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declares a dividend may expect to be charged with practicing a fraud on its stockholders and on anyone who afterwards acquires the stock. Goodwill when it appears on the balance sheet of a corporation or partnership is supposed to be carried at cost price or less, and any action which tends to obscure this inference may result in deception, even if there is no intention to deceive.

During 1918 Swift & Co. paid a stock dividend of $25,000,000. The president of the company stated as follows:

This dividend is not being paid out of earnings. It is being issued against surplus resulting from an adjustment of values of the fixed assets of the company to values current January 1, 1914, based upon the appraisement under the American Appraisal Company of Milwaukee.

No dividend of this nature can be paid unless the entire surplus of earnings realized since March 1, 1913, has first been exhausted.22

Refund of taxes paid on stock dividends under 1913 law.

RULING. In order to complete claims for the refunding of income tax collected under the Act of October 3, 1913, on stock dividends; that is, claims based upon the decision of the Supreme Court in the case of Towne v. Eisner, the following evidence is required.

An affidavit showing:
(1) The name of the corporation which declared and paid the

stock dividend.
(2) The date of declaration of the stock dividend and date of

receipt by claimant. (3) In which year's return of annual net income did the claim

ant include this stock dividend ? (4) Under what item on the return was the value of the stock

dividend included, and what was the valuation placed

upon the dividend in the return? (5) Has the stock thus received and returned as a dividend

been sold by the claimant, and if so, what was the date of sale; how much did claimant receive from the sale ; and what part of the total amount received from the sale was included by the claimant in its return of annual

net income for the year in which the sale occurred ? "Letter from Deputy Commissioner Speer, May 14, 1918.

(6) Did the dividend consist of stock of the corporation dis

tributing the dividend to claimant, or did it consist of

stock acquired by the distributor in another corporation? Note: A stock dividend is a distribution by a corpora

tion to its stockholders of capital stock of the distributing corporation. A distribution of capital stock other than that of the distributing corporation is not a stock

dividend but a dividend in property. The receipt on form i should also be filed with the claim. .... (Letter to collectors, signed by Commissioner Daniel C. Roper, and dated February 26, 1918.)

Can recipient of stock dividend on which tax was paid refuse to accept refund of tax?—Taxpayers, who received stock dividends on which income tax has been assessed and collected and have since sold their stock, may have suffered a loss which they would not have incurred if Congress had not made such a mess of the whole subject of the taxation of stock dividends.

It might be possible for anyone who has sold his stock to maintain this position: that having followed the law and the regulations, and having paid the tax assessed against him, he was justified in assuming that the matter was entirely closed. In other words, the government would be estopped from collecting a greater tax in such cases.

If thereafter he sold the stock received as a dividend and reported the proceeds of sale in accordance with the law and the regulations, having paid the tax assessed upon him, he was again justified in his assumption that the matter was closed.

If he is compelled to accept a refund of the tax paid on account of the dividend and amend his return on account of the sale, he may be assessed for a very large additional tax for which he would not have been liable except for the action of Congress.

In 1917 a corporation with capital stock of $100,000 declared a stock dividend of $400,000, exhausting its entire surplus, all of which was earned after March 1, 1913. Under the provision of the law which, as Senator Şimmons said, encouraged corporations to pay out all their surplus, the stockholders were taxed on the dividend at the rates in force from 1913 to 1917, inclusive.

In 1919 the holders of the stock (of whom there were only 3) sold their holdings at 110. The holder of 500 shares of the old stock reported as follows: Cost of 500 shares.......

.........$ 50,000.00 Dividend received, 2,000 shares in 1917, on which tax was paid. 200,000.00

Book value or cost of 2,500 shares...
Sold 2,500 shares for....

.........$250,000.00

..... 275,000.00

Taxable profit in 1919.......

.....$ 25,000.00

If it is held that the stock dividend in 1917 was not taxable, and if the tax collected is refunded, the taxpayer may find himself in an unfortunate position, which is reflected in the following statement: Refund of tax paid in 1917—trifling. Amended return in 1919: Proceeds of sale of 2,500 shares.....

.....$275,000.00 Cost .......

.....

........ 50,000.00

Taxable profit in

1919..

..............$225,000.00

The additional tax to be assessed will perhaps be..............$100,000.00

The taxpayer's real grievance is that in no circumstances would he have sold his stock in 1919 except for the fact that the Treasury issued regulations holding that the decision of the Supreme Court in the Towne case did not govern dividends paid under the 1916 law.

The illustration refers to a dividend paid in 1917 in order to bring in the allocation of part of the dividend to rates in force in prior years. If the date be changed to 1915 the problem is almost the same and applies to many cases.

CHAPTER XXII

INCOME FROM PARTNERSHI
NERSHIPS AND PERSONAL SERVICE

CORPORATIONS

The 1918 law made no change in the status of the partnership under the income tax law. Like the previous laws, the present one in effect ignores the partnership's existence as an independent entity and taxes the partners on the income from the business in substantially the same manner as though the income were received from an individual business enterprise.

What is a partnership under income tax law?—There are three classes of taxpayers upon which in all cases, or in specific cases, taxes are imposed upon what is known as a partnership basis. This simply means that the tax is not levied upon a group or an entity, but upon the individuals who compose the group. These groups are:

1. Common law partnerships
2. Limited partnerships of a certain type

3. Personal service corporations Under the federal income tax laws the treatment of the foregoing classes is not entirely uniform. Individual members of common law partnerships are uniformly taxed as individuals. Members of limited partnerships may or may not be taxed as individuals. Stockholders of personal service corporations are supposed to be taxed as individuals, but the federal income tax law lacks the power to change a corporation into a partnership and the attempt to do so has resulted in certain complications which are discussed hereafter.

'It relieved partnerships of the excess profits tax, however,

General ownership.-Ordinarily when two or more persons are associated together for the purpose of conducting a business for profit, they are deemed to constitute a partnership. The following article points out when certain relationships do not constitute a partnership.

REGULATION. Joint investment in and ownership of real and personal property not used in the operation of any trade or business and not covered by any partnership agreement does not constitute a partnership. Co-owners of oil lands engaged in the joint enterprise of developing the property through a common agent are not necessarily partners. In the absence of special facts affirmatively showing an association or partnership, where a vessel is owned by several individuals and operated by a managing owner or agent for the account of all, the relation does not constitute either a joint-stock association or a partnership. The participation of two United States corporations in a joint enterprise or adventure does not constitute them partners. (Art. 1507.)

Domestic partnerships.—The following regulation defines a domestic partnership:

REGULATION. A domestic . . . . partnership is one organized or created in the United States, including only the States, the Territories of Alaska and Hawaii, and the District of Columbia, and a foreign .... partnership is one organized or created outside the United States as so defined. The nationality or residence of members of a partnership does not affect its status. A partnership created by articles entered into in San Francisco between residents of the United States and residents of China is a domestic partnership. .... (Art. 1509.)

Net Income of Partners—How Determined The general provision of the law governing the taxation of partnerships, which includes all partnerships, except limited partnerships of the "corporation” type, reads as follows:

Law. Section 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the

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