Why the melon-cutting?;

              Bulletin HASKINS & SELLS 85
Why the Melon-cutting?
WHEN a unique event affecting some
one business organization occurs, it
is customary to attribute the event to some
internal cause more or less associated with
the organization in question. But when
one corporation follows another in action
of the same character, it is only natural to
seek the reason in some outside source.
The recent series of stock dividends on
the part of companies in the oil group is
not a coincidence. There is undoubtedly
some motive for the action. And the
motive seems to be found largely in the fear
of prospective legislation affecting taxation.
When the Supreme Court of the United
States decided that stock dividends are not
taxable as income, it practically check­mated
the government in its battle with
tax-payers. The decision was a great
victory for the latter, not only moral but
financial. Citizens today, who are for­tunate
enough to be recipients of stock
dividends, pay a tax only on the profit
attaching to such of the shares as they sell.
Corporations at present probably have
nothing to fear from a large surplus. The
fear lies in future legislation which may
make some attempt to tax undistributed
profits in excess of the needs of the business.
But what constitutes the needs of the busi­ness
will doubtless be a bigger problem to
solve than some of those already encoun­tered
in connection with invested capital.
As to the stock dividend decision, the
government is concerned, not with the
effect on the corporation, since the cor­poration
pays the tax on profits earned
and accumulated, but with the effect on
the taxation of the individual where the
corporation piles up surplus and then dis­tributes
it as stock dividends. As accumu­lated
surplus distributed through the
medium of a stock dividend, profits pro­duce
no revenue to the government from
the individuals who receive them because,
in effect, while there is a rearrangement of
share ownership, the profits remain in the
business as additional share capital. That
taxation in the hands of recipient stock­holders
would be double taxation, and
obviously unfair, seems to have the support
of the Supreme Court.
There is much agitation over the recent
action of the oil companies, because of the
appearance of evasion which the action
has. Declaring stock dividends and issuing
shares representing such dividends results
in putting into the hands of a shareholder
something of value which he did not have
before, for which he gave nothing, which
is an earning on his investment, and which
he may sell for cash. This, it is claimed,