have been previously charged off and deducted from gross income,

then the amount recovered shall be returned as income. (Reg. 33 Rev., Art. 94.)

[Page 285.]

Stock Received as Bonus. Where common stock is received as a bonus in consideration of the purchase of preferred stock, the common stock has no taxable status The entire proceeds derived from the sale or transfer of such stock is income subject to the normal and additional tax. (Reg. 33 Rev., Art. 4.)

[Page 285.]

Sale of Bonds at Premium. If bonds are sold at a premium, the premium must be reported as income. (Reg. 33 Rev., Art. 150.)

CHAPTER 26

RECEIPTS WHICH ARE IN PART RETURN OF CAPITAL

[Page 292.]

Instalment Payments. Corporation selling furniture, musical instruments, clothing, furnishings, etc., on the instalment basis, title passing to the vendee at the time of sale, will treat such contracts as accounts receivable and as "sales during the year" at their face value, thus accounting for as income the difference between the cost and the sales price. If the purchaser defaults in payment and the account becomes uncollectible and the uncollected balance is charged off, the amount so charged off may be deducted as a loss. (Reg. 33 Rev., Art. 120.)