acter of the stock received. In the language of the court in the Weiss case, "as the result of transactions disclosed in the Phellis and Rockefeller cases, certain corporate assets not exceeding accumulated surplus were segregated and passed on to individual stockholders. The value of the segregated thing so received was held to constitute taxable income. Cullinan's gain resulted from a dividend in liquidation actually distributed in the stock of a holding company incorporated under the laws of a foreign state [i. e., one of the United States] not organized for the purpose of carrying on the old business, and which held no title to the original assets. . . . We cannot conclude that mere change for purposes of reorganization in the technical ownership of an enterprise under circumstances like those here [i. e., in the Weiss case] disclosed, followed by issuance of new certificates, constitutes gain separated from the original capital interest. Something more is necessary-something which gives the stockholder a thing really different from what he theretofore had." Justices Holmes and Brandeis in this last case dissented, believing that the rule of Cullinan v. Walker should have been applied. The layman will find it difficult not to agree with the two dissenters. These cases illustrate the enormous difficulties which would have been put on the courts had not the reorganization exemption sections been introduced into the law. The 1924 and the 1926 acts would have exempted all of them, except the Weiss case where a taxable profit of $50 (cash in excess of the basic value, presuming cost to have been par) would have been recognized; the new stock would have had a basic value of zero. IX DIVIDENDS Taxable cash dividends. Profits distributed from earnings accumulated or accrued prior to March 1, 1913. Dividends from personal service corporations. Liquidating dividends. Property dividends. Stock dividends. Redemption of stock as a dividend. Profit of corporations taxable to stockholders. DIVIDENDS are of three kinds: cash, property, and stock. When a cash or property dividend is paid, assets of the corporation are severed from its control and put into the hands of stockholders, and the corporate net worth is correspondingly decreased. A stock dividend does not affect the assets of a corporation in any way, nor is the total net worth of the business increased or decreased. A liquidating dividend may be either a cash or property dividend. Cash dividends from domestic corporations are subject to individual surtax only. While included in the gross income of corporations, they are also included among the deductions and are thus non-taxable to corporations. They are taxable to the individual at the surtax rates prevailing at the time of their payment, despite the fact they may have been paid from profits earned in prior years. The fact that a portion of the dividend consists of non-taxable income received by the corporation does not affect its status when received by the individual stockholder (Sec. 201, Art. 1541-1542; I. T. 2131, 2222), unless the dividend is paid from income earned or accrued prior to March 1, 1913, as explained below. Under the 1918 act, dividends received from foreign corporations which had no income from sources within the United States were taxable to individuals at both normal and surtax rates and to corporations at normal and excess profits tax rates. If any income, no matter how small, proceeded from sources within the United States, the dividend was treated in the same manner as a dividend from a domestic corporation (Art. 301 and 561, Regulations 45). By provision in the revenue acts since 1918 (Sec. 216(a) and 234(a)(6)), dividends of foreign corporations are taxable in the same manner as dividends from domestic corporations only if more than 50% of the gross income comes from sources within the United States, as determined by a three-year average preceding the declaration of the dividend (Art. 301(a)). CASH DIVIDENDS FROM MARCH 1, 1913, SURPLUS The payment of a dividend from surplus pertaining to years prior to March 1, 1913, is recognized by the law as a return of capital to the stockholder. If he is permitted to use March 1, 1913, value as his investment in lieu of cost, any reduction of that investment through the receipt of cash or property should be subtracted from it. The varying practice under different acts in this connection has already been noted.1 Before it may be said that a dividend has been paid from profits accruing prior to March 1, 1913 (and therefore exempt), all earnings since that date must be exhausted, including those accruing up to the date the dividend was paid (Sec. 201(b); Art. 1542). Beginning with the 1921 act, specific mention is made of "increases in value of property accrued prior to March 1, 1913" (in addition to accumulated prior operating earnings), which may also be distributed tax-free, provided all subsequent earnings have been distributed. This provision was added as a result of Lynch v. Hornby (247 U. S., 339, decided June 3, 1918) wherein it was held that under the Revenue Act of 1913 the realization after March 1, 1913, of increases in 1 Pages 89-90. |