The mine was acquired in 1910 for $350,000, but was not operated until 1914. The depletion reserve of $160,000 had accumulated by a credit of 4% of the March 1, 1913, value for each year from 1914 to 1921, inclusive, the number of tons of mineral removed each year continuing unchanged. An analysis of the surplus account showed the following: Dec. 31, 1913 Mine appreciated to Mar. 1, How much of the dividend is taxable to the recipients? ANSWER: Surplus December 31, 1921, as per books... $200,000 ..... 60,000 Realized appreciation in the Depletion Re- 48,000 Since the stockholders received $188,000, and the amount of surplus available for distribution was $158,000, the balance, $30,000, was paid out of the depletion reserve (based on cost), and was therefore a return of capital to the stockholders. The $158,000 is taxable to the recipients as ordinary dividends. REFERENCES: Sec. 201 (a): "That the term 'dividend' when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913. . (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." (c) "Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee." PROBLEM 6 Illustrating Taxable Profit on Sale of Stock Where FACTS: The Chiswell Manufacturing Company was organized January 1, 1910, at which time its $10,000 par value common stock was issued for cash at $110 per share. Through subsequent reverses the $1,000 paid-in surplus was entirely lost, and on February 28, 1913, the balance sheet of the company showed a deficit of $2,000. To eliminate this deficit each stockholder was assessed $20 per share on March 1, 1913, so that the market value and book value of the stock at this date were each equal to par. After this date the company operated at a profit. Mr. York who was an original subscriber for 10 shares of the stock and continued his holdings until after receiving a stock dividend (the only dividend paid by the company) of 10 additional shares of common stock sold the original 10 shares in 1921 for $1,500. QUESTION: What part, if any, of this $1,500 is taxable to Mr. York, and at what rates? ANSWER: Mr. York had 20 shares (10 original plus 10 stock dividend) which cost him $1,300, or $65 per share. His taxable profit was therefore $85 per share, or $850. This profit is taxable at both normal-tax and surtax rates. REFERENCE: Article 1548 (1), Reg. 62: ". . . . Where the stock issued as a dividend is all of substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market value) of the old shares of stock, divided by the total number of the old and new shares. . . ." PROBLEM 7 Illustrating Taxable Net Income on Sale of Dividend Stock FACTS: In 1914, Mr. Julian Atkins purchased 50 shares of W. H. Dare Co. stock at 108. In 1916, he purchased 30 additional shares at 180. In 1917, he received a stock dividend of 80%. In 1921, he sold the 30 shares, purchased in 1916, and 20 shares of dividend stock, which could not be definitely allocated as between the first two lots purchased, all at $90 per share. QUESTION: What is Mr. Atkins' taxable net income on the sale of this stock? ANSWER: The 30 shares, purchased in 1916, cost $5,400. On these he received 24 shares of dividend stock, making a total of 54 shares for $5,400 and an average cost of $100 per share. He consequently lost $10 per share on these, or $300. The 50 shares purchased in 1914 cost $5,400. On these he received 40 shares of dividend stock, making a total of 90 shares for $5,400 and an average cost of $60 per share. His profit on the dividend stock was, therefore, $30 per share, or $600. The profit of $600 and the loss of $300 makes a net profit of $300 on the sale. REFERENCE: Article 1548 (4), Reg. 62: "Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock issued with respect to such stock can not be identified as having been issued with respect to any particular lot of such stock, then any sale of such dividend stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the stock dividend chargeable to such stock." PROBLEM 8 Illustrating Taxability of Cash Dividend Paid out of Earnings Accumulated in Part Prior to March 1, 1913, And in Part on or Subsequent to That Date FACTS: The balance sheet of the Brookland Bolt Co., Meadowbrook, Md., on December 31, 1921, the end of the company's accounting year, appeared as follows: Loss March 1, 1913 to December 31, 1915 .... 40,000 $ 80,000 Earnings January 1, 1916 to December 31, 1921 10,000 $ 90,000 |