President's 1961 Tax Recommendations

shareholders in the form of stock. Proposed Section 7903(b) of S. 2038 exempts from withholding distributions made in

stock of the distributing corporation.

Thus under the present

form of the bill, those who take their capital gain dividend in stock would not be subject to withholding while those who take cash would be subject to withholding.

Not only is

there a measure of discrimination in this result, but there would exist difficult problems in the processing of tax returns, since the returns do not show the type of property received by the shareholder and without additional information the Service would not know whether or not tax had been

withheld.

The present exemption for stock dividends in proposed Section 7903(b) undoubtedly stems from the procedural difficulties which would be experienced by withholding agents if they had to retain the stock until the shareholder remitted cash sufficient to pay the tax to be withheld. This is a problem today with respect to taxable stock or property dividends paid to aliens, but the number of cases is small.

Moreover, the rate of withholding on capital gain

dividends is necessarily twice as heavy as on ordinary dividends since only 50% of the capital gain dividend is taken into income by the shareholder. Thus there will be a much

greater degree of overwithholding and a greater number of

refunds required.

The NAIC suggests, therefore, that if withholding

is enacted, the exemption from withholding now provided in proposed Section 7903(b) for stock dividends be extended to

all capital gain dividends, whether taken in cash or in stock.

For the reasons above stated, we respectfully submit

that withholding should not be instituted on dividend payments. We shall, of course, be pleased to furnish you with any further information you may wish, or to confer with you or your staff at your convenience.

You will appreciate, of course, that in the limited time available since the meeting in Washington, it has not been possible to check as thoroughly as we should have liked the accuracy of all the statistical information and other data referred to above. It has necessarily been assembled from various published papers and other sources, and there has not been opportunity in all cases to review the basis upon which they were prepared. However, the statements regarding data assembled and published by the National Association of Investment Companies have been reviewed and verified by its staff.

Respectfully yours,

Eivin S. CP

Edwin S. Cohen

TO ALL TAXPAYERS

Interest and dividends whether paid to you or credited to your account, must be included in your U.S. income tax return. Accuracy in reporting such amounts, even if small, will benefit both the recipient and the government, and will avoid expensive enforcement action that might otherwise be necessary.

Commissioner of Internal Revenue

U. S. TREASURY DEPARTMENT - INTERNAL REVENUE SERVICE

DOCUMENT NO. 5219