THE INCOME TAX LIABILITY OF DIVIDENDS IN LIQUIDATION

The development of a scheme at once equitable and constitutional for the taxation of corporate distributions has been one of the more difficult problems confronting Congress and the courts since the adoption of the income tax amendment. Doubtless the chief reason for this difficulty has been the fact that the income tax liability of a shareholder upon such a distribution has not been determinable merely by ascertaining whether the amounts received are the variety of receipts commonly regarded by their recipients as income,- in a word, by determining whether they constitute a gain to the shareholder. Rather, it is a commonplace that Congress has seen fit to provide in the recent revenue acts that the rate and the method of taxing the distribution to the shareholder shall vary with the source of the distribution. Thus, although a dividend from corporate surplus accumulated since February 28, 1913, is subject to the surtax, a dividend from corporate surplus accumulated before March 1, 1913 (which in many cases could constitutionally be taxed) may not be taxable at all, although in the Revenue Act of 1924, it has been given an important effect in determining the tax liability of future distributions. Again, a distribution neither out of increase in value of property accrued before March 1, 1913, nor out of corporate earnings or profits, if it is subject to tax at all, may not be taxable at more than the 12,1/2 per cent rate upon capital gains. The weighing of the two considerations affecting income tax liability -the source of the distribution on the one hand, and the gain to the shareholder on the other-becomes most troublesome in connection with distributions in liquidations, since in such cases it is common for all the possible sources and consequently all the various exemptions and methods of taxation to be involved. Since the Treasury and attorneys for taxpayers are not agreed upon the proper interpretation of the provisions of the more recent revenue acts in this respect, and since few of the situations have been judicially considered, a discussion of some of the outstanding problems may be in order

THE INCOME TAX LIABILITY OF DIVIDENDS IN LIQUIDATION

The development of a scheme at once equitable and constitutional for the taxation of corporate distributions has been one of the more difficult problems confronting Congress and the courts since the adoption of the income tax amendment. Doubtless the chief reason for this difficulty has been the fact that the income tax liability of a shareholder upon such a distribution has not been determinable merely by ascertaining whether the amounts received are the variety of receipts commonly regarded by their recipients as income,- in a word, by determining whether they constitute a gain to the shareholder. Rather, it is a commonplace that Congress has seen fit to provide in the recent revenue acts that the rate and the method of taxing the distribution to the shareholder shall vary with the source of the distribution. Thus, although a dividend from corporate surplus accumulated since February 28, 1913, is subject to the surtax, a dividend from corporate surplus accumulated before March 1, 1913 (which in many cases could constitutionally be taxed) may not be taxable at all, although in the Revenue Act of 1924, it has been given an important effect in determining the tax liability of future distributions. Again, a distribution neither out of increase in value of property accrued before March 1, 1913, nor out of corporate earnings or profits, if it is subject to tax at all, may not be taxable at more than the 12,1/2 per cent rate upon capital gains. The weighing of the two considerations affecting income tax liability -the source of the distribution on the one hand, and the gain to the shareholder on the other-becomes most troublesome in connection with distributions in liquidations, since in such cases it is common for all the possible sources and consequently all the various exemptions and methods of taxation to be involved. Since the Treasury and attorneys for taxpayers are not agreed upon the proper interpretation of the provisions of the more recent revenue acts in this respect, and since few of the situations have been judicially considered, a discussion of some of the outstanding problems may be in order