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Bulletin HASKINS & SELLS 71 A RECENT decision of the United States Supreme Court, rendered in the case of Marr vs. United States (45 Sup. Ct. Rep. 575), has an important bearing on the income tax liability of stockholders in corporate reorganizations. Under the law, the fact that shares of corporate stock increase in value does not subject the holder thereof to a tax on the increase as income. The tax is imposed upon income, and not upon capital invested or property as such. Further, a bona fide stock dividend is not taxable, according to the decision of the United States Supreme Court in the famous case of Eisner vs. Macomber. The rule is that "a stock dividend shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer." The question raised in the present case was whether or not, in a corporate reorganization, an income tax can be levied on the excess of the value of the stock issued by the new company, over the cost of the stock in the old company. The effect of the decision which was rendered is that the procedure followed in the reorganization is the deciding factor in determining the propriety of a tax. In general, if the identity of the business enterprise is maintained and there is no change in the proportional interests of the stockholders in the company, then no tax on income can be imposed. But if these identities are not preserved, the imposition of a tax is proper. The facts in the case were as follows: Prior to 1913, Marr purchased 339 shares of preferred and 425 shares of common stock of the General Motors Company, a New Jersey corporation, for $76,400.00. He held the shares for a number of years. In 1916 this corporation had outstanding $15,000,000 of 7% preferred stock and $15,000,000 of common stock, all of the par value of $100 per share. It had accumulated a large surplus, so that the value of its common stock was $842.50 per share. There was then organized the General Motors Corporation, a Delaware corporation, with an authorized capital of $20,000,- 000 of 6% non-voting preferred stock and $82,600,000 of common stock, all of the par value of $100 per share. The Delaware corporation issued its stock in exchange for that of the New Jersey corporation, on the following basis: one and one-third shares of new preferred stock for each share of old, and five shares of new common stock for each share of old, with cash payments for fractional shares. The Delaware corporation thus became the owner of all the outstanding stock of the New Jersey corporation, and took over its assets and assumed its liabilities. The latter was then dissolved. There remained $7,600,000 of authorized common stock in the new company, which was not required for the exchange. This was either sold or retained for sale in the future. Marr received in exchange for his holdings 451 shares of preferred and 2,125 shares of common stock in the Delaware corporation, which, including a small cash payment, had an aggregate market value of $400,866.57. This was $324,- 466.57 greater than the original cost of his stock in the New Jersey corporation. The Treasury Department assessed a tax on this amount, pursuant to the Revenue Act of 1916. Marr paid the tax under protest, and litigation resulted. An Income Tax Pitfall
Object Description
Title |
Income tax pitfall |
Author |
Anonymous |
Subject |
Stocks -- Taxation -- United States |
Citation |
Haskins & Sells Bulletin, Vol. 08, no. 09 (1925 September), p. 71-72 |
Date-Issued | 1925 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 8-p71 |