A cash dividend of $50,000 was declared payable January 3, 1922. QUESTION: Is any of this dividend taxable? If so, how much? ANSWER: $10,000, or 20%, of the dividend is taxable, this being the amount accumulated after February 28, 1913. The loss in 1913, 1914, and 1915 served to reduce the surplus accumulated prior to that time, not to offset future earnings. REFERENCES: Sec. 201 (b): "For the purpose of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; Bul. 31-20-1098; 0. D. 610: "... The operating losses of the company.. are not to be charged against the earnings or profits of any particular year, and the fact that there were such losses does not prevent or alter the application of the rule that the dividend will be deemed to have been paid from earnings accumulated since February 28, 1913. . . ." Bul. 40-20-1219: A. R. M. 82 (superseding O. D. 610, part of which is quoted above): "The word 'accumulated' as used in this sense means, in the judgment of the Committee, profits which have been earned and not dissipated by subsequent losses." PROBLEM 9 Illustrating Computation of Loss on Sale of Stock or Shares on Which Dividend has been Received From Earnings FACTS: Accumulated Prior to March 1, 1913 Amos Aaron in April, 1913, purchased 10 shares of stock in the Brookland Bolt Company, Meadowbrook, Maryland, at $210 per share. On January 3, 1922 he received a dividend of $100 per share, $80 per share of which was paid from earnings accumulated prior to March 1, 1913. In February, 1922, Mr. Aaron sells his stock at $120 per share. QUESTION: What, if any, is Mr. Aaron's loss per share? ANSWER: The tax-free distribution of $80 per share from earnings accumulated prior to March 1, 1913, would in effect reduce the cost of Mr. Aaron's stock to $130 per share. The sale of the stock at $120 per share results in a loss to Mr. Aaron of $10 per share. REFERENCE: Sec. 201 (b): "For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares, and (2) the aggregate amount of such distributions received by him thereon." See Problem 8. PROBLEM 10 Illustrating Computation of Profit or Loss on Sale of Capital Stock on Which Liquidating Dividend Has Been Paid FACTS: T. F. Evans in 1910 acquires 200 shares of stock in the Evans Engineering Corporation at $92 per share. In 1921 he received a cash dividend of $37.60 per share, $6 per share of which constituted a return of capital. There were no other liquidating dividends and no stock dividends. The March 1, 1913, value of the stock was $90 per share. Mr. Evans sells his stock in 1922 at $85 per share. QUESTION: What was the taxable profit or the deductible loss per share? ANSWER: The distribution of $6 per share served to reduce the cost from $92 per share, to $86 per share, and the March 1, 1913, value from $90 per share to $84 per share. There was, therefore, no taxable profit and no deductible loss, the stock having been sold for $85, a price below cost base ($86), but above March 1, 1913, value base ($84). REFERENCE: Sec. 201 (c): (Quoted under Problem 5.) PROBLEM 11 Illustrating Effect of Stock Dividend with Subsequent Redemption or Cancellation of Stock so Distributed FACTS: The Anderson Brooks Corporation planned to make a distribution of dividends in such a manner as to save its stockholders from taxation on the amounts received by them. To effect this evasion of tax the corporation declared a stock dividend payable September 15, 1921, in an amount less than the earnings accumulated since February 28, 1913, and a few days later redeemed the stock so distributed. QUESTION: Is this stock dividend subject to taxation in the hands of the stockholders? ANSWER: REFERENCE: 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 in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation after February 28, 1913." PROBLEM 12 Illustrating Taxability of Dividends Received in One Year, Distributed From Earnings Accumulated in Prior Years FACTS: The Freeport Furniture Company, which keeps its books on a calendar-year basis, distributes a dividend on January 15, 1921. This being within the first sixty days of the distributing company's accounting year, and the distribution having taken place before January 1, 1922, the distribution must be deemed (according to Sec. 201-f) to have been made from earnings or profits accumulated during preceding taxable years. It is therefore found that the distribution was made from earnings accumulated in 1916. QUESTION: The distribution having been made in 1921, from earnings accumulated in 1916, when the tax rates were much lower, at what year's rates are the dividends taxable to the recipient stockholder? ANSWER: The dividend is taxable at 1921 rates. REFERENCES: Sec. 201 (e). (Quoted under Problem 13.) Sec. 201 (f). "Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period. This subdivision shall not be in effect after December 31, 1921." Bul. 1-19-9; 0. D. 5: "The 60-day provision of section 201 (e) of the Revenue Act of 1918 is not for the purpose of determining the rates of tax to be paid by the shareholders, but is for the purpose of allowing the corporation to determine the earnings from which the dividend is paid." PROBLEM 13 Illustrating Taxability of Dividends Paid in One Calendar Year and Received by Stockholders in Succeeding Year FACTS: The Atlas Book Concern on December 27, 1921, declared a cash dividend payable December 31, 1921. Dividend checks were accordingly mailed December 31, 1921, but out-of-town stockholders did not receive their checks until early in 1922. QUESTION: For what year do the out-of-town stockholders, reporting on the calendar-year basis, report as income the dividends mailed to them in 1921 but received by them in 1922? ANSWER: The dividends should be reported as income in 1921. REFERENCES: 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." Bul. 2-19-140; O. D. 97: "The date of payment rather than the date of receipt is the governing factor in determining when a dividend should be treated as taxable income to the recipient. Consequently, a dividend paid in Kansas, and received there by stockholders December 30, 1917, but not received by stockholders in California until January, 1918, will be taxable at 1917 rates to the California stockholders." |