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ever in the opinion of the Commissioner the use of inventory is necessary clearly to determine the income of any taxpayer, individual, corporate or otherwise, inventory shall be taken upon such business as the Commissioner may prescribe. It is not unlikely that important Treasury rulings on this subject will be issued later.
19. The income of an individual in the form of dividends or net earnings of corporations or similar organizations is treated accordingly as the organization is or is not taxable under the corporate sections of the Law. In general, organizations are taxable if they are organized in the United States, no matter where they operate, or if they were organized in other countries, but operate in or derive income from the United States. The dividends received from such taxable organizations are not liable to any normal tax in the hands of an individual, but are liable to the surtax. The dividends paid by foreign organizations, themselves not liable to tax under the corporate sections of the law, are liable to both normal and surtax rates.
20. It is well understood that the reason dividends from organizations, themselves taxable, have not been liable to any normal tax in the hands of an individual is that such organizations already have paid the corporation tax on that part of their net earnings, distributed in the form of dividends. Until 1917, the tax on corporate net income has been at the same rate as the normal tax on individual net income. Since 1917, however, that situation has changed to the disadvantage of income in the form of corporate earnings. (This is referred to more fully in a discussion of the "basic" tax at page 32.)
21. Dividends received from organizations taxable Non-Resident under the corporate sections of the law, are free from Aliens normal tax when received by non-resident aliens, the same as in the case of citizens or residents. Obviously, non-resident aliens are not subject to tax on dividends received from foreign organizations which themselves do not come within the scope of the corporate provisions of the law.
Under the 1913 Act, dividends, if taxable at all, 1913 were taxed regardless of the time of accrual to the corporation of the profits or earnings from which such dividends were paid. The 1916 Law changed this situation. It defined dividends as including any distribution made Law or ordered to be made by a corporation or an association out of the earnings or profits which had accrued since March 1, 1913 (the date as of which the tax applied under the 1913 Law). The converse of this statement was said to be true by the Treasury Department, namely, that dividends were not taxable if paid out of earnings which accrued before March, 1913.
It may be added, parenthetically, that the principal provisions regarding dividends under each law are mentioned because court decisions and Treasury regulations often make reference to the former statutory provisions governing the subject.
23. In 1917, the law was again changed as to dividends. In respect to any distribution made on or after August 6, 1917, it was declared that such dividends Law should be deemed to have been made from the most recently accumulated undivided profits or surplus of the corporation and should constitute a part of the annual income of the person receiving the same for the year in which received. The Statute further provided, how
Dividends Received by
ever, that such dividends should be taxed at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation distributing the dividends. The provision was continued that dividends paid out of undivided surplus or profits earned prior to March 1, 1913, were free of income tax under this provision.
24. The Revenue Act of 1918 declares that the term "dividend" (except in connection with certain insurance companies) means any distribution made by a corporation (other than a personal service corporation) to share-holders whether in cash, property or stocks, out of earnings or profits accumulated since February 28, 1913 (the date as of which the tax applied under the 1913 Law); and any such distribution made by a personal service corporation out of earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.
25. Unless all earnings and profits have first been distributed, any distribution shall be deemed to be made from them. Such distribution made in 1918 or in any year thereafter, is held to be made from earnings or profits accumulated since February 28, 1913 (in the case of a personal service corporation, from the most recently accumulated earnings and profits). After these earnings and profits have been distributed, those accumulated before March 1, 1913, may be distributed exempt from
26. Dividends received by individuals, as is well understood, have at no time been subject to the normal tax. Corporations, however, under certain of the previous laws, were required to pay a corporation income tax thereon. The Act of 1918, however, changes the former
situation. Such dividends and amounts received as dividends from a personal service corporation out of taxable earnings or profits are not subject to tax in the hands of the receiving corporation. It seems that these dividends must be included in the return of net income made by the corporation, but may be classified as deductions.
27. Like the earlier laws, the Revenue Act of 1918 Stock declares a dividend paid in stock of the corporation shall be considered income "to the amount of earnings or profits distributed." Amounts distributed in liquidation shall be treated as payments in exchange for stock or shares and any gain or profits therefrom shall be taxable as other gains or profits.
28. There is a further provision that any stock dividend (1) received by a taxpayer between January 1, and November 1, 1918, both inclusive, or (2) bona fide authorized or declared during such period and entered on the corporation books but received by the taxpayer after November 1, 1918, and within thirty days after the passage of the Act, shall be taxed to the recipient at the rates prevailing for the years in which the corporation accumulated the earnings or profits from which such dividends were paid. The dividend, however, shall be deemed to have been paid from the most recently accumulated earnings or profits.
29. The question has been raised if this provision for the taxation of stock dividends (at the rates prevailing for the year in which the corporation accumulated the earnings out of which such stock dividends were paid) might not apply also to dividends paid in cash. It will be recalled that the law was so applied in 1917. Doubt
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Jan. 1 and
of Taxable Year
less, the Treasury will rule on the question, but meanwhile it may be said that the Act itself cannot be said clearly to allow the taxation of cash dividends at rates applying in previous years.
30. There has been considerable litigation of the question if Congress, under the Constitution, has the power to place an income tax on stock dividends; that is, are stock dividends income. Thus far, this question in its broad aspect has not been decided by the United States Supreme Court.
On January 23, 1919, the United States District Court in New York, on a demurrer, rendered what was in effect a decision that stock dividends are not taxable as income. It does not seem impossible that if this view finally prevails with the United States Supreme Court, all money collected by the Government as income taxes on stock dividends under all of the previous laws, beginning in 1913, will be subject to refund to the taxpayers. 31. The Act of 1918 also contains a new provision which states that distribution made during the first sixty days of a "taxable year," shall be deemed to have been made from the earnings or profits of the preceding taxable years. A distribution after the first sixty days of the taxable year shall be deemed to have been made from the 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.
If the corporation books 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 accumulated ratably during such period.