lilifii!)! mmwm mm THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW Gift of Bencer-Moss Co. A TREATISE ON THE FEDERAL CORPORATION TAX LAW INCLUDING THEREIN A Conunentary on the Act itself, an Appendix containing the Text of the Act all Rules and Regulations of the Treasury Department, relating in any way to the Act ; Text of all Laws relating to the Collection, Re- missicn and Refund of Internal Revenue ; Text applicable to the Administration of the Federal Corporation Tax Law, and Opinions of the Attorney-General bearing upon the Meaning of the Act BY THOMAS GOLD FROST, LL.D., Ph.D. OF THE NEW YORK CITY BAR Author of General Treatise on the Law of Guaranty Insurance, The Incorporation and Organization of Corporations, etc. ALBANY, N. Y. MATTHEW BENDEE & COMPANY 1911 T Copyright. 1911 By MATTHEW BENDER & COMPANY DEDICATED TO HON. PHILIP S. POST, jR. OF THE CHICAGO BAR PREFACE. The purpose of the author in presenting a Treatise on the Federal Corporation Tax is to provide both the profession and the public generally with a comprehensive text book on a subject which has up to the present time received but little attention. In the present volume will be found not only a full discussion of the text of the law itself, but there has been added as well a synopsis of all the rulings of the Treasury Department on the subject, together with the opinions of the Attorney-General and the decisions of the courts bearing thereon. It is the hope of the Author that in writing a book of this character he will have furnished not only to the legal profession but to federal officials and corporate officers generally a work which they will find both helpful and useful. Thomas G. Fbost. , New York City, November 2, 1911. TABLE OF CONTENTS. CHAPTER 1. NATURE OF THE FEDERAL CORPORATION TAX ENACTMENT. Section 1. History of the Corporation Tax Law of 1909 1 2. The Tax Is Undoubtedly an Excise Tax 2 3. The Federal Corporation Tax Is Not a Franchise Tax 3 4. The Tax Is Not a Direct Tax Upon Shares or the Income Thereof 5 5. The Tax Is Not a Direct Tax Even In the Case of Com- panies Engaged Mainly or Wholly In the Business of Handling or Dealing In Real Estate 6 6. The Federal Corporation Tax Is Not In the Nature of An Infraction Upon the General Powers of the States to Authorize the Formation of Corporations and Joint Stock Companies 7 7. The Fact That the Federal Corporation Tax Operates Upon Public Service Companies Does Not AfTect the Validity of the Act 11 8. The Federal Corporation Tax Is Not Imposed Upon State or Municipal Bonds or Upon the Income of Such Bonds Forming Part of the Business Assets of the Company Whose Business Is Taxed 14 9. As An Excise the Tax Is Uniform Under Clause 1 of Sec- tion 8 of Article 1 of the L'nited States Constitution. . . IG 10. The Federal Corporation Tax Does Not Lack Uniformity Because It Contains Certain Exemption As to tlie Kind of Corporations Which Are Subject to the Tax IS 11. The Federal Corporation Tax Does Not Subject Corpora- tions to Unreasonable Search or Seizures, or Require Officers Thereof to Incriminate Themselves 20 12. The Tax May Be Collected In One Year Though It Is Measured By the Net Income of the Tax Paying Com- pany During the Preceding Year 21 CHAPTER II. CONSTITUTIONALITY OF THE ACT. Section 13. Constitutionality of th.- Fodoral Corporation Tax. [vii] 22 M'i Table of Contents. CHAPTER III. CONSTRUCTION AND INTERPRETATION OF THE ACT. Section 14. Construction and InterpreUtion of the Act 48 15. Rules for the Construction and Interpretation of the Federal Corporation Tax Act 43 CH.^PTER IV. SCOPE AND INTENT OF THE ACT. Section 16. General Discussion of the Act With Reference to Companies Affected Thereby 51 17. Definition of a Corporation 52 18. Definition of Joint Stock Companies 52 19. Definition of Association 54 20. Meaning of Organization for Profit 65 21. Meaning of the Phrase Having a Capital Stock Represented by Shares ^5 22. Definition of Insurance Companies as Used in the Act 66 23. Character and Purpose of Corporations, Joint Stock Com- panies and Associations — How Determined 67 24. General Statement as to Classes of Companies Excepted From the Operation of the Act 68 25. Definition of Labor Organizations 69 26. Definition of Agricultural Organizations 69 27. Definition of Horticultural Organizations 70 28. Definition of Fraternal Beneficial Societies 71 29. Legal Effect of Excluding From the Operation of the Act Certain Classes of Fraternal Beneficial Organizations and Societies 71 30. What la In Fact the Lodge System 71 31. Meaning of the Phrase Providing for the Payment of Life, Sick, Accident and Other Benefits to the Members of Such Societies, Orders and Associations and Dependants of Such Members 72 32. Definition of Building and Loan Association 72 33. Meaning of tlie Phrase, Organized and Operated Exclusively for the Mutual Benefit of Their Members 72 34. Definition of Religious Corporations and Associations 73 35. Definition of ("haritiilije Organizations and .Associations.... 73 36. Definition of K"ts. ix 40. What Foreign Corporations Are Subject to the Payment of the Federal Corporation Tax Law 77 41. Meaning of Phrase Engaged In Business In the United States ^2 42. Rules for Determining Whether a Foreign Corporation Is Engaged In Business In the United States 82 CHAPTER V. TAX RETURNS. Section 43. Tax Returns — General Provision In Relation Thereto 84 44. Inventories ^^ 45. Content of the Return 89 46. The Return — By Whom Made 91 47. The Return — Where to Be Made 91 48. Verification of Return 92 49. Tax Returns From Insurance Companies 93 50. Tax Returns From Banks and Financial Institutions 94 51. Tax Returns From Transportation Corporations 96 52. Tax Returns From Manufacturing Corporations 98 53. Tax Returns From Mercantile Corporations 99 54. Tax Returns From Miscellaneous Corporations 101 CHAPTER VI. FUNDAMENTAL BASIS OF THE FEDERAL CORPORATION ACT. Section 55. What Is the Fundamental Basis of the Federal Corporation Tax 104 56. Definition of Income 105 57. Meaning of the Phrase " Income Received " In Paragraph 2 of the Act 105 58. Meaning of the Phrase " Income From All Sources Found In Paragraph 2 of the Act 107 59. Classification of the Elements Which Go to Make Up the Gross Income of Corporations and Companies Subject to the Tax 108 60. Income From Business 109 61. Income From Investment 112 62. Income From Capital Invested In Personal Property 112 63. Income From Real Estate 112 64. Income From Sale of Capital Assets 113 65. Income From Property Constitutionally Exempt From Fed- eral Taxation 1 1 -^ 66. Income From Dividends on Stock Held In Other Companies. 115 67. Income Received In a Representative Capacity 117 68. Income From Foreign Business and Foreign Investments. . . 117 Table or Co^" tents. 69. Meaning of Net Income 117 70. Manner of Ascertaining Net Income of Domestic Companies 117 71. Manner of Ascertaining Net Income of Foreign Companies. . 118 72. Are the Terms Net Income and Net Profits Identical In Meaning H^ 73. Are the Provisions of the Act as to the :Method of Calculat- ing tlie Net Income of Companies INIandatory or Directory 119 74. Statutory List of Deductions to be iSIade From Gross Income 120 75. Deductions of Expense of Maintenance of Business and Properties 1-- 76. Deductions for Expense of Operation of Business and Properties l-<^ 77. Meaning of Ordinary Expenses 123 78. Meaning of Necessary Expenses 1-3 79. Meaning of Expenses Actually Paid Out of Income 124 80. What Are Proper Charges for Rentals or Franchise Pay- ments 124 81. Deduction for Losses 124 82. Meaning of Losses 125 83. Meaning of phrase " Losses Actually Sustained Within the Year " 125 84. Condition That Losses Must Not Have Been Compensated by Insurance or Otherwise 125 85. Meaning of Reasonable Allowance for Depreciation of Prop- erty 126 86. Deductions by Insurance Companies — What Are Permis- sible 127 87. Allowance for Sums Paid on Policies and Annuity Contracts 127 88. Allowance for the Net Addition Retjuired by Law to Be Made to Reserve Funds 127 89. Deductions for Indebtedness 127 90. Deduction for Interest Actually Paid on the Bonded In- debtedness 128 91. Deduction for Interest Actually Paid on Indebtedness Other Than Bonded 128 92. Limitation I'pon tlie Allowance for Interest 12S 93. Deduction In Case of Banking Institutions to the Amount of All Interest Actually Paid by Them Within the Year on Deposits 130 94. D.'diictinn for Taxes 131 95. .Mi-:uiing of the Word " Taxes " as Employed In the Act. . . . 131 9(1. \\ but Species of Foreign Taxes May Be Deducted 131 97. Dfdncfions to the .\inniiiit nf Dividends Received Upon Stock of Other CompaMics Suhjcct to tlie Payment of the Corporation Excise '! "ax 131 98. Are Deductions Permissible for nividcnds on Shares In ;i Company Wliosc \et Income Is Less Than .155,000 13-.2 99. An- Deduct ioiis I'ciini'isihlc on .Account of Dividends ou Shares In I'oreign Companies 132 Table of Conte^'ts. xi 100. Foreign C'onipanipa — Statutory Method of Calculating Statutory Income l:{2 101. How sliall the Business of Foreign Companies Transacted In the United States Be Distinguished From That Transacted In Foreign Countries l;5;! 102. Meaning of Business Transacted Within the United States. l.'J.! 103. Meaning of Capital Invested Witliin the United States.... 1.34 104. Statutory Enumeration of Deductions From Gross Income by Foreign Companies 1.1 1 105. What Are Ordinary and Necessary Expenses as Defined by the Act i;5.-, 106. What Losses Are Proper Subjects of Deduction l;!.") 107. What Interest May Lawfully Be Deducted From Gross In- come 1 ;•,.") 108. What Taxes May Properly Be Charged Against the Gross Income 135 109. W^hat Dividends May Be Deducted From Gross Income. . . . 135 110. Special Provision for Assessment Insurance Companies.... 136 CHAPTER VII. CORRECTIONS AND REVISIONS OF RETURNS. Sbction 111. Transmission of the Return 137 112. Penalty for Failure to Make Return 137 113. Power of Collectors of Internal Revenue to Reject Incom- plete Returns 13S 114. Power of Commissioner of Internal Revenue to Require Correct Returns 138 115. Evidence Required Upon Which to Base An Order for Cor- rected Returns 1 :?fl 116. Power of Commissioner of Internal Revenue to Require Additional Information to Be Furnished l.>!> 117. Power of Commissioner of Internal Revenue to Examine Company Books MO 118. Power of Commissioner of Internal Revenue to Take Testi- mony HO 119. Powers of Commissioners In Taking Testimony 140 120. Attendance of Witnesses Before the Commissioner — How Secured 141 121. Examination of Company's Books — How Secured 141 122. What Courts Have Jurisdiction to Punish Witnesses for Refusal to Attend Before Commissioners 142 123. What Witnesses May Be Compelled to Testify and to Pro- duce Books 1 42 124. Power of Commissioner of Internal Revenue to Make. Amend or Correct Returns Uj)on Evidence Taken I'nder His Direction 142 125. Statutory Limitation of Time for tlie Correction of Returns 1-13 126. Penalties for Erroneous or False and Fraudulent Tveturns. . 143 xii Table of Contents. 127. Are the Returns Public Records 148 128. Statutory Protection Against Disclosure of Contents or Returns 146 CHAPTEK VIII. ASSESSMENT OF THE FEDERAL CORPORATION TAX. Section 129. Assessment — General Remarks Thereon 147 130. Powers and Duties of Commissioner In Making Assessment 147 131. Statutory Definition of Amount of Assessment 148 132. Time Within Which Assessment Must Be Made 148 133. Notice of Assessment 148 134. When Assessment Becomes Due and Payable 149 135. Legal Effect of Making Payment of Assessment Under Protest 149 136. Form of Protest 152 CHAPTER IX. COLLECTION OF FEDERAL CORPORATION TAX. Section 137. Collection of the Tax — General Remarks Thereon 153 138. To What Extent Is the Tax a Lien 154 139. Enumeration of Statutory Methods for Collecting the Tax. . 155 140. Levy Upon and Sale of Personal Property 156 141. Attachment and Sale of Real Estate 158 142. Action of Debt 162 143. Powers of the Secretary of the Treasury In the Collection of the Tax , 163 144. Powers of Commissioner of Internal Revenue in the Collec- tion of Tax 164 145. Powers of Collectors of Internal Revenue In the Collection of the Corporation Tax 165 146. Rules and Regulations of the Secretary of the Treasury With Reference to the Collection, Remission and Refund of the Federal Corporation Tax 169 CHAPTEK X. COURT PROCEDURE. Section 147. General Remarks Thereon 171 148. Remedy by Appeal to the Commissioner of Internal Revenue 171 149. What Courts Have Power to Hear Appeals From the Levy- ing of the Tax 172 150. Romrdy by Fniunction 172 151. Romody by Mandamus 172 152. Remedy by Action Against the Officer for Levys Made by Him In Connection With the Enforcement of the Tax. . ]~'.i 153. Action to Recover Taxes Paid Under Protest 174 Table of Comtknts. xiii APPENDIXES. APPENDIX A. Text of Corporation Tax Enactment I75 APPENDIX B. Special Excise Tax Ig4 Treasury Department Regulation No. 1534. (Aug. 21, 1909.) APPENDIX C. Assessment and Collection of Special Excise Tax 180 Treasury Department Regulation No. 1571. (Dec. 3, 1909.) APPENDIX D. I]xcise Tax 196 Treasury Department Regulation No. 1578. (Jan. 4, 1910.) APPENDIX E. Gross Income of Corporation 198 Treasury Department Regulation No. 1583. (Jan. 18, 1910.) APPENDIX F. Returns of Corporations 199 Treasury Department Regulation No. 1588. (Jan. 24, 1910.) APPENDIX G. Excise Tax 202 Treasury Department Regulation No. 1592. (Feb. 5, 1910.) APPENDIX H. Excise Tax — Publicity Clause 203 Treasury Department Regulation No. 1594. (Feb. 17, 1910.) APPENDIX I. Indebtedness Secured by Mortgage on Real Estate Purchased by Corpora- tions 204 Treasury Department Regulation No. 1595. (Feb. 28, 1910.) APPENDIX J. Foreign Steamship Companies Engaged In Transporting Freight or Pas- sengers Between American and Foreign Ports 205 Treasury Department Regulation No. 1600. (March 14. 1010.) xjv Table of Contents. APPENDIX K. Classes of Corporations, etc., Subject to Tax 206 Treasury Department Regulation No. 1606. (March 29, 1910.) APPENDIX L. Instructions to Collectors of Internal Revenue 211 Treasury Department Regulation No. 1611. (April 4, 1910.) APPENDIX M. Instructions to Collectors of Internal Revenue 212 Treasury Department Regulation No. 1615. (April 15, 1910.) APPENDIX N. Decision in Stegall r. Thurman 213 Treasury Department Regulation No. 1616. APPENDIX 0. Examination of Books Belonging to Corporations 217 Treasury Department Regulation No. 1617. (April 19, 1910.) APPENDIX P. Additional Notice to Be Sent to Delinquent Corporations 219 Treasury Department Regulation No. 1633. (May 27, 1910.) APPENDIX Pi. State, County and Municipal Corporations Not Liable to Tax 220 Treasury Department Regulation No. 1634. (May 27, 1910.) APPENDIX Q. Special Instructions to Collectors of Internal Revenue 221 Treasury Department Regulation No. 1639. (June 13. 1910.) APPENDIX n. Five Per Cent. Penalties 222 Treasury Department Regulation No. 1(!51. (Aug. 27. 1910.) APPENDIX S. Real Estate Sold ('ndcr Warrant of Distraint 223 Treasury D<'[)artni('nt Kogulation No. 1654. (Sept. 16, 1910.) APPENDIX T. ReturnR by Mutual Muilding and Loan .Associfitiona 224 Treasury I)<-j)artnient Regulation No. 1655. (Sept. 24. 1910.) Table of Contents. xv APPENDIX U. Instructions Relative to Preparation of Account 225 Treasury Department Regulation No. 1656. (Oct. 6, 1910.) APPENDIX V. Five Per Cent. Penalty and Interest on Delayed Payments of Assessed Taxes 226 Treasury Department Regulation No. 1659. (Oct. 20, 1910.) APPENDIX W. Blank Forms for Returns to Be Furnished by Corporations Making Re- turns 227 Treasury Department Regulation No. 1664. (Nov. 17, 1910.) APPENDIX X. Inspection of Returns of Corporations 228 Treasury Department Regulation No. 1665. (Nov. 28, 1910.) APPENDIX Y. Synopsis of Decisions Relating to Special Excise Tax on Corporations. . . . 231 Treasury Department Regulation No. 1675. (Feb. 14, 1911.) APPENDIX Z. United States Supreme Court Decision In Flint v. Stone Tracy Co., et al.. 2.39 Treasury Department Regulation No. 1685. (March 13, 1911.) APPENDIX AA. Opinion of the United States Supreme Court in Eliot r. Freeman et al . . 240 Treasury Department Regulation No. 1686. (March 20, 1911.) APPENDIX BB. Opinion of the United States Supreme Court in Zonne v. Minneapolis Syndicate et al 243 Treasury Department Regulation No. 1687. (March 20, 1911.) APPENDIX CC. Opinion of Attorney-General Under Date of Jan. 13, 1910 245 January 13, 1910. APPENDIX DD. Opinion of Attorney-General Under Date of Jan. 24, 1910 247 January 24, 1910. xvi Table of Contents. APPENDIX EE. Opinion of Attorney-General Under Date of Feb. 14, 1910 249 February 14, 1910. APPENDIX FF. Opinion of Attorney-General Under Date of Feb. 21, 1910 255 February 21, 1910. APPENDIX GG. Opinion of Attorney-General Under Date of March 9, 1910 257 March 9. 1910. APPENDIX HH. Opinion of Attorney-General Under Date of March 31, 1910 262 March 31, 1910. APPENDIX II. Opinion of Attorney-General Under Date of April 2, 1910 265 April 2, 1910. APPENDIX JJ. Form of Return by Insurance Companies 268 Form No. 634. APPENDIX KK. Form of Return by Banks and Other Financial Institutions 270 Form No. 635. APPENDIX LL. Form of Return by Transportation Corporations 272 Form No. 636. APPENDIX MM. Form of Return by Manufacturing Corporations 274 Form No. 637. APPENDIX NN. Form of Return by Mercantile Corporations 276 Form No. 639. APPENDIX 00. Form of Return by MiHcelJaneous Corporations 278 Form No. 638. Tablk of Contents. xvii APPENDIX PP. Bill of Complaint In the Case of Stella P. Flint, as General Guardian of the Property of Samuel N. Stone. Jr., a Minor, Plaintiff, r. Stone Tracy Company et al., Defendants, as Filed in the Circuit Court of the United States for the District of Vermont (No. 747, October Term, 1909 ) In the Supreme Court of the United States 280 APPENDIX QQ. Bxtracts From United States Revised Statutes Relative to Collection of Internal Revenue Taxes 283 APPENDIX RR. The Tucker Act 298 FEDERAL CORPORATION TAX LAW CHAPTER I. NATURE OF THE FEDERAL CORPORATION TAX ENACTMENT. Sec. 1. History of the Corporation Tax Law of 1909. — The so-called '' Federal Corporation Tax Enactment " was the out- come of political forces which brought about the engrafting of a corporation tax rider upon the so-called Payne Tariff Act of 1909. Immediately after the inauguration of President Taft he called Congress in extraordinary session for the purpose of revising the Dingley Tariff Act. Wliile the new tariff act was under discus- sion before Congress a strong effort was made to incorporate in the new tariff act a provision for a tax upon both individual and corporate incomes. Partly as a compromise and partly because of the inherent fear on the part of the dominant party that the new tariff act would not be sufficient to produce the revenue needed for proper governmental purposes, the Federal Corpora- tion Tax Enactment was proposed and ultimately became a law. It became a law August 5, 1909. The tax itself is embodied in a single section of the Payne Tariff Act, the same being numbered as section 38. See U. S. Kevised Statutes 1909, pp. 11-112- 117 ; also Appendix A. Fed. Corp. Tax — 1 [1] 2 Federal Cobpoeation Tax Law. Sec. 2. The Tax Is Undoubtedly an Excise Tax. — The Cor- poration Tax Act (section 1) attempts to characterize its own nature when it declares that certain corporations named in the act shall be subject to pay annually a special excise tax with reference to the carrs'ing on or doing business by such corpora- tions, joint stock companies or associations or insurance company. The subject of the tax is thus by statute clearly defined to be the carrying on or doing business by the several classes enumerated in the act. Neither the properties of corporations or their franchises are made the subject of the tax. Indeed, so far as their property or franchises are concerned, it is only their use as instruments of business that are made the subject of the tax. Of course the specific designation of the tax as a special excise in the act itself is by no means conclusive upon the courts in determining the nature of the tax attempted to be levied by Congress. The tax is not an " income tax," as that word is used in the United States Constitution. It only becomes necessary to ascer- tain the income of the business of the various companies made subject to tlie tax in order to furnish a means of measuring the amount of the tax, which in its turn is based not upon that income, but upon the occupation from which it is derived. That the tax is strictly a piece of excise legislation is shown conclusively by the decision of the Supreme (\)urt in Flint v. Stone Tracey & Com])any et al. (decided by the United States Supreme Cuurt, Mardi l-'5, IDll) wliorc it was said tliat: " Wlii](^ tlie mere declaration contained in a statulc tliat it shall he regarded aa a tax of a parlicular character does not make it such if it is apparent that it canndt l>e so dosij^'natcd consistently with the meaning and elTect of the act, ncvertheles-i the (h'claration of the lawmaking power is entitled to much weight, and in this statute the intention is expressly declared to impose a special excise tax with respect to the carrying on or doing business by such corpnrati'in. joint stock company or association or company. It is tlierefore appar pay tlie tax clianoe to bo (•nj;afje<| maiidv or oven wholly in tlic business of handling' or (h'alinir in real estate. 'I'lic l'nitc(l States Supreme Court, on this subject, in Flint v. Stone Tracey & Co. (220 U. S. 107), s|K>ke as follows: Nature of Fedebal Corporation Tax Enactmej^t. 7 It is especially objected that certain of the corporations whose stockholder* challenge the validity of the tax are so-called real estate companies, whose business is principally the holding and management of real estate. These cases are No. 415, Cedar Street Co. v. Park Realty Co.; No. 431, Percy H. Brundage V. Broadway Realty Co.; No. 443, Phillips v. Fifty Associates et al.j No. 44G, Mitchell V. Clark Iron Co.; No. 412, William H. Miner v. Corn Exchange Bank et al., and No. 457, Cook et al. v. Boston Wharf Co. In No. 412, Miner v. Corn Exchange Bank et al., the bank occupies a build ing in part and rents a large part to tenants. Of the realty companies the Park Realty Company was organized to " work, develop, sell, convey, mortgage, or otherwise dispose of real estate; to lease, exchange, hire, or otherwise acquire property; to erect, alter, or improve buildings; to conduct, operate, manage, or lease hotels, apartment houses, etc. ; to make and carry out contracts in the manner specified concerning buildings ♦ » * and generally to deal in, sell, lease, exchange, or other- wise deal with lands, buildings, and other property, real or personal," etc. At the time the bill was filed the business of the company related to the Hotel Leonori and the bill averred that it was engaged in no other business except the management and leasing of the hotel. The Broadway Realty Company was formed for the purpose of owning, hold- ing, and managing real estate. It owns an office building and certain secu- rities. The office building is let to tenants, to whom light and heat are furnished, and for whom janitor and similar services are performed. The Fifty Associates are operating under a charter to own real estate with power to build, improve, alter, pull down, and rebuild, and to manage, exchange, and dispose of the same. The Clark Iron Company was organized under the laws of Minnesota, owns and leases ore lands for the purpose of carrying on mining operations, and receives a royalty depending upon the quantity of ore mined. The Boston Wharf Company is operating under a charter authorizing it to acquire lands and flats, with their privileges and appurtenances, and to lease, manage, and improve its property in whatever manner shall be deemed ex- pedient by it, and to receive dockage and wharfage for vessels laid at its wharfs. What we have said as to the character of the corporation tax as an excise tax disposes of the contention that it is direct and therefore requiring apportionment by the Constitution. Sec. 6. The Federal Corporation Tax Is Not in the Nature of an Infraction Upon the General Powers of the States to Authorize the Formation of Corporations and Joint Stock Companies. — That the Federal Coryxjration Tax is not an infrac- tion of the general power of the States to authorize the formation of corporations and joint stock companies is fully sustained by the decisions of the United States Supreme Court. Fn Veazie Bank v. Fenno, 8 Wall. 533, 547, that court spoke as follows : 8 Federal Corpoeation Tax Law. It it, then, a tax on a franchise granted by a State, which Congress, upoM any principle exempting the reserved powers of the States from impairment by taxation, must be held to have no authority to lay and collect? We do not say that there may not be such a tax. It may be admitted that the reserved rights of the States, such as the right to pass laws, to give effect to laws through executive action, to administer justice through ex- ecutive action, to administer justice through the courts, and to employ all necessary agencies for legitimate purposes of State government, are not proper subjects of the taxing power of Congress. But it cannot be admitted that franchises granted by a State are necessarily exempt from taxation; for franchises are property, often very valuable and productive property; and when not conferred for the purpose of giving effect to some reserved power of a State, seem to be as properly objects of taxation as any other property. But in the case before us the object of taxation Is not the franchise of the bank, but property created, or contracts made and issued under the franchise, or power to issue bank bills. A railroad company, in the exercise of its cor- porate franchises, issues freight receipts, bills of lading, and passenger tickets, *nd it cannot be doubted that the organization of railroads is quite as im- portant to the State as the organization of banks. But it will hardly be questioned that these contracts of the company are objects of taxation within the powers of Congress, and not exempted by any relation to the State which granted the charter of the railroad. And it seems difficult to distinguish the taxation of notes issued for circulation from the taxation of these railroad eontracts. Both descriptions of contracts are means of profit to the corpo- rations which issue them; and both as we think may properly be made con- tributory to the public revenue. Pages 547, 648. On this subject the United States Supreme Court in Flint v. Stone Tracey & Co. (220 U. S. 107), spoke as follows: While the tax in this case, as we have construed the statute, is upon the exercise of the privilege of doing business in a corporate capacity, as such business is done under authority of State franchises, it becomes necessary to consider in this connection the right of the federal government to tax the activities of private corporations which ari.se from the exercise of franchises granted by the State in creating and conferring powers upon such corpora- tions. We think it is the result of the cases heretofore do(M(l<'(l in this court that such business activities, though exercised because of State created fran- cliises, are not beyond the taxing power of the United States. Taxes upon rights exercised under grants of State franchises were sustained by this court in Railroad Company v. Collector, 100 V. R. .^Of) ; Ignited States v. Erie R. R. Co., IOC U. S. .327; Spreckela Sugar Refining Co. v. McClain, 102 U. S. .S!17. It is true that in those cases the question does not seem to have been di- rectly made, but. in snstaining such taxation, tlie right of the federal govern m^'nt to reach aiich agencies was nocessiirily involvrd. The question was raitfd and decided in the ca.se of Veazie Bank ;•. Fnino, fi Wall. .'5.33. In that well kiiftwn case a tax upon the notea of a Stato I)ank isaiied for circulation was «UHtnijifil. Mr. ('lii cuiirsc of (lio oy)inion. said: Is it. tlif-n. a tax ou a franchise grantee! by a State, wliirli Congress upon Nature of Fedkhal CoBPoaATiON Tajc Ejsactmknt. U any principle exempting the reserved powers of the States from impairment by taxation must be held to have no authority to lay and collect? We do not say that there may not be such a tax. It may be admitted that the reserved rights of the States, such as the right to pass laws, to give efTect to laws through executive action, to administer justice through the courts, and to employ all necessary agencies for legitimate purposes of State govern- ment, are not proper subjects of tlie taxing power of Congress. Hut it cannot be admitted that franchises granted by a State are necessarily exempt from taxation ; for franchises are property, often very valuable and productive property ; and when not conferred for the purpose of giving effect to some reserved power of a state, seem to be as properly objects of taxation as any other property. But in the case before us the object of taxation is not the franchise of the bank, but property created or contracts made and issued under the franchise or power to issue bank bills. A railroad company, in the exercise of its cor porate franchises, issues freight receipts, bills of lading, and passenger tickets; and it cannot be doubted that the organization of railroads is quite as important to the State as the organization of banks. But it will hardly be questioned that these contracts of fhe company are objects of taxation within the powers of Congress, and not exempted by any relation to the State which granted the charter of the railroad. And it seems difficult to distin- guish that taxation of notes issued for circulation from the taxation of these railroad contracts. Both descriptions of contracts are means of profit to the eorporations which issue them ; and both, as we think, may properly be made •ontributory to the public revenue. Pages 547, 548. It is true that the decision in the Veazie Bank case was also placed in a measure upon the authority of the United States to control the circulating medium of the country, but the force of the reasoning which we have quoted has not been denied or departed from. In Thomas v. United States, 192 U. S., supra, a federal tax on the transfer of corporate shares in State corporations was upheld as a tax upon business transacted in the exercise of privileges afforded by the State laws in respect to corporations. In Nicoll V. Ames, 173 U. S. 509, a federal tax was sustained upon the enjoy- ment of privileges afforded by a board of trade incorporated by the State of Illinois. When the Constitution was framed the right to lay excise taxes was broadly tonferred upon the Congress. At that time very few corporations existed. If the mere fact of State incorporation, extending now to nearly all branches o/ trade and industry, could withdraw the legitimate objects of federal taxa- tion from the exercise of the power conferred, the result would be to exclude the national government from many objects upon which indirect taxes could be constitutionally imposed. Let it be supposed that a group of individuals. as partners, were carrying on the business upon which Congress concluded to lay an excise tax. If it be true that the forming of a State corporation would defeat this purpose, by taking the necessary steps required by the State law to create a corporation aiid carrying on the business under rights granted by a State statute, the federal tax would become invalid, and that source of national reyenue be destroyed, except as to the business in the hands of indi- 10 Federal Corporation Tax Law. viduals or partnerships. It cannot be supposed that it was intended that it should be within the power of individuals acting under State authority to thus impair and limit the exertion of authority which may be essential to national existence. In this connection South Carolina v. United States, 199 U. S. 437, is im- portant. In that case it was held that the agents of the State government, carrying on the business of selling liquor under State authority, were liable to pay the internal revenue tax imposed by the federal government. In the opinion previous cases in this court were reviewed and the rule to be deduced therefrom stated to be that the exemption of State agencies and instrumentali- ties from national taxation was limited to those of a strictly governmental character, and did not extend to those used by the State in carrying ou business of a private character. 199 U. S. 461. The cases unite in exemption from federal taxation the means and instni mentalities employed in carrying on the governmental operations of the State. The exercise of such rights as the establishment of a judiciary, the employ- ment of officers to administer and execute the laws and similar governmental functions cannot be taxed by the federal government. The Collector v. Day, 11 Wall. 113; United States V. R. R. Co., 17 Wiall. 322; Ambrosini v. United States, 187 U. S. 1. But this limitation has never been extended to the exclusion of the activi ties of a merely private business from the federal taxing power, although the power to exercise them is derived from an act of incorporation by one of the States. We, therefore, reach the conclusion that the mere fact that th": busi ness taxed is done in pursuance of authority granted by a State in the crea tion of private corporations does not exempt it from the exercise of federal authority to levy excise taxes upon such privileges. But it is insisted this taxation is so unequal and arbitrary in the fact that it taxes a business when carried on by a corporation and exempts a similar business when carried on by a partnership or private individual as to place it beyond the authority ponforrod upon Congress. As wo have seen, the only limitation upon the authority conferred is uniformity in laying the tax, and uniformity does not require the equal application of the tax to all persona or corporations who may come within its operation, but is limited to geographi- cal uniformity throughout the United States. This subject was fully diu cussed and set at rest in Knowlton r. Moore, 178 U. S., supra, and we can add nothing to the discussion contained in tliat case. In levying excise taxes the most ample authority has been recognized from the beginnin,'^ fo select some and omit other possible subjects of taxation, to select one calling and omit another, to tax one class of prop<'rty and to forbear to tax another. For examples of such taxation, see cases in the margin. deci(l<'(l in this ('(inrl, iij)hol(liiig Ww power. Many instances might be given where tliis court has sustained the right of a State to select subjects of taxation, although as to them the Fourteenth .Amendment imposes a limitation upon State legislatures, requiring that r.o p«>rHon shfill !»■ dinicd tlic ('(iiial protection of the laws. See some of them notcfi in the margin. In Bell's fJap R. R. Co. r. IVnnsylvania. 134 U. S. 232, dealing with the Foiirteentli Amendment, which in this respect imposes limitations only o« State authority, this court said: Nature of Federal Corporation Tax Exactment. 11 " The provision in the Fourteenth Amendment that no State shall deny to any person within its jurisdiction the equal protection of the laws, was not intended to prevent a State from adjusting its system of taxation in all proper and reasonable ways. It may, if it chooses, exempt certain classes of property from any taxation at all, such as churches, libraries, and the prop erty of charitable institutions. It may impose different specific taxes upon different trades and professions, and may vary the rates of excise upon various products; it may tax real estate and personal property only, and not tax securities for payment of money; it may allow deductions for indebtedness, or not allow them. All such regulations, and those of like character, so long as they proceed within reasonable limits and general usage, are within the discretion of the State legislature, or the people of the State in framing their constitution." It is insisted in some of the briefs assailing the validity of this tax that these cases have been modified by Southern R. R. Co. v. Greene, 216 U. S. 400. In that case a corporation organized in a State, other than Alabama, came into that State in compliance with its laws, paid the license tax and property tax imposed upon other corporations doing business in the State, and acquired under direct sanction of the laws of the State a large amount of property therein and when it was attempted to subject it to a further tax on the ground that it was for the privilege of doing business as a foreign corporation, when the same tax was not imposed upon State corporations doing precisely the same business, in the same way, it was held that the attempted taxation was merely arbitrary classification, and void under the Fourteenth Amendment. In the case the foreign corporation was doing business under the sanction of the State laws no less than the local corporation; it had acquired its property under sanction of those laws; it had paid all direct and indirect taxes levied against it, and there was no practical distinction between it and a State corporation doing the same business in the same way. Sec. 7. The Fact That the Federal Corporation Tax Ope- rates Upon Public Service Companies Does Not Affect the Validity of the Act. — The business of public service corpora- tions is not intrinsically an operation of the State which created the company. Even were it so, it has been held that the United States may tax a business conducted either for or by the State itself. In this connection attention is called to the remarks of thij Supreme Court in South Carolina v. United States, 199 U. S. 437. In that case, Justice Brewer, referring to the limitations upon the United States and States implied in the Constitution, spoke as follows : Among those matters which are implied, though not expressed, is that the nation may not, in the exercise of its powers, prevent a State from discharginer the ordinary functions of government, just as it follows from the second clause of Article VI. of the Constitution, that no State can interfere with the 12 Federal Corporation Tax Law. free and unembarrassed exercise by the national government of all the powers •onf erred upon it. Pages 451, 452. And concerning the extent to which the States may go into business if they see fit and the consequent restriction of the taxing power of the United States, if business done by a State should be held free from federal taxation, it was said : The right of South Carolina to control the sale of liquor by the dispensary system has been sustained. Vance v. W. A. Vandercook Co., No. 1, 170 U. S. 438. The profits from the business in the year 1901, as appears from the findings of fact, were over half a million dollars. Mingling the thought of profit witli the necessity of regulation may induce the State to take posses- sion, in like manner, of tobacco, oleomargarine, and all other objects of internal revenue tax. If one State finds it thus profitable other States may follow, and the whole body of internal revenue tax be thus stricken down. More than this, there is a large and growing movement in the coimtry in favor of the acquisition and management by the public of what are termed public utilities, including not merely therein the supply of gas and water, but also the entire railroad system. Would the State by taking into possession these public utilities lose its republican form of government? We may go even a step further. There are some insisting that the State shall become the owner of all property and the manager of all business. Of course this is an extreme view, but its advocates are earnestly contending that thereby the best interests of all citizens will be subserved. If this change should be made in any State, how much would that State contribute to the revenue of the nation ? If this extreme action is not to be counted among the probabilities, consider the result of one much less so. Suppose a State as- sumes under its police power the control of all those ninttors subject to the internal revenue tax and also engages in the business of importing all foreign goods. The same argument which would exempt the sale by a State of liquor, tobacco, etc., from a license tax would exempt the importation of merchandise by a State from import duty. While the State might not prohibit importa tions, as it can the sale of liquor, by private individuals, yet paying no import duty it could undersell all individuals and so monopolize the importation and •ale of foreign goods. 01)viously if the powi-r of the State is carried to the extent suggested, and with it is relief from all federal taxation, the national government would be largely crippled in its revenues. Indeed, if all the States should concur in exercising their powers to the full extent, it would be almost impossible ff)r the nation to cnlloct any revenues. In other words, in this indirect way it woulii be within the competency of the States to jiraetically destroy the efficiency of the national government. If it be said that the States can be trust^'d not to resort to any such extreme measures, because of the resulting inl'crferencc with the ofTicienry of the national government, we may turn to thf! ojiiriioii of .Mr. ('hief .riistice Marstiall, in M'CiilIo^li r. Maryland, supra (p. 4.31 ), for a complete answer: " But is this a case of confidence? Would the people of any one State trust Nature of Fedeieal Corporation Tax Enactment. 13 thoee of another with a power to control the most insignificant operations of their State government? We know they would not. Why, then, should we suppose that the people of any one State should be willing to trust those of another with the power to control the operations of a government to which they have confided their most important and most valuable interests? In the legislature of the Union alone are all represented. Tlie legislature of the Union alone, therefore, can be trusted by the people with the power of con- trolling measures which concern all, in the confidence that it will not be abused." In other words, we are to find in the Constitution itself the full protection *o the nation, and not to rest its sufficiency in either the generosity or the neglect of any State. There is something of a conflict between the full power of the nation in respect to taxation and the exemption of the State from federal taxation in respect to its property and a discharge of all its functions. Where and how shall the line between them be drawn? We have seen that the full power of •ollecting license taxes ia in the terms granted to the national government with only the limitations of uniformity and the public benefit. The exemption of the State's property and its functions from federal taxation is implied from the dual character of our federal system and the necessity of preserving the State in all its efficiency. In order to determine to what extent that im- plication will go we must turn to the condition of things at the time the Con- stitution was framed. What, in the light of that condition, did the framers of the Constitution intend should be exempt. Certain is it that modern notions as to the extent to which the functions of a State may be carried had then no hold. Whatever Utopian theories may have been presented by any writers were regarded as mere creations of fancy, and had no practical recognition. It is true that monopolies in respect to certain commodities were known to have been granted by absolute monarchs, but they were not regarded as con- sistent with Anglo-Saxon ideas of government. The opposition to the Con- stitution came not from any apprehension of danger from the extent of power reserved to the States, but, on the other hand, entirely through fear of what might result from the exercise of the powers granted to the central govern- ment. While many believed that the liberty of the people depended on the preservation of the rights of the States, they had no thought that those States would extend their functions beyond their then recognized scope, or so as to imperil the life of the nation. Looking, therefore, at the Constitution in the light of the conditions sur- rounding at the time of its adoption, it is obvious that the framers in grant ing full power over license taxes to the national government meant that the power should be complete, and never thought that the States by extending their functions could practically destroy it. Pages 454-457. The United States Supreme Court, in Flint r. Stone Traeey &: Co. (220 TJ. S. 107), on this subject, spoke as follows: We come to the question, "Are so-called public service corporations, such as the Coney Island & Brooklyn Railroad Co.. in case No. 40!>. and th(> Int^^'- borough Rapid Transit Co., No. 442, exempted from the operation of tliis 14 Federal Corporation Tax Law. statute V" In the case of South Carolina v. United States, 199 U. S. 437, the court held that when a State, acting within its lawful authority, undertook to carry on the liquor business it did not withdraw the agencies of the State carrying on the traffic from the operation of the internal revenue laws of the United States. If a State may not thus withdraw from the operation of a federal taxing law a subject-matter of such taxation, it is difficult to see how the incorporation of companies whose service, though of a public nature, is, uevertlioloss. with a view to private profit, can have the effect of denying the federal right to reach such properties and activities for the purposes of revenue. It is no part of the essential governmental functions of a State to provid'i means of transportation, supply artificial light, water, and the like. These objects are often accomplished through the medium of private corporations, and though the public maj' derive a benefit from such operations, the com- panies carrying on such enterprises are nevertheless private companies, whose business is prosecuted for private emolument and advantage. For the pur pose of taxation they stand upon the same footing as other private corpora tions upon which special franchises have been conferred. The true distinction is between the attempted taxation of those operation.^ of the State essential to the execution of its governmental functions, and which the State can only do itself, and those activities which are of a private character. The former the United States may not interfere with by taxing the agencies of the State in carrj'ing out its purposes ; the latter, although regulated by the State and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate federal taxation. Applying this principle, we are of opinion that the so called public service corporations represented in the casca at bar are not exempt from the tax in question. Itailroad Co. p. Penniston, 18 Wall. 5, 33. Sec. 8. The Federal Corporation Tax Is Not Imposed Upon State or Municipal Bonds or Upon the Income of Such Bonds Forming Part of the Business Assets of the Company Whose Business Is Taxed. — It is conceded of course tliat the bonds of a State or of a iminieipality of a State, or the income derived there- ffoiii. ciiiinnt he irKidc the f^nhjert of a federal tax. Pollock v. Fanners Loan & Trust Co., 157 U. S. 429, 583, 580. 'I hi' rc'i^fiii 'if this is of ('(mrsc that the power to issue such is an esscnliiil cleiucut of fh(> aovereiij^nty of the State and eanuot he iiiipaiicd hy federal h'i^islat ion. However, this j)rincip]e in no wise alTects the validity of the Federal iiiconic Tax for the reasriu that the same is not imposed on the said i>ouds or on the income of such bonds, but is imposed on the business of the com- pany whieh holds the bonds sis part of its business assets and tlic income from such IkjihIh, as w(dl as from the c/mipnny's other Natuuk of FiiDEOiAi. CouroKATioN Tax Enactaiknt. 16 business, assets and activities, is used only as a measure of tlui amount of the tax on the business. On this subject the United States Supreme Court in Flint v. Stone Tracey Co. (220 U. S. 107), spoke as follows: It is further contended that some of the corporations, notably insurance companies, have large investments in municipal bonds and other nontaxable securities, and in real estate and personal property not used in the business: that therefore the selection of the measure of the income from all sources in void, because it reaches property which is not subject of taxation, upon the authority of the Pollock case, supra. But this argument confuses the measure of the tax upon the privilege with direct taxation of the estate or thing taxed. In the Pollock case, as we have seen, the tax was held unconstitutional because it was in effect a direct tax on the property solely because of its ownership. Nor does the adoption of this measure of the amount of the tax do violence to the rule laid down in Galveston, Harrisburg & San Antonio Ry. Co. v. Texas, 210 U. S. 217, nor the Western Union Tel. Co. ;;. Kansas, 216 U. S. 1. In the Galveston case it was held that a tax imposed by the State of Texas equal to one per cent, upon the gross receipts " from every source whatever," of lines of railroad lying wholly within the State, was invalid as an attempt to tax gross receipts derived from the carriage of passengers and freight in inter- state commerce, which in some instances was an attempt to burden commerce among the States, and the fact that it was declared to be "equal to" one per cent, made no difFerence, as it was merely an effort to reach gross receipts by a tax not even disguised as an occupation tax, and in nowise helped by the words " equal to." In other words, the tax was held void, as its substance and manifest intent was to tax interstate commerce as such. In the Western Union Telegraph cases the State undertook to levy a graded charter fee upon the entire capital stock of $100,000,000 of the Western Union Telegraph Company, a foreign corporation, ami engaged in commerce among the States, as a condition of doing local business within the State of Kansas. This court held, looking through forms avA reaching the substance of the thing, that the tax thus imposed was in reality a tax upon the right to do interstate commerce within the State and an undertaking to tax property beyond the limits of the State; that whatever the declared purpose, when reasonably interpreted, the necessary operation and eflFect of the act in ques- tion was to burden interstate commerce and to tax property beyond the jurisdiction of the State, and it was therefore invalid. There is nothing in these cases contrary, as we shall have occasion to see, to the former rulings of this court which hold that where a tax is lawfully imposed upon the exercise of privileges within the taxing power of the State or nation, the measure of such tax may \yc the income from the property of the corporation, although a part of such income is derived from property in itself nontaxable. The distinction lies between the attempt to tax the prop- erty as such and to measure a legitimate tax upon the privileges involved in the use of such property. 16 Federal Corporation Tax Law. Sec. 9. As an Excise the Tax Is Uniform Under Clause 1 of Section 8 of Article 1 of the United States Constitution. — The federal corporation tax complies with the constitutional rule as to uniformity (under clause 1 of section 8 of article 1 of the United States Constitution) even though it is laid upon other kinds of business than insurance only, provided that such business is conducted by a corporation or joint stock company having shares of stock. The only uniformity called for by the clause of the Constitution here referred to is geographical uniformity, and when this is conceded, the claim that the tax is uniform is likewise conceded. Upon this subject the United States Supreme Court in Flint •. Stone Tracey Co. (220 U. S. 107), spoke as follows: The applicable provisions of the Constitution of the United States in thii connection are found in article 1, section 8, clause 1; in article 1, section 2, clause 3; and article 1, section 9, clause 4. They are respectively: " The Congress shall have power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States. " Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective numbers. " No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken." It was under the latter requiroment as to apportionment of direct taxes according to population that this court in the Pollock case held the statute of 1894 to be unconstitutional. Upon the rehearing of the case Mr. Chief Justice Fuller, who spoke for the court summarizing the effect of the decision, said: " We have considered the act only in respect of the tax on income derived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or em- ployments, in view of the instances in which taxation on business, privileges, or employments lias assumed the guise of an excise tax and been sustained as such. l.W U. S. 635." And as to excise taxes, the chief justice said: " We do not mean to say thai an act laying by apportionment a direct tax on all real estate or personal property, or tlie income thereof might not also lay excise taxes on business, privilogos, employments, and vocations. Page (137." Tlie Pollock case was before this court in Knowlton r. Moore, 173 U. S. 41. In that case this court HiiHl.-iiiied an excise tax upon tlie transmission of prop- <'rty by iniieritance. It was contended there as liere, that the case was ruled by the Pollock case, and of that case this court, speaking by the present chief iiiftic*', said: A'atube of Fedebal CoKi'oRATioN Tax Enactment. 17 '• The issue presented in the Pollock case was whether an income tax was direct within the meaning of the Constitution. The contentions which the case involved were thus presented. On the one hand it was argued that only capitation taxes and taxes on land as such were direct, within the meaning of the Constitution, considered as a matter of first impression, and that pre vious adjudications had construed the Constitution as having that import. On the other hand, it was asserted that, in principle, direct taxes, in the consti- tutional sense, embraced not only taxes on land and capitation taxes but all burdens laid on real or personal property because of its ownership, which were equivalent to a direct tax on such property, and it was affirmed that the previous adjudications of this court had settled nothing to the contrary. " * * * Undoubtedly, in the course of the opinion in the Pollock case it was said that if a tax was direct within the constitutional sense the mere erroneous qualification of it as an excise or duty would not take it out of the constitutional requirement as to apportionment. But this language related to the subject matter under consideration, and was but a statement that a tax which was in itself direct, because imposed upon property solely because of its ownership, could not be changed by affixing to it the qualifications of excise or duty. Here we are asked to decide that a tax is a direct tax on property which has at all times been considered as the antithesis of such a tax ; that is, that it has ever been treated as a duty or excise, because of the particular occasion which gives rise to its levy. " * * * Considering that the constitutional rule of apportionment had its origin in the purpose to prevent taxes on persons solely because of their general ovmership of property from being levied by any other rule than that of apportionment, two things were decided by the court: First, that no sound distinction existed between a tax levied on a person solely because of his general ownership of real property, and the same tax imposed solely because of his general ownership of personal property. Secondly, that the tax on the income derived from such property, real or personal, was the legal equivalent of a direct tax on the property from which said income was derived, and hence must be apportioned. These conclusions, however, lend no support to the essential equivalents of a tax on property generally, real or personal, solely because of its ownership, must be converted into direct taxes, because it is conceived that it would be demonstrated by a close analysis that they could not be shifted from the person upon whom they first fall." The same view was taken of the Pollock case in the subsequent case of Spreckels Sugar Refining Co. v. McClain, \92 U. S. 397. The act now under consideration does not impose direct taxation upon prop- erty solely because of its ownership, but the tax is within the class which Congress is authorized to lay and collect under article 1, section 8, clause 1, of the Constitution, and described generally as taxes, duties, imposts, and excises, upon which the limitation is that they shall be uniform throughout the United States. Within the category of indirect taxation, as we shall have further occasion to show, is embraced a tax upon business done in a corporate capacity, which is the subject-matter of the tax imposed in the act under consideration. The Pollock case construed the tax there levied as direct, because it was impo.«»ed upon property simply because of its ownership. In the present case the tax Fed. Corp. Tax — 2 18 FliDEKAL Coill'DKATlOX TaX LaW. is not payable unless there be a carrying on or doing of business in the desig- nated capacity, and this is made the occasion for the tax, measured by the standard prescribed. The difl'erence between the acts is not merely nominal, but rests upon substantial differences between the mere ownership of property and the actual doing of business in a certain waj-. It is unnecessary to enter upon an extended consideration of the technical meaning of the term " excise." It has been the subject matter of considerable discussion — the terms duties, imposts, and excises are generally treated as embracing the indirect forma of taxation contemplated by the Constitution. As Mr. Chief Justice Fuller said in the Pollock case, supra: "Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words ' duties, imposts, and excises,' such a tax for more than one hundred years of national existence has as yet remained undiscovered, notwithstanding the stress of par ticular circumstances has invited thorough investigation into sources of revenue." And in tiie same connection the chief justice, delivering the opinion of the court in Thomas r. United States, 192 U. S. 362, in speaking of the words duties, imposts, and excises, said: " We think that they are used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture, and sale of certain commodities, privileges, particular business transactions, vocations, occupa- tions, and the like." Duties and imposts are terms commonly applied to levies made by govern- ments on the importation or exportation of commodities. Excises are " taxes laid upon the manufacture, sale, or consumption of commodities, within the country upon licenses to pursue certain occupations, and iipon corporate privileges." Cooley Cons. Lim. (7th ed.) 680. The tax under consideration, as we have construed the statute, may be de scribed as an excise tax upon the particular privilege of doing business, in a corporate capacity; t. e., with the advantages which arise from corporate or quasi-corporate organization; or, when applied to insurance companies, for doing the business of such companies. As was said in the Thomas case, 192 U. S., supra, the requirement to pay such taxes involves the exercise of privi- leges, and the element of absolute and unavoidable demand is lacking. If business is not done in the manner described in the statute no tax is payable. If w<> are correct in hoMing tliat tliis is an excise tax, there is notiiing in till" ('(institii(iHC- Spreckels Sugar rt<'nning Co., 192 U. S. .397. Sec. 10. The Federal Corporation Tax Does Not Lack Uni- formity Because It Contains Certain Rxemptions as to the Kind of Corporations Which Are Subject to the Tax. — The yinints licrc rclVrrcd to ni:i\' he hricllv (■miincrntcd ms follows: 'I'lic tiiN iiiil\- ;i]ij)lics to iiicdtiics over :u\i\ iiliov'c lixc tlioiisand dollars. Oil lliis ■-nliici't tlu- I'tiilcil Stnfcs Siiprnnc (^onrt in Flint r. Si., II.' 'Vv.u-cy & Co. (220 11. S. 107), spoko as f.)llo\vs: Nature of Fkdkkai. (Jokpokatioa Tax Enactment. 19 It is again objected that incomes under $5,000 are exempted from the tax. It is only necessary in this connection to refer to Knowlton v. Moore, 178 U. a., supra, in which a tax upon inheritances in excess of $10,000 was sustained. In Magoun V. Illinois Trust & Savings iJank, 170 U. S. 283, 293, a graded in- , heritance tax was sustained. Neither does it lack uniformity because it exempts from the operation of the tax, labor, agricultural or horticultural organiza- tions, fraternal beneficial societies, orders or associations, ojxirat- iug under the lodge system, and providing for the payment of life, sick, accident or other benefits, to the members of such societies, orders and associations and dependents upon such members, domestic building and loan associations organized explicitly for the mutual benefit of their members, together with the religious, charitable or educational organizations. On this subject the United States Supreme Court in Flint v. Stone Tracey & Co. (220 U. S. 107), spoke as follows: As to the objections that certain organizations, labor, agricultural, and horticultural, fraternal and benevolent societies, loan and building associa tions, and those for religious, charitable, or educational purposes, are ex- cepted from the operation of the law, we find nothing in them to invalidate the tax. As we have had frequent occasion to say, the decisions of this court from an early date to the present time have emphasized the right of Congress to select the objects of excise taxation, and within this power to tax some and leave others untaxed must be included the right to make exemptions such as are found in this act. Again, it is urged that Congress exceeded its power in permitting a deduc lion to be made of interest payments only in case of interest paid by banks nnd trust companies on deposits, and interest actually paid within the year on its bonded or other indebtedness to an amount of such Ixinded and other indebtedness not exceeding the paid up capital stock of the corporation or company. This provision may have been inserted with a view to prevent cor- porations from issuing a large amount of bonds in excess of the paid-up capital stock, and thereby distributing profits so as to avoid the tax. In any f-vent. we see no rea'^on why this method of ascertaining the deductions al lowed should invalidate the act. Such details are not wholly arbitrary, and were deemed essential to practical operation. Courts cannot substitute their judgment for that of the legislature. Tn such matters a wide range of dis- cretion is allowed. The argument that different corporations are so difTerently circumstanced in different States, and the operation of the law so unequal as to destroy it. is so fully met in the opinion in Knowlton r. Moore, 178 U. S., supra, thnt it is only necessary to make reference thereto. For this purpose fh" 1:"v operates uniformly, ceosraphicallv considored. throufrbont the T^nifod Pf^t'^'s, and in the same way wherever the subject-matter is found. A liquor tax is '1'^t rendered unlawful as a revenue measure because it may yield nothinir i" L 20 Federal Corporation Tax Law, those States which have promoted the liquor traffic. No more is the present law unconstitutional because of inequality of operation owing to different local conditions. Nor is the special objection tenable, made in some of the cases, that the corporations act as trustees, guardians, etc., under the authority of the laws or courts of the State. Such trustees are not the agents of the State govern- ment in a sense which exempts them from taxation because executing the necessary governmental powers of the Stat*". The trustees receive their com pensation from the interests served, and not from the public revenues of the- State. Sec. 11. The Federal Corporation Tax Does Not Subject Corporations to Unreasonable Search or Seizures, or Require Officers Thereof to Incriminate Themselves. — The act con- tains no authorization which could be made the basis for a claim that it subjects the companies subject to the tax to unreasonable search or seizure, or makes it imperative upon officers thereof to incriminate themselves. The United States Supreme Court, in Elint v. Stone Tracey & Co, (220 U. S. 107), on this subject, spoke as follows: It is urged in a number of cases that in a certain feature of the statute* there is a violation of the Fourth Amendment of the Constitution, protecting against unreasonable searches and seizures. Tliis amendment was adopted to protect against abuses in judicial procedure, under the guise of law, which invade the privacy of persons in their homes, papers, and effects, and applies to criminal prosecutions and suits for penalties and forfeitures under the revenue laws. Boyd v. United States, IIG U. S. G32. It does not prevent the issue of search warrants for the seizure of gambling paraphernalia and other illegal matter. Adams v. New York, 192 U. S. 585. It does not prevent the issuing of process to require attendance and testimony of witnesses, the pro duction of books and papers, etc. Interstate Commerce Commission r. Brim son, 154 U. S. 44V; Inter.state Commerce Commission V. Baird, 194 U. S. 25. Certainly the amendment was not intended to prevent ordinary procedure in use in many, perhaps most, of the States, of requiring tax returns to be mad?, often under oatli. The objection in this connection applies when the substance of the argunif'iit is reached, to tlx- sixth section of the act, which provides: "Sixth. Wlicii flic assessment kIkiII be ni.ule, as provided in this section, th»- returns, together with any corrections thereof which may have been mado bv the eonimissidncr. shall be filed in the office of the Commissioner of In ternal Revenue and shall constitute p\iblic records and be open to inspection as such." An iinK'ndrncnt was niiidc .luiir 17. 1910, which reads na follows: "For el i^sifving, imlcxiiiLr, cxhiliil inj.', and properly caring for the returns of all corporations, reijuircd by section thirty eight of an act entitled 'An Act to provide revenue, equalize duties, encournge tlic industries of the ITnit<«, litOi), known as "The Corporation Tax" law. (Stat. liHM), pp. 112-117.) It is conU'uded in the first place that tliis section of tlie act is unconstitu- tional, because it is a revenue measure, and originat4'd in the senate in viola- tion of section 7 of article 1 of the ('onstitution, providing tliat " all bilN for the raising of revenue shall originate in the hoiise of re]»res<>ntatives, hut the senate may propose or concur with amendments as on other hills." The history of the act is contained in tlie governnK'iil's brief, aiul is accepted as correct, no objection being made to its acciiracy. This statement shows that the tarifT liill. of which the section under con- frideration is a j)art. originated in the house of rcj)r<rty generally, real or personal, solely because of its ownership, must be converted into direct taxes, because it is conceived that it would be demonstrated by a close analysis that they could not Iw Hhift<'(i from the person upon whom they first fall." The same view was taken of the Pollock case in the subsequent case of SpreckelH Sugar P<'fining Co. r. McClain. 1!)2 V. S. 397. The act now iirulcr considerntion does not impose din-rt taxation upon prop erty Hr)lely because of its ownership, but tlic tax is within the class which CongresH in authorized to lay and collect under artich' 1, section S, clause 1, (if the Constitution, and described generally as taxes, duties, imposts, and excises, upon which the limitation is that they shall be uniform tliroughout flic I 'nited States. W'it'iin tli<' category of indireet taxation, as we shall have further occasion to show, is embraced a tax upon business done in a corporate eapaeitv, which 18 the subject matter of the tax imposed in the act unch-r consideration. Th* Constitutionality of the Tax. 27 Pollock case construed the tax there levied as direct, because it was imposed upon property simply because of its ownership. In the present case the tax is not payable unless there be a carrying on or doing of business in the desig- nated capacity, and this is made the occasion for tlie tax, measured by the standard prescribed. The difference between the acts is not merely nominal, but rests upon substantial differences between the mere ownership of property and the actual doing of business in a certain way. It is unnecessary to enter upon an extended consideration of the technical meaning of the term " excise." It has been the subject-matter of considerablf discussion — the terms duties, imposts, and excises are generally treated as embracing the indirect forms of taxation contemplated by the Constitution. As Mr. Chief Justice Fuller said in the Pollock case, supra: "Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words ' duties, imposts, and excises,' such a tax for more than one hundred pears of national existence has as yet remained undiscovered, notwithstanding the stress of particular circumstances has invited thorough investigation into sources of revenue." And in the same connection the chief ju.stice, delivering the opinion of the court in Thomas v. United States, 192 U. S. 363, in speaking of the words duties, imposts, and excises, said: " We think that they were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture, and sale of certain commodities, privileges, particular business transactions, vocations, occupa- tions, and the like."' Duties and imposrte are terms commonly applied to levies made by govern ments on the importetion or exportation of commodities. Excises are '" taxes laid upon the manufacture, sale, or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges." Cooley, Cons. Lim. (7th ed.) 680. The tax under consideration, as we have construed the statute, may be de- scribed as an excise upon the particular privilege of doing business in a corporate capacity, i. e.. with the advantages which arise from corporate or ^uosi-corporate organization ; or, when applied to insurance companies, for doing the business of such companies. As was said in the Thomas case, 102 U. S., supra, the requirement to pay such taxes involves the exercise of privi leges, and the element of absolute and unavoidable demand is lacking. If business is not done in the manner described in the statute, no tax is payable. If we are correct in holding that this is an excise tax, there is nothing in the Constitution requiring such taxes to b:^ apportioned according to popula tion. Pacific Ins. Co. v. Soule, 7 Wall. 433; Springer r. TTnited States, 102 U. S. 586; Spreckels Sugar Refining Co.. 192 U. R. 397. Tt is next contended that the attempted taxation is void because it levies a tax upon the exclusive right of a State to grant corporate franchises. Iiocansp it taxes franchises which are the creation of the State in its sovereign right and authority. This proposition is rested upon the implied limitation upon the powers of national and state governments to take action which encroaches upon or cripples the exercise of the exclusive power of sovereignty in tlie other It has been held in a number of cases that the State cannot tax franchises 28 Federal Corporatioa' Tax Law. created by the United States or the agencies or corporations which are created for the purpose of carrying out governmental functions of the United States. McCulloch V. Maryland, 4 Wheat. 316; Osborn r. Bank, 9 Wheat. 738; Rail- road Co. r. Peniston, 18 Wall. 5; California v. Central Pac. R. R. Co., 127 U. S. 1. An examination of these cases will show that in each case where the tax was held invalid the decision rested upon the proposition that the corporation was created to cany into effect powers conferred upon the federal government in its sovereign capacity, and the attempted taxation was an interference with the effectual exercise of such powers. In Osborn r. The Bank, supra, a leading case upon the subject, whilst it was held tliat the bank of the United States was not a private corporation, but a public one, created for national purposes, and therefore beyond the taxing power of the State, Chief Justice Marsliall, in delivering the opinion of the court, conceded that if the corporation had been originated for the man- agement of an individual concern, with private trade and profit for its great end and principal object, it might be taxed by the State. Said the chief justice: " If these premises [that the corporation was one of private character] were true, the conclusion drawn from them would be inevitable. This mere private corporation, engaged in its own business, with its own views, would certainly be subject to the taxing power of the State, as any individual would be ; and the casual circumstance of its being employed by the government in the trans- action of its fiscal affairs would no more exempt its private business from the operation of that power than it would exempt the private business of any individual employed in the same manner." The inquiry in this connection is: How far do the implied limitations upon tlie taxing power of the United States over objects which would otherwise be legitimate subjects of federal taxation, withdraw them from the reach of the federal government in raising revenue, because they are pursued under fran chises wliich are the creation of the States? In approacliing this subject we must remember that enactments levying taxes, as otlior laws of the federal government when acting within constitu- tional authority, are the supreme law of the land. The Constitution contains only two limitations on the right of Congress to levy excise taxes; they must be levied for tiie public welfare and are required to be uniform throughout the United States. As Mr. Chief Justice Chase said, speaking for the court in License Tax Cases, T) Wall. 402, 471: "Congress cannot tax exports, and it must impose direct taxes l)y tlie rul(> of apportionment, and indirect taxes by the rule of uniformity. Tims limited and thus only, it reaches every subject ami may be ex«'rci3cd at discretion." Tlie limilations to which the chief justice refers Wfrn Ww only ones imposed in (lie Constitution upon the taxing power. In McCray v. United States, Ifl.') U. S. 27. this court sustained a federal tax on fdeomargarino, artificially colored, and held that while the Fifth and T'lilli ArTicndm<'nlH (pialify. ^o far as ajiplicablc, all flic provisions of the Con stitiitjon, nothing in thorn' amcnilments operates to take away the power to tax conferred by tlio Const itntion on the Congress. In thai ease it was contended that the Hul)j<'rt taxed was within the exclusive domain of the States, and CoiiSTlTUTIONALlTY OF THE TaX. A'J i.iat ti.e real purpose of Congress was not to raise revenue, but to tax out of existence a substance not harmful uf itself and one wliicli might be lawfully manufactured and sold; but, the only cnn.stitutional limitation whicii this court conceded, in addition to the requirement of uniformity, and that for the sake of argument only so far as concerned the case then under consideration, was that Congress is restrained from arbitrary impositions or from exc^-eding its powers in seeking to effect unwarranted ends. The limitation of unifut it will hardly be ques- tioned that these contracts of the company are objects of taxation within the powers of Congress, and not exempted by any relation to the State which granted the charter of the railroad. And it seems difficult to distinguish the taxation of notes issued for circulation from the taxation of these railroad contracts. Both descriptions of contracts are means of profit to the corpora- tions which issue them; and both, as we think, may properly be made con- tributory to the public revenue." Pages 547, 548. It is true that the decision in the Veazie Bank case was also placed, in a measure, upon the authority of the United States to control the circulating medium of the country, but the force of the reasoning, which we have quoted, has not been denied or departed from. In Thomas v. United States, 192 U. S., supra, a federal tax on the transfer of corporate shares in State corporations was upheld as a tax upon business transacted in the exercise of privileges afforded by the State laws in respect to corporations. In Nicol V. Ames, 173 U. S. 509, a federal tax was sustained upon the en- joynu'nt of privileges afforded by a board of trade incorporated by the State of Illinois. When the Constitution was framed the right to lay excise taxes was broadly conferred upon the Congress. At that time very few corporations existed. If the mere fact of State incorporation, ext<'nding now to nearly all branches of trade and industry, could withdraw the legitimate objects of federal taxa- tion from the exercise of the power conferred, the result would be to exclude the national government from many objects upon which indirect taxes coul;l be constituticjnally imposed. Let it be supposed that a group of individuals, as partners, were carrying on a business upon wliich Congress concluded to lay an excise tax. If it be true that the forming of a State corporation would defeat this purpose, by taking the necessary steps required by the State law u> create' a (rorjioratioii and carrying on the business under rights granted by a State statute, the federal ta.x would become invalid and that source of national revenue be destroyed, except as to the business in the hands of individuals or partnerships. It cannot be suppo.sed tlial it was in(<'n(!cd that it should l)e within the jjower of individuals acting un(i<'r State autlmrity to thus impair and limit tiu; exertion of authority wliich may be c.s.sential to national exJHt^'nce. In thi^ cnnnictiiin Soutli Carnjina r. United States. 199 I'. S. 4.'t7. is im- portant. In tliat case it was held that the agents of th<' Stat<' govcrninenl. carrying on tlie business of sellinjr li(|uor under State authority, were liabU* to pay the internal revenue tax imposed i)\ (lie foderal government. In the opinion previous cases in this ermrl were reviewed, ami the iiih' In 1m' iledueed tlx-refroni stated to be that t hi' e\ein|i1 inn of State agencies and inst rumentali- ties from national taxation was limited to thos*' of a strictly governmental character, and did not extend In thos<' uK<'d by the State in carrying on buai nesB of a private character. 199 U. S. 461. Constitutionality of the Tax. :jl 'fhe cases unite in exempting from federal taxation tlio means and infltru- mentalities employed in carrying on the governnu-ntal operations of the State. The exercise of such rights as the establishment of a judiciary, the employ- ment of officers to administer and execute the laws and similar governmental functions cannot be taxed by tiie federal gov<'rnmcnt. The Collector r. Hay, 11 W'lall. 113; United States v. R. R. Co., 17 Wall. 322; Ambrosini v. United States, 187 U. S. 1. But this limitation has never been extended to the exclusion of the activities of a merely private business from the federal taxing power, although tlie power to exercise them is derived from an act of incorporation by one of thf States. We, therefore, reach the conclusion that the mere fact that the busi- ness taxed is done in pursuance of authority granted by a State in the creation of private corporations does not exempt it from the exercise of federal author- ity to levy excise taxes upon such privileges. But, it is insisted, this taxation is so unequal and arbitrary in the fact that it taxes a business when carried on by a corporation and exempts a similar business when carried on by a partnership or private individual as to place it beyond the authority conferred upon ('ongress. As we liave seen, the only limitation upon the authority conferred is uniformity in laying the tax, and uniformity does not require the equal application of the tax to all persons or corporations who may come within its operation, but is limited to geo graphical uniformity throughout the United Stat<*s. Tliis subject was fully discussed and set at rest in Knowlton v. Moore, 178 U. S., supra, and we can add nothing to the discussion contained in that case. In levying excise taxes the most ample authority has been recognized from the beginning to select some and omit other possible subjects of taxation, to select one calling and omit another, to tax one class of property and to forbear to tax another. For examples of such taxation, see the following cases decided in this court, upholding the power: Hylton V. United States, 3 Dall. 171 (a tax on carriages which the owner kept for private use) ; Nicol v. Ames, 173 U. S. 509 (a tax upon sales or ex- changes of boards of trade) ; Knowlton r. Moore, 178 U. S. 41 (a tax on the transmission of property from the dead to the living) ; Treat r. White. 181 U. S. 264 (a tax on agreements to sell shares of stock, denominated "calls" by stockbrokers) ; Patton v. Brady, 184 U. S. 608 (a tax on tobacco manu factured for consumption, and imposed at a period intermediate the commence ment of manufacture and tlie final consimiption of the article) ; Cornell r. Coyne, 192 U. S. 418 (a tax on "filled cheese" manufactured expressly for export) ; McCray v. United States, 195 U. S. 27 (a tax on oleomargarine not artificially colored, a higher tax on oleomargarine artificially colored and no tax on butter artificially colored) : Thomas v. United States, 102 U. S. 363 (a tax on sales of shares of stock in corporations) ; Pacific Insurance Co. ;•. Soule, 7 Wall. 433 (tax upon the amounts insured, renewed, or continued bv Insurance companies upon the gross amounts of premiums received and assess- ments made by them, and also upon dividends, undistributed sums, and in comes) ; Veazie Bank r. Fenno, 8 Wall. 533 (a tax of ten per centum on tlie amount of the notes paid out of any State bank, or State bankiii<: associa- tion) ; Seholey r. Rew, 23 Wall. 331 (a tax on devolutions of title to real estate) ; Spreckels v. Sugar Refining Co., 102 U. S. 307 (a tax on the gross 32 Federal CoRPOR^iTiON Tax Law. receipts of corporations and companies, in excess of $250,000, engaged iff refining sugar or oil) ; Kailroad Co. v. Collector, 100 U. S. 595 (a tax laid in terms upon the amounts paid by certain public service corporations as interest on their funded debt, or as dividends to their stockholders, and also on " all profits, incomes, or gains of sucli company, and all profits of such company carried to the account of any fund, or used for construction." Held to be a tax upon the company's earnings and therefore essentially an excise upon the business of the corporations) ; Springer r. United States, 102 U. S. 5S(i (a duty provided by the internal revenue acts to be assessed, collected, and paid upon gains, profits, and incomes, held to be an excise or duty and not a direct tax). Many instances might be given where this court has sustained tlie right of a State to select subjects of taxation, although as to them the Fourteenth Amendment imposes a limitation upon State legislatures, requiring that no person shall be denied the equal protection of the laws. See the following cases : Beers r. Glynn, 211 U. S. 477 (a State tax on personalty or nonresident decedents who owned realty in the State) ; Hatch v. Reardon, 204 U. S. 152 (a State tax on the transfers of stock made within the State) ; Armour Pack- ing Co. V. Lacy, 200 U. S. 226 (a State license tax on meat packing houses. A foreign corporation selling its products in the State, but whose packing establislunents are not situated in the State, is not exempt from such license tax) ; Savannah, Thunderbolt & Isle of Hope Ry. v. Savannah, 198 U. S. 392 (a classification which distinguishes between an ordinary street railway and a steam railroad, making an extra charge for local deliveries of freight brought over its road from outside the city, held not to be such a classification as t<7 make the tax void under the Fourteenth Amendment) ; Cook v. Marshall County, 196 U. S. 261 (State tax on cigarette dealers) ; Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283 (uj)holding the graded inheritance tax law of Illinois) ; Bell's Gap R. R. Co. r. Pennsylvania, 134 U. S. 232 (State tax upon the nominal face value of bonds, instead of their actual value, held a valid part of the State system of taxation). In Bell's Gap R. R. Co. v. Pennsylvania, 134 U. S. 232, dealing with the Fourteenth Aincndnient, which in this respect imposes limitations only on State authority, this court said: "The provision in the Fourteenth Amendment, that no State shall deny to nnv person witliin its jurisdiction the eqtial protection of the laws, was not intended to f)rev('nt a State from adjusting its system of taxation in all proper and reasoniihle ways, it may, if it cliooses, exempt certain classes of property from any taxation at all, such as churches, libraries, and the prop- erty of c'liaritabie instittitions. It may impose difTerent specific taxes upon did'erent trad<'H and professions, and may vary the rates of excise upon various products; it may tax real estate imd prrsnual property in a dilTen-nt manner; it may tax visible property only, and not tax securities for payment of money; it may allow deductions for indebtedness, or not allow them. ,\11 such regu- lations, and those of lik<' cliaract of nieasdrenient of .a privih'ge tux wliich it was witliin tlic lawful ;mtli of taxiitioii is a rcnson w)iv the riglit to tax should lie cotitined to sul)jects which may be hiw- Constitutionality of tiih Tax. 3 aw Diet., vol. 1, p. 273. We think it is clear that corporations organized for the purpose of doing businesR, and actually engaged in such activities as leasing property, collectinpf rents, managing office buildings, making investments of profits, or leasing ore lands and collootiiig royaIti<'s. managing wharves, dividing profits, and in 8<')me cases investing the siiry)his, an- engaged in busiiu'ss within tlic meaning of this statute, and in the capacity necessary to make such organizations subject to the law. Of the Motor Taximeter Cab Company case. No. 4.'?2, the company owns and lenses taxic.ibs, an objects are often accomplished through the medium of private corporations, and, though the public may derive a benefit from such operations, the com- panies carrying on such enterprises are, nevertheless, private companies, whose business is prosecuted for private emolument and advantage. For the pur- pose of taxation they stand upon the same footing as other private corpora- tions upon which special franchises have been conferred. The true distinction is between the attempted taxation of those operations of the States essential to the execution of its governmental functions, and which the State can only do itself, and those activities which are of a private character. Tlie former the United States may not interfere with by taxing the agencies of the State in fiarrying out its purposes; the latter, although regulated by the State, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate federal taxation. Applying this principle, we are of opinion that the so-called public service corporations, represented in the cases at bar, are not exempt from the tax in question. Eailroad Co. v. Peniston, 18 Wall. 5, 33. It is again objected that incomes under $5,000 are exempted from the tax. It is only necessary, in this connection, to refer to Knowlton v. Moore, 178 U. S., supra, in which a tax upon inheritances in excess of $10,000 was sus- tained. In Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 293, a. graded inheritance tax was sustained. As to the objections that certain organizations, labor, agricultural and horticultural, fraternal and benevolent societies, loan and building associa- tions, and those for religious, charitable, or educational purposes, are excepted from the operation of the law, we find nothing in them to invalidate the tax. As we have had frequent occasion to say, the decisions of this court from an early date to the present time have emphasized the right of Congress to select the objects of excise taxation, and within this power to tax some and leave others untaxed, must be included the right to make exemptions such as are found in this act. Again, it is urged that Congress exceeded its power in permitting a deduc- tion to be made of interest payments only in case of interest paid by banks and trust companies on deposits, and interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indobtedness not exceeding the paid-up capital stock of the corporation or company. This provision may have been inserted with a view to prevent 40 Fex>eiial Corporation Tax Law. corporations from issuing a large amount of bonds in excess of the paid-up capital stock, and thereby distributing profits so as to avoid the tax. In any event, we see no reason why this method of ascertaining the deductions allowed should invalidate the act. Such details are not wholly arbitrary, and werd deemed essential to practical operation. Courts cannot substitute their judg- ment for that of the legislature. In such matters a wide range of discretion is allowed. The argument that different corporations are so differently circumstanced in different States, and the operation of the law so unequal as to destroy it. is so fully met in the opinion in Knowlton v. Moore, 178 U. S., supra, that it is only necessary to make reference thereto. For this purpose the law operates uniformly, geographically considered, throughout the United States, and in the same way wherever the subject-matter is found. A liquor tax is not ren- dered unlawful as a revenue measure because it may yield nothing in those States which have proliibited the liquor traffic. No more is the present law unconstitutional because of inequality of operation owing to different local conditions. Nor is the special objection tenable, made in some of the cases, that the corporations act as trustees, guardians, etc., under the authority of the laws or courts of the State. Such trustees are not the agents of the State govern- ment in a sense which exempts them from taxation because executing the necessary governmental powers of the State. The trustees receive their com pensation from the interests served, and not from the public revenues of the State. It is urged in a number of the cases that in a certain feature of the statute there is a violation of the Fourth Amendment of the Constitution, protecting against unreasonable searches and seizures. This amendment was adopted to protect against abuses in judicial procedure under the guise of law which invade the privacy of persons in their homes, papers, and effects, and applies to criminal prosecutions and suits for penalties and forfeitures under the revenue laws. Boyd v. United States, 116 U. S. 632. It does not prevent the issue of search warrants for the seizure of gambling parajjliernalia and other illegal matter. Adams r. New York, 192 N. Y. 585. It does not prevent the issuing of process to require attendance and testimony of witnesses, the pro- duction of books and papers, etc. Interstate Commerce Commission r. Brim- son, 154 U. S. 447; Interstate Commerce Commission r. Baird, 104 IT. S. 25. Certainly the amendment was not intended to i)revcnt tlie ordinary procedure in use in many, perhaps most, of the States of requiring tax returns to be made, ofli'ii iiiidtT oatli. 'i"h<' objection in this coinnTtioii applies, when the HubHtanr<' of (he argument is reaclH'. The rnle is that, a statnte should be so construed that if possible, no clause, sentence or word should 1k' superfluous, void or CONSTRUCTTON AND INTERPRETATION OF THE AcT. 45 insignificant. Montclair Township r. Ramsdell, 107 U. S. 147, 2 U. S. Sup. Ct. Rep. 391, 27 L. E. 431. 14. Effect should be given to all the words of the statute where that is possible without conflict. Wilmot v. Mudge, 103 U. S. 217, 26 L. E. 536. 15. All general terms in a statute should be limited in their application so as not to lead to injustice, oppression or any imcon- stitutional operation, if that be possible. Carlisle v. U. S., 16 Wall. 147, 21 L. E. 426. 16. All laws should receive a sensible construction. General terms should be so limited in their operation as not to lead to injustice, oppression or an absurd consequence. It will always therefore be presumed that the legislature intended exceptions to its language, which would avoid results of this character. The reason of the law in such cases should prevail over its letter. U. S. v. Kirby, 7 Wall. 482, 19 L. E. 278. 17. In construing a statute general expressions will not be restrained by particular words where the distinct import of a sentence describing an entire class would thereby be useless. Adams v. Woods, 2 Cranch 336, 2 L. E. 297. 18. Where the language of a statute is clear, it is not for the court to say that it shall be so construed as to include cases, be- cause no good reason can be assigned why such cases should be excluded from its provision. Denn v. Reid, 10 Peters 524, 9 L. E. 519. 19. Revenue statutes are to be construed liberally to carry out the purposes of their enactment. U. S. v. Hodson, 10 Wall. 395, 19 L. E. 937 ; Smythe v. Fisk, 23 Wall. 374, 23 L. E. 47. 20. An exemption from taxation must be clearly defined and founded upon clear language without doubt or ambiguity. Bank of Commerce v. Tennessee, 161 TJ. S. 134, 16 Sup. Ct. Rep. 456, 50 L. E. 645. 21. The taxing power of the State is never to be presumed to be relinquished and it exists unless the intention to relinquish is declared in clear and unambiguous terms which will admit of no other reasonable construction. S. W. R. C. Co. v. Wright, 116 U. S. 231, 6 Sup. Ct. Rep. 375, 29 L. E. 627. 22. Exemption from taxation is not favored by law and will 46 Federal Corporation Tax Law. not bo sustained unless such clearly appeared to have been the intent of the legislature; and every reasonable doubt should be resolved in favor of the taxing power. Y. & M. Ky. Co. v. Adams, ISO r. S. 1. 23. Penal provision of revenue statutes are not to be strictly construed. Smythe r. Fiske, 23 Wall. 374, 23 L. E. 47. 24. The meaning of general words in a statute must be re- stricted whenever it is found necessary to do so in order to carry out the legislative intention. Reiche v. Smythe, 13 Wall. 162, 20 L. E. 566. 25. A statute is to be interpreted according to the intent of the legislature apparent upon its face; and every technical rule as to the construction or force of particular terms must yield to the clear expression of the paramount will of the legislature. U. S. v. Freeman, 3 How. 556, 11 L. E. 724. 26. To render the title of an act of any avail in its construc- tion, the language of the act must be doubtful or ambiguous and the ambiguity must be in the context and not in the title. U. S. V. O. & C. Ry. Co., 164, U. S. 526, 17 Sup. Ct. Rep. 165, 41 L. E. 541. The heading to a section of a statute is proper to be con- sidered in interpreting the statute when an ambiguity exists and a literal interpretation will work out wrong or injury. Knowlton V. Moore, 17 U. S. 41, 20 Sup. Ct. Tie]). 747, 44 L. E. 969. 27. Tlio rules of construction belonging to the English com- mon law arc adopted and adliercd to bv tlie federal courts in determining the meaning of the federal statutes, (^harles River Bridge v. Warren P.ridge, 11 Peters 420, 9 P. E. 773. 2S. Statutes should be construed so as not to give effect to all tlie words used iii their ordinary sense; but also to eviscerate, if possible, their true s})irit and intent from all the connected circum- stances, attendant or subsequent as well as preceding. Lawrence V. All(>n, 7 How. 785. 29. In construing a statute every clause should be expounded by reference to every other, and if possible, every clause and provision should Ih' given iind liave the effect contem])lated by the legislatUH'. One pf)rtion of a statute should not be con- strued to annul or destroy wluit has ])een clearly granted by another. The mo«t general and absolute terms of one section may Construction and Interpretation ok the Act. 4.7 "be qualified and limited by the conditions and exceptions cou- tained in another, so that all may stand together. Peck v. Jewess, 7 How. 612, 12 L. E. 841. 30. The spirit as well as the letter of a statute must be re- spected ; and where the whole context of the law demonstrates the particular intent in the legislature to effect a certain object, some degree of implication may be called in to aid the intent. Dorous- seau V. U. S., 6 Cranch 307, 3 L. E. 232. 31. Where exceptions are provided in a general statute, il excludes all others than those expressed, and the courts are not at liberty to engraft upon such statute other exceptions than those expressed. Kendall v. U. S., 107 U. S. 123, 2 Sup. Ct. Rep. 277, 27 L. E. 437. 32. The statute may define the purjwse of an enactment as well by using a term of known and determined meaning as by expressed enumeration of all the particulars including that term. U. S. V. Smith, 5 Wlieat. 153, 5 L. E. 57. 33. The popular or current import of words furnish the gen- eral rule for the interpretation of public laws as well as of private and business transactions. Maillard v. Lawrence, 16 How. 251, 14 L. E. 925. 34. Where words in a statute have acquired a well-understood meaning through judicial interpretation, it is to be presumed that they were used in that sense in a subsequent statute on the same subject, unless the contrary appears. U. S. v. Mooney, 116 U. S. 106, 6 Sup. Ct. Eep. 304, 29 L. E. 550. 35. It is not competent to reject or disregard a material part of an Act of Congress unless it be so clearly repugnant to the residue of the act that the whole cannot stand together. Eice v. Minn. & N^. W. R. R. Co., 1 Black 358, 17 L. E. 147. 36. Where a provision is left out of a statute either by design or mistake of Congress, the courts have no power to supply it. To do so would be to legislate and not to construe. Hobbs v. McLean, 117 U. S. 567, 6 Sup. Ct. Rep. 870, 29 L. E. 940. 37. The statute should be read according to the natural and obvious import of its language, without resort to settled and forced construction for the purpose of either limiting or extcndinir its operation; and when the language is plain, words or phrasess 48 Federal Corpoe^vtion Tax Law. should not be inserted so as to incorporate in the statute a new and distinct provision. U. S. v. Temple, 105 U. S. 97, 26 L. E. 967. 38. If an interpretation of any part would operate unjustly or absurdly or contrary to the meaning of the act, it should be re- jected. The construction must be such that the whole can stand if possible. Heydenfeldt v. Daney Gold & Sil. Min. Co., 13 U. S. 634, 23 L. W. 995. 39. When a statute limits a thing to be done in a particular mode, it includes a negative of any other mode. R. & G. R. Co. V. Eeid, 13 Wall. 269, 20 L. E. 570 ; Stephen v. Smith, 10 Wall. 321, 19 L. E. 933. 40. In all cases where the clauses of an Act of Congress are ambiguous or doubtful, it is admissible for purposes of interpreta- tion and construction to give great deference if not controlling effect to the interpretation given to such ambiguous language foimd in the act as was given to it by that department of the national government to whom the duty of enforcing the act is given. Peabody v. Daughlin, 16 Wall. 240, 21 L. E. 311; U. S. V. Tanner, 147 U. S. 661, 13 Sup. Ct. Rep. 436, 37 L. E. 321; Robinson v. Davoning, 127 U. S. 607, 8 Sup. Ct. Rep. 1328, 32 L. E. 269; Hahn v. U. S., 107 U. S. 402, 2 Sup. Ct. Rep. 494, 27 L. E. 527; Vissell v. Penrose, 8 How. 317, 12 L. E. 1095; St. Paul M. & M. Ry. Co. v. Fels, 137 IT. S. 528, 11 Sup. Ct. Rep. 168, 34 L. E. 767; IT. S. v. Dickson, 15 Peters 141, 10 L. E. 689. 41. While it is the duty of the courts to ascertain the meaning from the words used in the statute and the subject-matter to which it relates, there is an equal duty to restrict the meaning of general words, whenever it is found necessary to do so, in order to carry out the legislative intent. IT. S. v. Freight Assn., 166 IT. S. 290. 42. To understand the true meaning of u clause, it is necessary to f>bserve what the Hubject was in regard to which Congress attempted 1(» legislate. Market (%>. v. Hoffman, 101 IT. S. 112. 43. '{"he nilc tiiat every clause in a statute should liav(^ effect, nrifl one [Kirtion sboulil not li<' j)l;i('('(l in iintagonisin to another, is well settled. Petro r. (;ommercial P»ank, 142 U. S. 544; Warren V. U. S., 168 Fed. 682. 44. It is ii general rule in construing statutes tlint cfTcct must he- irivcii lo ;ill tlicir prov i-ions if su<'li construction is consistent Construction and Interpretation of the Act. 49 with the general purposes of the act and the provisions are not necessarily conflicting. All acts of the legislature should be so construed if practicable that one section will not defeat or destroy another, but explain and support it. When a provision admits of more than one construction, that one will be adopted which best serves to carry out the purposes of the act. Bernier v. Bernier. 147 U. S. 242, 37 L. E. 152. 45. It is the duty of the court to give effect, if possible, to every clause and word of a statute, avoiding, if it may, any con- struction which implies that the legislature w^as ignorant of the language it employed. Inhabitants of Montclair v. Ramsdell, 107 IJ. S. 431, 27 L. E. 431. 46. Statutes must be interpreted according to the intent and meaning of the legislature ; and that intention must, if practicable, be collected from the words of the act itself; or, if the language is ambiguous, it may be collected from other acts in pari materia, in connection with the words, and sometimes from the cause or necessity of the statute; but where the language af the act is unambiguous and explicit, courts are bound to seek for the in- tention of the legislature in the words of the act itself, and they are not at liberty to suppose that the legislature intended anythino; different from what their language imports. New Lamp Chimney (^o. V. A. B. & C. Co., 91 U. S. 256. 47. Words and phrases are often found in different provisions of the same statute, which, if taken literally, without any qualifi- cation, would be inconsistent and sometimes repugnant, when by a reasonable interpretation — as by qualifying both, or by restrict- ing one and giving to the other a literal construction — all become harmonious, and the whole difficulty disappears; and in such a case the rule is, that repugnancy should, if practicable, be avoided ; and that, if the natural import of the words contained in the respective provisions tends to establish such a result, the case is one where a resort may be had to construction for the purpose of reconciling the inconsistency, unless it appears that the difficulty can be overcome without doing violence to the language of the lawmaker." Xew Lamp Chimney v. Ansonia Brass «&r Copper Co., 91 U. S. 256, 27 L. E. 336. 48. The correct rule of interpretation is, that if divers statutes Fed. Corp. Tax — 4. 50 Federal Corporation Tax Law. relate to the same thing, they ought all to be taken into considera- tion in construing any one of them, and it is an established rule of law, that all acts in pari materia are to be taken together, as if they were one law. Dough. 30, 2 Term Rep. 387, 586, 4 Maule & Selw. 210. If a thing contained in a subsequent statute be within the reason of a former statute, it shall be taken to be within the meaning of that statute (Lord Raym. 1028) ; and if it can be gathered from a subsequent statute in pari materia', what meaning the legislature attached to the words of a former statute, they will amount to a legislative declaration of its meaning, and will govern the construction of the first statute. Morris v. Mellin, 6 Barn. & Cress. 454, 7 Barn. & Cress. 99. Wherever any words of a statute are doubtful or obscure, the intention of the legisla- ture is to be resorted to, in order to find the meaning of the words. Wimbisli V. Tailbois, Plowd. 57. A thing which is within the intention of the makers of the statute, is as much within the statute as if it were within the letter. Zouch v. Stowell, Plowd. 366 ; U. S. V. Freeman, 3 How. U. S. 556, 11 L. E. 724. 49. It is undoubtedly the duty of the court to ascertain the meaning of the legislature from the words used in the statute and the subject-matter to which it relates; to restrain its operation within narrower limits than its words import, if the court U satisfied that the literal meaning of its language would extend to cases which the legislature never designed within it. McKee v. United States, 164 U. S. 287, 41 L. E. 437. Scope and Intent of the Act. 51 CHAPTER IV. SCOPE AND INTENT OF THE ACT. Sec. 16. General Discussion of the Act With Reference to the Companies Affected Thereby. — At the very commencement of the act (section 1, lines 1-10) is found an enumeration of the several classes of companies upon which the act is to operate in the form of being subject to the payment of the excise tax therein provided. The portion of the act here referred to is as follows (section 1, lines 1-37) : Every corporation, joint stock company or association organized for profit, having a capital stock represented by shares, and every insurance company now or hereafter organized under the laws of the United States, or of any State or Territory of the United States, or under the Acts of Congress appli- cable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country, and engaged in business in any State or Territory of the United States, or in Alaska, or in the District of Columbia, shall be subject to pay annually a special excise tax, — provided, however, that nothing in this section contained shall apply to labor, agricultural, or horitcultural organizations or to fraternal beneficial societies, orders, or asso- ciations operating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders, and associations arid dependents of such members, nor to domestic building and loan associations organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual. Treasury recnilations (T. D. 1510, December 3, 1900, see Appendix C.) define very clearly the class of corporations which are subject to the operation of the Federal Corporation Tax Law. In the regulation here referred to is found the following language : The attention of collectors and others is especially called to the fact that the Federal Corporation Tax applies to all corporations, joint stock com- panies, or associations, or insurance companies described therein, except those 52 Federal Coepoii^ition Tax Law. specifically exempted without reference to the kind of business carried on. For statistical purposes, all such corporations, joint stock companies, and associations will be classified as follows: "Class A. Financial and Commercial. — Including banks, banking associa- tions, trust companies, guaranty and surety companies, title insurance com- panies, building associations (if for profit), and insurance companies, not specifically exempt. " Class B. Public Service. — Such as railroads, steamboat, ferryboat, and stage line companies; pipe line, gas, and electric light companies, express, transportation, and storage companies; telegraph and telephone companies. " Class C. Industrial and Manufacturing. — Such as mining, lumber, and coke companies; rolling mills; foundry and machine shops; saw mills; flour, woolen, cotton, and other mills; manufacturers of cars, automobiles, elevators, agricultural implements and all articles manufactured wholly or partly or in part from metal, wood, or other material; manufacturers or refiners of sugar, molasses, sirups, or other products ; ice and refrigerating companies ; slaughter houses, tannery, packing, or canning companies, etc. "Class D. Mercantile. — Including all dealers (not otherwise classed as pro- ducers or manufacturers) in coal, lumber, grain, produce, and all goods, wares, and merchandise. " Class E. Miscellaneous. — Such as architects, contractors, hotel, theater, or other companies or associations, not otherwise classed." National banks do not come within any of the exemptions named in the act (T. D. 1606, March 29, 1910, see Appendix K.). In order to clearly grasp the scope and content of the act under discussion, it will now be necessary to define some of the terms used in that portion of the Federal Corporation Tax Act above set forth- Sec. 17. Definition of a Corporation. — A corporation is a product of the expression of the sovereign political power of the State in the formation of the creation of a juristic person possess- ing such limited powers as may be granted to it by the legislative branch of our state or national governments. Under the terms of the act itself in order to be subject to the operation thereof, the corfx>ration must be organized for profit, and have a capital stock represented by shares. Sec. 18. Definition of Joint Stock Companies. — A joint stock company is a r/j///«-y)rivate coriniration, wherein a number of individuals have unit/;d for purposes of common profit by con- Scope and Intent of the Act. 53 tribiiting to a common capital divided into shares, all of which are alienable at the option of the owner. Commenting on the character of joint stock companies, the New York Supreme Court (Appellate Division, Second Department) in Lane v. Albortson, 78 App. Div. GOT, 113 V\. Rep. 047, 79 N. Y. Supp. 947, spoke as follows: Thf principal dilierence between a copartnership and a joint stock corpora- tion is tliat there is in the latter as a rule no delectus personarum, and the transfer of the shares or th« death of a member does not dissolve it. In People ex rel. Winchester v. Coleman, 133 N. Y. 279, Finch, J., says: " The People ex rel. Piatt v. Wemple, 117 N. Y. 136, shows very forcibly how almost tlie full measure of corporate attributes has, by legislative enactment, been bestowed upon joint stock associations ' until the difference, if there be one, is obscure, elusive, and difficult to see and describe,' and proceeds to point out that the essential difference lies in the fact that a corporation drowns tlie individual rights, while the association leaves the individual rights un- impaired, in that the common-law liability for debts remains unchanged and unimpaired. In the case referred to (People ex rel. Piatt v. Wemple), the court, per Danforth, J., say : ' Nor is the principal question altogether new. In Waterbury v. Merchants Union Express Co., 50 Barb. 158, the nature and legal character of the defendant, a joint stock association, created in like manner with the one before us, was held to have all the attributes of a cor- poration, and all its incidents except a common seal. The statutes from 1849 to 18C7 were examined and held to confer the qualities which distinguish a comporation from a partnership, and to establish the relations of a member of the association as those of a stockholder in a corporation, and not those of an individual in a partnership, and that in controversies affecting them the analogies afforded by laws and jurisprudence in the case of corporations should be followed, and not those derived from a simple partnership.' " And in the Waterbury case, supra, the court say: "Their property or capital is represented in shares and certificates of stock differing in no respect from shares and stock certificates in corporations. * * * It may very well be that in the case of actual insolvency the shareholder, in view of his con- tingent liability, should have a quicker remedy to wind up and close the concern than the statute laws of this State allow in the case of corporations other than those organized for banking purposes. Be this as it may, it is nevertheless true that the situation and relations of a shareholder in one of these associations are in other respects alike and very exactly like those of a stockholder in a corporation." In Elliott V. Freeman et al., 220 TJ. S. 178, the court in con- struing the federal corporation tax spoke as follows: Under the terms of the Corporation Act corporations and joint stock asso- ciations must be such as are now or hereafter nrirnnized under the l.iws of the United States, or of any State or Territory of the United States, or under the Acts of Congress applicable to Alaska or the District of Columbia. 54 FedekuVI. Corporation Tax Law. * * * As we have coiistrufd the Corporation Tax Act in the j)revious case, Flint v. Stone Tracy Co., ante, the tax is imposed upon doing business in a corporate or ^uosi-corporate capacity; that is with the facility or advan- tage of corporate organization. It was the purpose of the act to treat corporations and joint stock com- panies similarly organized in the same way and assess them upon tiie facility in doing business which is substantially the same in both forms of organiza- tion. Joint stock companies are not infrequently organized under the statute laws of a State, deriving therefrom, in a large measure, the characteristics of a corporation. The language of the act • * * imports an organization deriving power from statutory enactment. The statute does not say under the laws of the United States, or a State, or lawful in the United States, or in any State, but is made applicable to such as are organized under the laws of the United States, etc. The description of the corporation or joint stock association as one organized under the laws of a State at once suggests that they are sucn as are the creation of statutory law, from which they derive their powers and are qualified to carry on their operations. * * * The difference between joint stock associations at common law and those organized under statutes are well recogniz^ed. Cook on Corpora- tions, § 505. There is an essential difference between a joint stock company as it exists at common law and a joint stock company having extensive statutory powers conferred upon it by the State within which it is organized. The latter kind of joint stock company is found in England and in the State of New York. To such an extent have these statutory powers been conferred on joint stock companies that the only substantial difference between them and corporations is that the members are not exempt from liability as partners for the debts of the company. Sec. 19. Definition of Association. — "Association" is a generic term and may indiflferontlv comprehend a voluntary con- federacy which is a partnershi]) dissohible ])y tlie persons who formed it or a corjwration confederacy, deriving its existence from a statute, and dissohible only by law. Thomas v. Dakin, 22 Wend. N. Y. 9, 104. In the words of the United States Supreme Court (U. S. v. Trinidad Coal Coking Co., 137 U. S. 101, 11 Sup. Ct. 57, 34 L K. r;40): The words " asROciation of personH " are often not inaptly employed to do- Bcrilx' a corporation. An incorporated company is an aHSOciatioii of indi viduniR acting as a Hiiigli- person, and by (heir corporate name. As tliis court liaH Haid, j)rivat<' corporations ar<' hut asHociations of individuals unit<'y one or more of the managers. The association may divide the profits of the business in such manner and amounts aB the majority of its members may determine, which division shall not "diminish or impair the capital of the said association." It is prohibited from loaning its cre'dit, name, or capital to any nieinbcr of the associatiim. It may be dissolved by the expiration of the period fixed for its duration, or by a Tn.ijority \^lA^' of its members in numl)er and value of interest; and when dissolved, aft<'r payintr its liabilities, the remainder of its assets shall br distributed in proportion to tlie int< hidd and own'-d in the nitnie of the assncintion. and it munt "sue or bo sued in the a.ssociation name, and wlien suit is Scope and Intjjmt of the Act. 57 brought agiiinst any such iissociatioii service thereof shall be made upon the cliairnian, secretary, and tiie treasurer thereof, vviiich servic<' sliall be as conijjieto and effective as if made upon each and every member of sucii association ; '* and service of process may also be had upon any agent, chief, or any other clerk or upon any director or manager of such association in any county wiiere the association may maintain or keep an office for the transaction, of business. The excise tax created by section 38 of the Act of August 5, 1909, is made to apply to " every corporation, joint stock company, or association organized for profit, and having a capital stock represented by shares * » * organ- ized under the laws * * * of any State." I have no doubt that an association organized as above shown falls within the provisions of this act. Its organization is perfected under statutory authority, and while it is denominated a partnership association, yet it is given, as a separate entity, every privilege and power that is essential to constitute an incorporated body. In fact, some privileges are conferred which might have been omitted and still it would fall within the provisions of the act. A similar question arose in the case of Liverpool Insurance Co. v. Massa- chusetts, 77 U. S. 56G. A statute of the State of Massachusetts imposed a tax upon " each fire, marine and fire, and marine insurance company, incor- porated or associated under the laws of any government or State other than one of the United States." It was insisted that this insurance company was not a corporation or association within the meaning of the statute. It ap- peared from an analysis of its articles of association, as authorized by the Parliament of Great Britain that ( 1 ) it had a distinctive and artificial name by which it could make contracts; (2) that it could sue and be sued in the name of one of its officers, and the whole body was bound by the judgment ; (3) that it had a provision for perpetual succession by transfer and trans- mission of its shares of capital stock; and (4) that its existence as an entity, apart from its shareholders, was recognized by the Act of Parliament, which enabled it to sue its shareholders and be sued by them. On the other hand, its individual members were liable for the debts of the company, and it could not be sued in its artificial name, and the Act of Parliament under which it was organized, expressly declared that such organization should not " be held to constitute the body a corporation." The court held that the organization was an artificial body which possessed all the essential elements of a corpo- ration, and that the declaration in the act under which it was organized, that it should not be so considered, could not alter the fact, and therefore held that it was liable to the tax specified in the Massachusetts statute. An association organized under the Pennsylvania statute has an artificial name in which all of its business is transacted, and by which it can sue and be sued; it has perpetual succession for the length of time specified in the articles of association, and while there is no positive provision which author- izes it to sue and be sued by a member of the association, yet there can be no doubt that any member of the association is at lilierty to make a separate contract with it as a person, and that an action thereon could ho maintained by either party, and that a right of action of any other kind might arise, and be litigated between them. In addition to this, a member of the association is exempt from liability for its indebtedness, except as to the amount of capital subscribed by him. 58 Federal CoRPorwVTioN Tax Law. yuch an association also clearly falls within the definition of a corporation given by -Mr. Justice Field in B. &. P. R. R. Co. f. Fifth Baptist Church. lOS U. S. 330, to wit: " Private corporations are but associations of individuals united for some common purpose and permitted by law to use a common name and to change its members without a dissolution of the association." And also the definition given by the Supreme Court of New York, in People r. Assessors of \\'atertown, 1 Hill, 620, which was quoted with approval by the Supreme Court of Maine, in Sibley r. Lumber Association, 93 Me. 401: "A corporation is a collection of individuals united in one body under such a grant of privileges as secures the succession of members without changing the identity of the body, and constitutes the members for the time being one artilicial person or legal being, capable of transacting some kind of business like a natural person." And within the definition given by Chief Justice Marshall in the Dartmouth College Case, 4 Wheat. .517, 63G, that — "A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law." The law creating this tax contains no special requirements as to what powers this artificial person shall possess, the only essentials being that it shall be organized under a law, that its object shall be for profit, and that it shall have a capital stock represented by shares. The capital of these associations is subscribed for in the usual way, and the members own an in- terest in the capital stock in proportion to the amount subscribed by them. In 1 C^ook on Corporations, § 12, it is said that a share of stock may be defined as — "A right which its owner has in the management, profits, and ultimate assets of the corporation." The interest of tlie members of the associations in question certainly falls within this definition. It is true that the issuance of certificates of shares ia not required, but a certificate of stock is but a mere muniment of title, a mere evidence of ownership and not the share itself. " It operates to transfer nothing from the corporation to the stockholder. but merely aflfords to the latter the evidence of his rights." 1 Cook on Cor- porations, 13. I am of the opinion, therefore, that associations organized under this Penn- sylvania state are liable to tiie tax imposed under section 38 of the Act of August 5, 1909. 2. Mutual savings banks organiz-ed under an act for the incorporation of SHvinfTH hanks, passed by the legislature of West Virginia February 21. 1.SS7. and amended by the Act of February 24, IHOH. Such a bank may he organized by not less than thirteen persons, citizens of the State, whose fitness fur (he proposed trust is certified to by the jiidj^e <>r judges of the Circuit T'ourt of llie county wherein the jiroposed sMvin^s bank is tf> he located. The form of llie chiirter, and the nicthmj of procuring the snm'', is y)artieularly set forth. From (he incorporators, and those subse- quently added (hereto, if (hey are selected by the hotly on (lie approval of tlie judge or a board of tnisfres, and who have power lo act for the corporation. Thesf trustees elect from (lieir number a president and vice-y)residen(. and Scope and Intent of the Act. 5ii appoint all necessary ofliccr.s to transact the buHiness of tlic bank. The bank, wlun organized, is authorized to receive any sum of money for deposit, and to invest the same as authorized by the act, and the deposits with dividends accrued thereon are required to be paid to the depositors under rules and regulations to be adopted by the board of trustees. By section 24 it is pro- vided that the income or profit of any such savings bank, after the deduction of all reasonable expenses incurred in the management thereof and the guar anty fund, shall be divided among its depositors or their legal representatives, at such times as may he fixed by its by-laws. There is no capital subscribed and the business consists in receiving deposits and investing the same so re- ceived in accordance with the provisions of the charter and the by-laws adopted thereunder, and of repaying the depositors; and all the profits, alter the payment of the necessary expenses, are divided among the depositors. There is no question that such a concern is a corporation ; but is it a cor- poration " organized for profit and having a capital stock represented by shares," as is required by the statute? In a certain sense, such a banking institution is organized for profit, — that is, it affords a reasonably safe means for the investment of one's capital; but its organization and the trans- action of its business is not for the profit of those who constitute its man- aging body, except in so far as they may be depositors. But the more serious question is, whether such an institution has a capital stock represented by shares. Can the depositors who place their money temporarily with such an institution, having no right to participate in its management, be regarded as shareholders, and the respective amounts deposited be considered as shares? 1 think an answer to these questions may be found in the following authorities: The case of Huntington v. Savings Bank, 96 U. S. 388, involved an institu- tion of precisely the same character. The suit was brought by an adminis- trator of a deceased trustee, on the theory that he was entitled to a pro rata of the accumulated profits. In discussing the nature of the corporation, the Supreme Court, .among other things, said: " It is to be noticed that the charter does not authorize the creation of any corporate stock or capital, nor does it contemplate the existence of any other than the deposits which may be made. TTie corporators are not required to contribute anything. There are, of consequence, no shareholders. Not a word is said in the instrument respecting any dividends of capital, or even of profits, to others than the depositors. Certainly no express authority is given to make dividends to the corporators; and we discover nothing from which such authority can be inferred: And again : "The institution having no capita', stock, whatever liability, if any there may be to the corporators, must be satisfied out of the profils made from the deposits." And with reference to the object of the corporation, it was said: " It is not a commercial partnership, nor is it an artificial being the mem- bers of which have property interests in it, nor is it strictly eleemosynary. Its purpose is rather to furnish a safe depositary for the money of those mem- bers of the community disposed to intrust tlioir property to its keeping. It ir^ eomewh.at of the nature of such corporations as church wardens for the con- 60 Federal Corpoeation Tax Law. servation of tho goods of a parish, the college of surgeons for the promotion of medical science, or the society of antiquaries for the advancement of the study of antiquities. Its purpose is a public advantage, without any interest in its members." In Hannon v. Williams, 34 N. J. Eq. 258, the court, in considering the nature of a savings bank of this character, said: " Savings banks differ widely in their objects, organization, and character from ordinary banks and other joint stock companies. They have no capital stock. They are incoiporated and organized not for the advantage of the corporators, but solely for the benefit of the depositors. Their object, &s stated in some of the early charters of this State, is to receive and safely in- \est the savings of mechanics, laborers, servants, minors, and others, thus affording to such persons the advantages of security and interest for their money, and in this way ameliorating the condition of the poor and laboring classes by engendering habits of industry and frugality. " Properly organized and conducted, a savings bank is a gwasf-charitable and purely benevolent institution ; its only object, tlie safekeeping and provi- dent investment of the funds of the depositors. The members of the corpora- tion have no property interests in its funds, of which they are by law con- stituted the managers and guardians. The depositors who alone are bene- ficially interested in the prosperity of the bank, have no voice in its manage- ment, nor even in the selection of the persons to whom its management iti intrusted." In Savings Bank v. Town of New London, 20 Conn. 111. 117, the Supreme Court of Connecticut, in speaking of the nature of deposits in savings banks, said: "Deposits are not stock within the most enlarged use of the word; nor are they rogulat«^d as such, but are more like deposits in other banks, drawing a stipulated interest. Tliey are money put into the hands of trustees, to be loaned out; and whether it comes to the trustees from one man or many men, makes no difference in view of the law." Mr. Justice Field, in Bailey v. Clark, 88 IT. S. 280, in defining the capital of a corporation, said: " When used with respect to the property of a corporation or association, the term has a settled meaning; it applies only to thi- property or means contriI)iit<'(i by the stocklioldors as the fund or basis for tho business or enter- prise, for wliicli the corjxiration or association was formed;" and the court therefore held that money borrowed from time to time by a banker and tem- Iiorarily used in the course of business did not constitute a part of the capital nf thr bank. I have iK'i-n unable to find any authority in which it has been held that a savings hank organized and doing business as is provided for by the laws of West Virginia, has a capital stock or fhal Us depositors are shareholders. In Ihe ease of llannon v. Williams, supra, taken in the trust<'«'. There can be no doubt that this cniicem is ;in association organized for profit and having a ca[)ital stock repr<'sented by shares. Put it is earnestly insiHted on behalf of these eomj)anies that the statutory re(]uirements that a company in order (o be amenable to the tax. shall be "organized under the laws of the United States or of niiy State or Territory of the I'liited States" has reference to statutory laws which preserilw' specifieally a metliod or plan of organization, and which confer franchises upon the liody when organized; in other wf)rdH, that the joint slock eoTiipaiiies and associations cmiteiTinlatod by the art n re only sueh as li;i\'e -l(l that where a corporation originally organized for the j)ur]iose of owning and renting an office building, leasing the property for one hundred and thirty years, and reorganized and })rnctically went out of business, its sole juithority being to hold the title subject t(i the lease and to receive ;iiid distribute the rciilnls accruing thereunder, or the proceeds of sale, if the property should be sold; that niider such circumstances it would not Ix; liable to the payment of the federal cor[K>ration tax. A clear limitation of \\\o luunber of organizations embraced witliin the act is to I>e found in the opinion of tlic United States Supreme Court in Klliot /'. Freeman rf, al., 220 II. S. 178. In Scope and Intent of the Act. 65 that case the court held in effect that to be subject to the payment of the tax not only must the corporations and associations be organized for profit and have a capital stock represented by shares, but they must further have been organized under some statute or derive from that source some quality or benefit not existing at the common law. Sec. 20. Meaning of "Organization for Profit." — In defin- ing what corporations shall be subject to the tax express limitation is to be found in the words " only such corporations, joint stock companies or associations as are organized for profit." The qualifying phrase here used, to wit, " organized for profit," un- questionably applies to each of the classes of legal entities which precede it, to wit, corporations, joint stock companies and associa- tions. In other words. Congress clearly intended to include within the operation of the act, business corporations, and to exclude all eleemosynary bodies organized and operated exclusively for re- ligious, charitable or educational purposes. The word '^ organ- ized," as here used, has reference to the inception of the enter- prise, and includes all such preliminary steps as might be neces- sary in order to create the necessary legal machinery for conduct- ing the particular business enterprise in hand. The word " profit," as used in the act, has a distinct meaning and relates unquestionably to the pecuniary gain to accrue to each of the members of the organization who contribute from their means to the common fund. Sec. 21. Meaning of the Phrase, Having a Capital Stock Represented by Shares. — To bring any corporation, company or association within the purview of the Federal Corporation Act it must not only have been organized for profit, but in addition thereto it must have a capital stock represented by shares. The phraseology here used eliminates in itself all partnerships, both general and limited from the operation of the act. The words " capital stock," as here used, refer to the money, property or services contributed by the members of the corporation, joint stock Fed. Corp. Tax — 5 66 Federal Coeporation Tax Law. company or association to the capital thereof, and is commonly represented by shares issued to such members at the inception of the particular enterprise to which such contribution has been made. (See Christensen v. Eno, 106 N. Y. 97, 12 N. E. 648.) The title to such capital stock as here referred to vests in tho corporation, joint stock company or association, while the title to the shares therein vests in the members. (See Van Allen v. Assessors, 3 Wall. 573, 18 L. E. 229.) A court of high authority (McGinty v. Athol Reservoir Co., 155 Mass. 183, 29 N. E. 510) has held that where no governing statute intervenes, a business corporation may exist without share owner- ship. (See Malleson v. Gen. Mineral Pat. Syndicate, L. R. 3 Chan. 538.) However, in the United States the rule is well nigh universal that business corporations, joint stock companies and unincorporated associations for profit must and in practice do have a capital stock represented b^^ shares. Thus the Attorney-General of the United States has rendered an opinion February 14, 1910, (see Appendix EE.) to the effect that mutual savings banks having no capital stock, are not liable to payment of the federal corporation tax. So again, the commissioner of internal revenue, in his bulletin dated March 29 (T. D. 1606, see Appendix K.), has taken the ])osition that holding companies known as " voting trusts," re- ceiving only dividends on stock, but having no capital stock, are not liable to the payment of the tax. lie, however, took the position that corporations organized for the purpose of holding real estate were subject to tlic iwiyinent of the tax. This opinion has since been confirmed l)y I lie decision of the United States Supreme Court in Flint v. Stone Tracey Co., 220 U. S. 107. The commissioner of internal revenue^ lins rnlod that corpora- tions organized to sell provisions, etc., to st(K'kliol(lers are subject to the payment of the tax. (See T. 1). KiOd, March 29, 1910, see Appendix K.) Sec. 22. Definition of Insurance Companies as Used In the Act. — 'i'hc i'\'neficia] societies, orders or associations oyx'rating under the lodge system, and ])rovi(ling for llie payment of life, sick, iu'ciilcnt nnd otlicr bciiclits to llio ni(Mid)ers of such societies, orders, associations imd (l(|>(ii(l;nits of such mombers, and donicstic biiiMiiiir ;iiid lo:iii associations organized and ope- rated exelusivelv I'm- the iiiiitii;il h<'iiclit of their mendiers, cor- porations or nHH«>cial ions organi/ed and M|i(ialcd cxclnsivclv fcr Scope and Intent of the Act. 69 religious, charitable or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual. It should be observed that owing to the plain wording of the provision of the act here referred to, any one of the excepted organizations named above if not organized for profit yet may have a capital stock represented by shares and still not be subject to the tax imposed by the act. In order to determine specifically just what organizations are excluded from the operation of the federal corporation excise tax, it will now be necessary to construe each of the excepted organiza- tions separately. It should be clearly borne in mind that the tax imposed by the Federal Corporation Tax Act applies to all corporations, joint stock companies and associations described therein, except those specifically exempted, without reference to the kind of business carried on. (T. R. March 29, No. 1606, see Appendix K.) Any person claiming special exemption, must, nevertheless, maice the return required by the act, accompanied by a statement, setting forth the ground on which exemption is claimed. (T. R. March 29, 1910, No. 1606.) National banks do not come within any of the exemptions named in the Federal Corporation Tax Act. (T. R. March 29, 1910, No. 1606. See opinion of the United States Supreme Court in Eliot V. Freeman et al., 220 U. S. 178; Zonne v. Minneapolis Syndicate et al, 220 U. S. 187). Sec. 25. Definition of Labor Organizations. — A labor organization is an association of individuals engaged in the trades and formed for the protection and promotion of the interests of the members thereof, with a view to securing improved wage and labor conditions. Sec. 26. Definition of Agricultural Organizations. — An agricultural organization is an association of individuals engaged in farming occupations, formed for the protection and promotion of the interests of the members thereof, with a view to securing 70 Federal Corporation Tax Law. improved methods in their work as well as to promote the financial and social welfare of the members. The commissioner of internal revenue, in his bulletin dated March 29, 1910 (T. R No. 1606, see Appendix K.), has made the following rulings, relative to the above corporations: 1st. Corporations owning sugar or other plantations and dis- posing of the products thereof, are not entitled to exemption from the payment of the federal corporation tax as agricultural cor- porations. 2d. Co-operative dairies, not issuing stock, and allowing pa- trons dividends based on butter fat in milk, are not liable to the payment of the tax. 3d. Mutual Hail Associations are not to be regarded as agricul- tural associations, and are therefore, subject to the payment of the tax. 4th. Agricultural organizations are not exempted from the pay- ment of the federal corporation tax unless their chief object is the promotion or advancement of agricultural interests, and no part of the net income thereof inures to the benefit of their stock- holders. Sec. 27. Definition of Horticultural Organizations. — An horticultural organization is an association of individuals engaged in gardening occupations formed for the protection and promotion of the interest of the members thereof, with a view to securing improved methods in their work as well as to promote the financial and social welfare of the members. As to what constitutes " horticulture " attention is called to tlie remarks thereon of Mr. Bailey in his Cyclojxidia of Ajnerican Horticulture, as follows: Ilorticiilttirf ih tho prnwing of floworH. fniits, vopptnbloa, iind all plants for ornuiiurit and fancy. IfortiPiilturn ilividos it.sclf into four sompwlmt co-ordinnte hnincheH. Annal8 Ilort. 18«1, 12r)-T30. PoinoIr)f.'y, or tho f;ro\vinp of frnits. Oloricnlfnro, or vopcfahlo fjardcTiinpf. Floriculture, or IIh- raiHiiifj of ornanionlal jilanis for tlu'ir individual uhch or for thoir protoction. LandHcnpo horticullun', nr tlio growing of plants for their UBe in tho landHcapo, or in landHcapo gardening. Scope and Intent of the Act. 71 Sec. 28. Definition of Fraternal Beneficial Societies. — A fraternal beneficial society is an organization fonne cxtciMl tlio ex(Mii]iti'>ii fmin ihc ojMM-ation of t]u> Fcfleriil r,,r[)Mnitinii T;ix i>:iw (inly \n those associations "organ- ized and operated exclusively for the ninliial Ix^nefit of tluMr nieinliers." ScoPK AND Intent of the Act. 73 Building and loan associations are not exempted from the pay- ment of the tax, if they have a capital stock, and loan to others than members, thus doing a business akin to a banking business. (T. R. No. IGOO, March 29, 1910, see Appendix K.) So buihi- ing and loan associations, issuing stock upon which dividends are guaranteed, are liable to the payment of the federal corporation tax. (T. R. March 29, 1910, No. 1606, see Appendix K.) Sec. 34. Definition of Religious Corporations and Associa- tions. — A religious corporation or association is an organization formed under statutory authority for the purpose of promoting the spiritual and moral welfare of its members, as well as to afford a legal method for the protection of title to such property as may have been acquired for the benefit of such members through the medium of permitting the title to such properties to vest in the organization rather than in the members as tenants in common. Such an organization is peculiarly necessary in view of the changing character of religious congregations as well as owing to the fact that belief in some creed or system of church government is usually the motive which induces membership in such organization. The phrase, " religious organization," has a very broad and catholic meaning, and includes not only what are commonly known as " church organizations," but includes as well Young Men's Christian Associations, Societies for Ethical Culture, and any organization authorized by statute which has for its essential purpose the moral and spiritual uplifting of man. Sec. 35. Definition of Charitable Organizations and Asso- ciations. — A charitable organization or association is one which is founded for altruistic purposes and is not designed to advance the pecuniary or social interests of its organizers or members. In practice this purpose is the distribution of pecuniary aid in the form of shelter, food, medicine, surgical or medical treatment to such persons as may see fit to make use of them under the con- ditions upon which they are offered. All such charitable associations as are referred to in the federal corporation tax must be of eleemosynary character, but the fact 74 Federal Corporation Tax Law. that they may receive pay for services rendered will not deprive- them of the right to claim that they are excluded from the ope- ration of the act. (See Powers v. Mass. Homeopathic Hos., 109 Fed. 294, 47 C. C. A. 122.) Sec. 36. Definition of Educational Corporations and Asso- ciations. — An educational corporation or association is one organized under statutory authority for the purpose of developing either along narrow or broad lines mental and manual capabilities of human beings. (See O'Day v. People, 171 Ilh 293, 49 N. E. 504; N. St. Louis Gymnastic Society v. Hudson, 85 Mo. 32; Mt. Hermon Boys School v. Gill, 145 Mass. 139, 13 N. E. 354; Cook V. State, 90 Tenu. 407, 16 S. W. 417.) Sec. 37. Meaning of the Phrase, " No Part of the Net In- come of Which Inures to the Benefit of Any Private Stock- holder or Individual." — It should be noted that only those religious, charitable or educational corporations or association» are specifically exempted from the operation of the Federal Cor- poration Tax Law whose entire not income is devoted to the accomplishment of some public benefit, and no part of which inures to the benefit of any private stockholder or individual. (See act. Appendix A, lines 35-37.) The meaning of this limita- tion is quite clear. Congress evidently intended by inserting the clause in question to refuse to exempt from the ojwration of the Corporation Excise Tax Law any so-called " eloemosynary " in- stitution which contemplated in any degree financial benefit to private stwkholdors or individuals. Thus hos]>itals and sani- tariums organized for private pur])oses, or schools the net in- come of which would ultimately go into the pockets of the stock- holders or individuals, are excluded from the benefit of the exemp- tioii extended to thfKse organizations which are operated exclusively for the l)enefit of the public. (As to the existence of other exemp- tions from the oj>eration of the federal corporation tax, other than those specifically enumerated in the act, sec opinion of United States Supreme Court in Kliot v. Freeman ri al, 220 II. S. 178, and Zonne v. Minn(!aj>oli.s Syn. et al., 220 U. S. 1H7.) Scope and Intent of the Act. 76 Sec. 38. Are Corporations Organized or Dissolved Within the Year for Which the Federal Corporation Tax Is Levied, Subject to the Payment Thereof? — It is entirely clear that all corporations organized within the preceding fiscal year as pre- scribed in the Federal Corporation Tax Enactment are subject to the payment of the excise tax therein levied, provided the facts as disclosed by the return of such corporations, show that such a tax is due. Again, the mere fact that a corporation has been legally dis- solved under some State statute within the same period of time does not exempt such dissolved corporation from the payment of the corporation excise tax provided such tax would have become due had dissolution not taken place. This on the same principle which has induced the federal courts to hold that notwithstanding the dissolution of a State corporation by the State court it may nevertheless be adjudged a bankrupt under the National Bank- ruptcy Act. (In re Mer. Ins. Co., Federal Cases 9441 ; In re In- dependent Ins. Co., Fed. Cases 7018.) Where a company has been dissolved and the required return is not made by its officers, such return will be prepared by the commissioner of internal revenue and the tax assessed thereon, the same as if the report had been regularly made. (T. R. March 29, 1910, No. 1606, see Appendix K.). The Treasury Department has ruled that all corporations organized during the tax year, or going into liquidation during such period, should nevertheless render a sworn return on the sub- scribed form. The tax imposed, however, is held by the Treasury Department not to apply to corporations which went out of exist- ence prior to the passage of the act. (T. D. March 29, 1910, No. 1606, see Appendix K.) In this connection attention is called to the opinion of the Attorney-General, under date of April 2, 1910: (See Appendix IT.) First. Whether or not such corporation is liable for the excise tax created by said section 38 of the Act of August 5, 1909 * * * In answer to this question I will say: 1. In the first clause of section .38, Act of August .'5, 1909 (Stat. ). it is provided " that every corporation • * • ^ow or hproaft*>r nrsani/ed under the laws of the United States or of any State • • • sliall be sub- 76 Federal Corporation Tax Law. ject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation * * * equivalent to one per centum of the entire net income over and above $5,000 received by it from all sources during such year." That is the tax payable annually, and it is imposed " with respect to the carrying on or doing business by such corporation," and the amount of tax is fixed at one per centum upon its net income above $5,000 received during such year — that is, the year during which the business is transacted with reference to which the tax is imposed. By the third para- graph it is provided that the income of the corporation shall be computed for the vear ending December 31, 1909, and for each calendar year thereafter. Therefore, tlie assessment of the tax is always for the year preceding its collection and not for the year within which the collection is made, and the present assessment is for the year 1909. It follows, therefore, that any cor- poration which was engaged in business after the approval of the act on August 5, 1909, is amenable to this tax. In Pennsylvania, etc., Company et al. v. New York City Rail- way et al., 176 Fed. 471, the court spoke as follows: The receivers ask instructions as to what action, if any, they shall take under Act August 5, 1909, c. 6, 36 Stat. 112 (U. S. Comp. St. Supp. 1909, 844), referring to section 38, which provides for special excise tax upon net income of certain corporations, joint stock companies, and associations. The act contains no provisions as to receivers, and it is not felt that Congress in- tended to include bankrupt corporations without any net income whose prop- erties are being administered by a court. It would seem to be sufficient if at the time fixed they make a return and statement to be filed with the proper officer showing that tlu'se roads are in the hands of receiveds. Whether the various railway companies are or are not within the terms of the act as cor- porations carrying on business and receiving a net income, is a question which they will of course determine for themselves upon the advice of their counsel. Whether, if this tax l)e properly assessed upon them should be paid by the receiver or lessee, is a question to be determined when it may arise. Such determination will be in no way affected by the present decision since " prac- tical construction as to such tax cannot be shown." Sec. 39. Definition of Foreign Corporations. — The phrase '* foroif^n corporation " as employed in the Federal Corporation Tax Law inchides any corporation, joint stock company or associa- tion not orfjanizod under the laws of the United States or of any State or Territory of the United States or of tlie Act of Congress applicable to Alaska or the District of Colmuhia. " Companies organized under the laws of the United States " has reference to those cor])arations whicli are specifically created by an Act of Congress and d(X\s not include corporations organized under a general and enabling Act of Congress extending to execu- Scope and Intent of the Act. i I tive heads or subordinate legislative bodies located in the jwsses- sions of the United States, the right at their option to authorize the creation of corporations, joint stock companies or associations. The word " territory " as used in this immediate connection undoubtedly has reference to Alaska, Arizona and New Mexico and possibly Hawaii, and does not include the possessions of the United States, such as Porto Rico, the Philippine Islands, Guam or the Island of Tutuila. Were this not so, there would have been no occasion to so specifically refer in the act to those corporations, joint stock companies or associations " organized under the Acts of Congress, applicable to Alaska or the District of Columbia." The Treasury Department has made a specific ruling that com- panies organized in Porto Rico and not engaged in business in the United States are not subject to the payment of the federal corporation tax. (T. R. March 29, 1910, No. 1606, see Appendix K) Sec. 40. What Foreign Corporations Are Subject to the Payment of the Federal Corporation Tax Law. — Only those corporations, joint stock companies or associations organized for profit, and having a capital stock represented by shares organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska, or in the District of Columbia, are subject to the payment of the federal corporation excise tax. Here again, the word " territory " undoubtedly has reference to Arizona and New Mexico, and does not apply to the other territorial possessions of the United States. The Attorney-General in his opinion rendered March 9, 1910 (see Appendix), had occasion to go into the question as to Avhether foreign steamship companies, owning vessels plying be- tween American and foreign ports, are subject to the payment of the federal corporation tax. This opinion reads as follows : SIR: — I have the honor to acknowledge receipt of your communication of January 28, 1910, in which you inquire whether, in my opinion, foreign steam- ship companies engaged in the business of ocean transportation of passengers, freight, and mails in ships owned by them plying between Amorioa and for- eign ports, which companies maintain agencies in this country wliere passpTijer tickets may be bought and freight received for transportation, are corpora- 78 Federal Corporation Tax Law. tions subject to the special excise tax provided by the Act of August 5, 1909 (36 Stat. 112). The act in question is by its provisions made applicable to all corporations organized under the laws of any foreign country which receive an income from business transacted and capital invested within the United States. But it is first insisted upon the part of these steamship companies that, inasmuch as the receiving and discharging of cargoes and passengers is a mere incident in the transportation of their cargoes and passengers over the high seas, they have no income derived from business transacted in the United States. I am of the opinion that this contention cannot be maintained. These com- panies have a large amount of capital invested in wharves, warehouses, and other facilities essential to carrying on their business in this country. Their business consists entirely in transporting passengers and goods and merchan- dise between ports in this country and those of foreign countries, and receiving and discharging the same. Through agents located here all contracts and arrangements incident to such a business at this end of their lines are made, and all exports are delivered to their warehouses and are loaded upon their vessels, and the passengers embark, while they are within the limits of the United States; and likewise while here their imports are unloaded and pas- sengers from foreign ports disembark. If these companies do not transact business in the United States, they transact no business in any foreign port, and their entire business is carried on upon the high seas. To such a con- clusion I am imable to give assent. It is next insisted that, inasmuch as they are engaged in the transportation of exports, the tax in question is a tax upon exports, and that the legislation is void as to them under that clause of section fl, article 1, of the Constitution, which provides that " no tax or duty shall be laid on articles exported from any State." In support of this contt'ntion the following cases are cited: Brown r. Maryland, 12 Wheat. 419, wherein the Supreme Court had under consideration a section of an act passed by the Legislature of Maryland, which provided : " That all importers of foreign articles or commodities, of dry goods, wares or morohandiso, hy bale or package, or of rum. wine, brandy, whisky and other distillfii spirituous liquors, etc., and other persons selling the same by whole- sale, hah' or (lackage, hogshead, barrel or tierce, shall, before they are author- ized to sell, tak'^ out a license, as by. the original act is directed, for which they shall j)ay fifty dollars." The cdurt held that this section, in so far as it applied to importers, was invajirl, l)ffans<- it was in efTect a tax levied by the State upon imports, which under the Constitution was prohibited. Almv r. California, 24 TIow. IdO, wherein it was held that an act passed to provid<' rovfiim- from a stamp tax on bills of lading for tlie transportation from any [mint or place in that State to any point or placi* without the State of gold or siIv«T coin, gold dust, gold or silver in bars or other form, and which required that sueh stamp be attached to every such bill of lading or stamped thiTcon was invalid because it was the inijiosition of a tax upon <'\ports. Fairbanks v. United States, ISl U. S. 283, wherein it was held that the stamp tax on a fr)reign bill of lading provided for by the act of .Tune 13, 1808, wnH e(iiiivalent to a tax on the articles for which the hills wer<' given, and wan violative of the above quoU-d provision of the Constitution. Scope and Intknt of the Act. 79 I am of the opinion that the principles decided in these cases are not appli- cable to tlie .statute now uikUt consideration. The tax imposed by this act is, as declared tlierein, " a special excise tax witli resiK;ct to the carrying on or doing business " by the corporation ; and 1 held in an opinion transmitted to you on -January 13, 1910, that it is not a tax on the property owned by the corporation, or upon tlie income from such property, but is in tiie strict and constitutional sense an excise tax; and that, for that reason, the income from the interest on United States bonds sliould be computed in the gross income of a corporation, and should not be excluded in ascertaining its net income. If I was rigiit in tliat conclusion, then this tax is not imposed upon exports carried by these steamship companies, or even upon the income derived from the transportation of such exports. But, a.side from this, I tiiink there is a very material distinction between the present act and those involved in the cases above cited. The passengers carried by these companies are not exports within the meaning of this clause of the Constitution. Crandall v. Nevada, 6 Wall. 35. And Congress has express power to tax imports. Consequently the revenues of these companies are derived from different classes of business, the larger portion of which is subject to taxation. The act does not undertake in its terms to make any distinction between the different kinds of business in which these or any other corporations embraced therein are engaged, but the tax is imposed upon them all alike, not as exporters of merchandise, but as an incident to their entire business. Such were not the facts in either of the cases cited. In Brown t'. ifaryland but two classes of persons were mentioned in the act. one importers of the articles designated, and the other wholesale dealers in those articles; and under its provisions an importer was required to pay the tax before a sale of the imported articles could be made, regardless of the size of the article or the amount sold. The act therefore imposed the tax upon the importer as such, he being subjected thereto solely because he was the re- cipient for sale of imported articles. A careful analysis of the reasoning of the court will show that the decision was rested upon this fact. In suppoit of the holding that the prohibition to tax the imported articles does not cease the moment it lands, the court used the following illustrations: "The United States have the same right to tax occupations which is pos sessed by the States. Now, suppose the United States should require every exporter to take out a license, for which he should pay such tax as Congress might think proper to impose; would the government be permitted to shield itself from the just censure to which this attempt to evade the prohibitions ot the Constitution would expose it by saying that this was a tax upon the person, not on the article, and that the legislature had a right to tax occupa- tions? Or, suppose revenue cutters were to be stationed off the coast for the purpose of levying a duty on all merchandise found in vessels which were leaving the United States for foreign countries, would it be received as an excuse for this outrage were the government to say that exportation nio:int n.) more than carrying goods out of the country, and as the prohibition to lay «i tax on imports or things, imported ceased the instant they were brouglit into the country, so the prohibition to tax articles exported ceased when they were carried out of the country? " (Page 444.) It will be observed that the first illustration deals with the exporter ag 80 Federal Cokpoeation Tax Law. such, while the second deals directly with the exported article while in trans- portation. But the distinction is more clearly drawn in answering the con tention that if the act be invalid, then an importer could without being sub- ject to a tax imposed by the iState, sell his goods either as retailer or peddler;' or that silver plate imported for his own use would not be subject to taxa- tion. The court upon this subject said: "This indictment is against the importer, for selling a package of dry- gui/ds, in the form in which it was imported, without a license. This state of things is> changed if he sells them or otherwise mixes them with the general property of the State, by breaking up his packages, and traveling with them as an itinerant peddler. In the first case the tax intercepts the import, as an import, in its way to become incorporated with the general mass of property, and denies it the privilege of becoming so incorporated, until it shall have contributed to the revenue of the State. It denies to the importer the right of using the privilege which he has purchased from the United States until he shall have also purchased it from the State. In the last cases the tax finds the article already incorporated with the mass of property by the act of the importer. He has used the privilege he had purchased, and has him- self mixed them up with the common mass, and the law may treat them as it finds them. The same observations apply to plate or other furniture used by the importer. So, if he sells by auction." (Page 442.) Therefore the same article in the hands of the same person may be taxable or not, according to whether it still retains the character of an import. So, in the other cases cited, the stamp tax was attached to the bill of lad- ing, which accompanied the exported article, and was. by the language of the acts, made applicable to exports as such. On the other hand, in Turpin th Burgess, 117 U. S. 504, it was held that a stamp required lo be fixed to every package of tobacco intended for exporta- tion, before its removal from the factory, was constitutional because the to- bacco had not become an article of export; and in discussing the question in referring to the two clauses of the Constitution wherein taxes upon exports are prohibited, and the States are proliibitod from imposing, without the con- sent of Congress, taxes upon imports, the court said: '■ The prohibition in both cases has reference to the imposition of duties on goods by reason or because of their being exportation or intended exportation, or while they are being exported. That would bo laying a tax or duty on exports or on articles exported within the moaning of the Constitution, but ii general tax laid on all property alike, and not levied on goods in course of exportation or because of their intended exportation, is not within the Con- stitution proiiibition." (Page .'iOT.) And in Cornell r. Coyne, 192 U. S. 418, wherein it was held that filled cheefie was not exempted from taxation under this clause of the Constihition l)ecau8e manufactured expressly for exportation, the court quoted with ap- proval the foregoing language of the court in Turpin v. Burgess. It appears, therefore, that the validity of an art, und<'r this clause of the rV)nstitution, wliioh taxes an article, depends not upon wlM'ther it will increase" flio priff of orts in the United States, are not to be regarded as doing business in this country within the meaning of the statute. (T. R. .March 20, 1010, No. inor,, scv Appendix K.) .'). The iti'^titiitidii jind iirosccution of actions in the courts of the United States doen not of itself constitute engaging in biisincRs in tlin United States. 4. Foreign eor])orations may take mortgages by way of invest- ment, f)r IIS seenrity for debts, or inny take real estate as security Scope and Intent of the Act; 83 for debts without thereby becoming engaged in business within tlie United States within the meaning of the Federal Corporation Tax Law, provided the doing of such acts is not within the express purpose for which such corporations were created ; as for example, where they are engaged in the mortgage, loan or real estate business. 5. Where foreign corporations consign merchandise to persons in the United States for purposes of sale, and sales are made thereof by the vendor in his own name and the proceeds collected by him, such foreign corporations cannot, by reason thereof, be treated, as having engaged in business in the United States within the meaning of the Federal Corporation Tax Law. 6. A foreign corporation may transact business within the United States through the medium of a domestic operating com- pany, incorporated here for that purpose, without subjecting itself to the payment of the federal corporation tax, as being engaged in business within the United States. (People v. Am. Bell Tel. Co. 117 N. Y. 241, 22 N. E. 1057; People v. Kelsey, 101 App. Div' 205, 91 ]Sr. Y. Supp. 709. 84 Federal Corporation Tax Law. CHAPTER V. TAX RETURNS. Sec. 43. Tax Returns — General Provisions In Relation Thereto. — Section 3 of the Federal Corporation Tax Law (lines 9 to 95) provides that on or before the first day of March of each year all corporations, joint stock companies or associations and insurance companies subject to the operation of the Federal Cor- poration Tax Law, shall make a true and correct return in such form as the commissioner of internal revenue, with the approval of the Secretary of the Treasury, shall prescribe. In this connection attention is called to certain rules and regula- tions issued by the commissioner of internal revenue, with the approval of the Secretary of the Treasury. The ones to which special attention is directed are the following (T. D. August 21, 1909, No. 1534, see Appendix B.) : Attention is special!}' called to section 38 of the Act of August 5, 1909, imposing on certain corporations, joint stock companies, associations and in- surance companies a special excise tax to be paid annually. In view of the large number of corporations, companies and associations subject to this tax, collectors of internal revenue will, on receipt of this cir- oular, at once proceed to thoroughly canvass their districts, and as soon as possible furnish this ofTifTice with a list of all such corporations, companies and associations organized in their districts, setting forth the amount of capital stock and principal place of business of each. They will also furnish a .sepa- rate list of all corporations, companies and associations organizezd elsewhere (inchiding such as are organized under the laws of a foreign coimtry) having their principal place of business in the district where such list is prepared. Duplicates of such lists will be made by each collector, one copy thereof to be retained in his nftlce, and the other, when completed, forwarded to th<* Commissioner of Internal Revenue. Blanks to be used in such cases will bo furnished collectors; and, for statistical purposes and convenient reference, all such corporations, enmjianies and assoei.'\1ions will be classified atintific manner it is well understood by all bookkeepers that if an inventory is taken on December 31, the end of the calendar year, the credits entered as balances in the several ledger accounts show the assets that such corporation has on hand, and hence the instructions in "Note A" at the bottom of the printed Form 037 state that "the cost of the goods mannf;iefiin'(l sIkiII he nHccrtMiiicil by nn addition of a charge (debit) to the account of tlie cost of tlie poods as manufacttired during tlie year of the sum of the inventorv at the beginning of the year." All cn-dit balances above referred to are transferred to the debit aide of such accounts when the sam-* are reopened on eoiiiinencing business in the (irst of the year, and the " addi- Tax Returns. 89 tion of a charge," as noted above, is thus made to the several accounts that are debited with the cost of goods numufactured during the year. The credit to the account is tlien made at the close of the year when the inventory is taken. Capital stock is held to include preferred and common stock. (T. R. March 29, 1910, No. IGOG, see Appendix K.) Sec. 45. Content of the Return. — The return shall set forth : (First) The total amount of the paid-up capital stock of such corporation, joint stock company or association, or insurance company, outstanding at the close of the year ; ( second ) the total amount of the bonded and other indebted- ness of such corporation, joint stock company, or association, or insurance company at the close of the year; (third) the gross amount of the income of such corporation, joint stock company or association or insurance company, received during such year from all sources, and if organized under the laws of a foreign country, the gross amount of its income received within the year from business transacted and capital invested within the United States and any of its territories, Alaska and the District of Columbia; also, the amount received by such corporation, joint stock company or insurance company within the year by way of dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax imposed by this section; (fourth) the total amount of all the ordinary and necessary expenses actually paid out of earnings in the maintenance and operation of the business and property of such corporation, joint stock company or asso- ciation, or insurance company within the year, stating separately all charge.^ such as rentals or franchise payments required to be made as a condition to and continued use or possession of property, and if organized under the laws of a foreign country, the amount so paid in the maintenance and operation of its business within the United States and its territories, Alaska, and the Dis- trict of Columbia; (fifth) the total amount of all losses actually sustained during the year and not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in the case of insurance companies the sums other than dividends paid within the year on policy and annuity contracts and the net addition, if any. required by law to be made within the year to reserve funds; and in the case of corporation, joint stock company or association or insurance company organized under t1i<' laws of a foreign country, all losses actually sustained by it during the year in business conducted by it within the United States or its territories. Alaska, and the District of Columbia, not compensated by insurance or otherwise, stat- ing separately any amounts allowed for depreciation of property, and in the case of insurance companies the sums other than dividends paid within the year on policy and annuity contracts and the net addition, if any, reqiiired by law to be made within the year to reserve fund; (sixth) the amount of interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the naid-up capital stock of such corporation, joint stock company or association, or DO i'jSDEJKAL CORPOEATIOK TaX LaW. insurance company, outstanding at the close of the year, and in the case of a liank, banking association or trust company, stating separately all interest paid by it within the year on deposits; or in case of a corporation, joint stock company or association or insurance company organized under the laws of a foreign country, interest so paid on its bonded and other indebtedness not exceeding the proportion of its paid up capital stock outstanding at the close of the year, which the gross amount of its income for the year from business tiausacted and capital invested within the United States and any of its territories, Alaska, and the District of Columbia, bears to the gross amount of its income derived from all sources within and without the United States; (seventh) the amount paid by it within the year for taxes imposed under the authority of the United States or any State or Territory of the United States, or anj' State or Territory thereof, and separately the amount so paid by it for taxes imposed by the government of any foreign country as a condition to carrying on business therein; (eighth) the net income of such corporation, joint stock company or association, or insurance company, after making the deductions in this section authorized. All such returns shall as received be transmitted forthwith by the collector to the Commissioner of Internal Reve- nue. (See Appendix A, par. 3, lines 24 to 95.) In his bulletin issued January 24, 1910 (T. D. 1588, see Appendix F.), the commissioner of internal revenue made the following rules: 1. That the return shall show the gross income (profit) received during the year, which is reported in item 3 on form 637. 2. All the necessary expenses in the maintenance and operation of the business and properties, which include labor, fuel, rentals, insurance, etc., shown in item 4. 3. Tosses sustained during the year and not compensated by insurance, or otherwise, including a reasonable allowance for depreciation, shown in item 5 a and b. 4. Interest on bonded or other indebtedness to an amount not exceeding the paid-up capital stock, shown in item 6. 5. All sums imposed for taxes during the year, shown in item 7. 6. All amounts received by it as dividends upon stock of other corporations, etc., subject to the tax imposed, as shown in item 8. To make a correct return it is necessary for the accountant to know: 1. The exact resources and liabilities of the corporation, both on January 1 and Decenil)or 31 of the year cov<'rod by the same. 2. A full statement of the business transacted during the year. Full amount of stock, as represented by the y)ar vnhio of the shares issjied, to he regardf'd as the paid-np capital stork, except wlien such stock is assess nhlc on accf>unt of dcfcrrce verification should read as follows) (doth each severally alTirm) and each for himself and each de- poses and says, that the foregoing report of the several items therein set forth, are, to hi^ best knowledge and l)eli('f, and from such information as he has been able to obtain, true and correct in eacli and every particular; that the amount of gross income therein set forth is the full amount of gross income without any deductions whatsoever received from all sources by fjie said ci>r- poration during the year jireceding and that the net income therein set forth is tlie full amount upon which the tax is proper to be assessed. Sworn and this . . (I subscribed to before me | ay of 101 . \ President. Treasurer. Notary J'uhlie. (Notarial Seal.) Tax Returns. i)'f tlio Federal ( 'orporsitidii Tax Law Ity tlic ('(iiiniiissioiier of internal rnvornie, willi llie approxal ^f>(l as li;ihili(ies by the roriK)r;il i(in making the return .'lud <'ii1('r<'(I as hiicIi on its bookw frnni .Fjinnary 1 to Deccinlicr .■{! of the year for whifh return is made.) Tax Returns. 101 5. (a) Total amount of losses sustained January 1 to December 31 $ (b) Total amount of depreciation January 1 to December 31 Total ( See Note to No. 4) ' 6. Total amount of interest January 1 to December 31 on bonded and other indebtedness to an amount not to ex- ceed amount of paid-up capital at close of year (See Note to No. 4) 7. (a) Total taxes paid January 1 to December 31, imposed under authority of the United States or any State or Territory thereof $ { h ) Foreign taxes paid Total (See Note to No. 4) 8. Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and in- surance companies subject to this tax Total Deductions 9. Net Income 10. Specific deduction from net income allowed by law $5,000 00 11. Amount on which tax at one per centum is to be calculated for assessment (Verification aa in section 48.) (This form, properly filled out and executed, must be in the hands of the collector of internal revenue for the district in which is located the principal ofiice of the corporation making the return on or before March 1.) Sec. 54. Tax Returns From Miscellaneous Corporations. — Under the regulations established by authority of the Federal Cor- poration Tax Law, by the commissioner of internal revenue, with the approval of the Secretary of the Treasury, all miscellaneous corporations must make a return in substantially the following form: (See Appendix AA.) Form No. 638. To be Filled in by Internal Revenue To be Filled in by Collector. Bureau. List No Assessment List 19. . . . Class Page Line District of Date Received and filed 19 102 Federal Corporation Tax Law. UNITED STATES INTERNAL REVENUE. Return of Annual Net Income. (Section 38, Act of Congress approved August 5, 1909.) Miscellaneous Corporations. Retubn of Net Income received during the year ending December 31, 1ft. ., by , a corporation, the principal place of business of which is located at in the State of 1. Total amount of paid-up stock outstanding at close of year. $ 2. Total amount of bonded or other indebtedness outstanding at close of year 3. Gross Income (Gross income shall consist of the total of the gross reve- nue derived from the operation and management of its business and properties, together with all amounts of in- come from other sources, including dividends on stock of other organizations subject to this special excise tax received, as shown by entries upon its books from Janu- ary 1 to December 31 of the year for which return is made. ) Deductions. 4. Total amount of all the ordinary and necessary expenses of maintenance and operation of the business and properties of the corporation • (The deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered as such on its books from January 1 to December 31 of the year for which return is made.) 5. (o) Total amount of loss sustained January 1 to Doceml)er 31 $ (6) Total amount of depreciation January 1 to December 31 Total ( See Note to No. 4) 6. Total amount of interest January 1 to December 31 on bonded iniicbt^-ilm'SH to an amount not to exceed the amount of paid up ca])ital at close of year (See Note to \o. 4.) 7. (a) Total taxes paid January 1 to Deceml>er her 31, imposed under authority of the rnit<'(l States or any State or Territory thereof $ {b) Foreign tiixes paid Total (Sec Note to \o. 4) Tax IIetubns. 103 8. Amount received by way of dividends upon stock if other corporations, joint stock companies, associations and in surance companies subject to this tax Total Deductions $ 9. Net Income 10. Specific deduction from net income allowed by law $5,000 00 11. Amount on which tax at one per centum is to be calcu- lated (Verification as in section 48.) (This form, properly filled out and executed, must be in the hands of the collector of internal revenue for the district in which is located the principal offioe of the corporation making the return on or before March 1.) ' 104 Fedeual CoBPOfiATiON Tax Law. CHAPTER VI. FUNDAMENTAL BASIS OF THE FEDERAL CORPORATION ACT. Sec. 55. What Is the Fundamental Basis of the Federal Corporation Tax. — The fundamental and controlling principle to be observed in the practical operation of the federal corpora- tion tax is that which treats the whole act as embodvinar an excise tax, the amount of which is measured by the income of the cor- poration, company or association subject to its terms. In the words of the United States Supreme Court in Flint v. Stone Tracey & Company, 220 U. S. 107, " it is apparent that the tax is imposed not upon the franchises of the corporation, irrespective of their use in business, nor upon the property of the corporation, but upon the doing of corporate or insurance business with respect to the carrying on thereof in a sum equivalent to 1 per centum upon the entire net income over and above $5,000 received from all sources during the year; that is, when imposed in this manner it is a tax upon the doing of business with the advantages whicli inhere to the peculiarities of corporate or joint stock organizations of the character described. As the latter organizations share many benefits of corporate organization, it may be described generally as a tax upon the doing of business in a corporate capacity." Ticaring tliis in mind, it next lK?comes projx^r to determine how tlic taxahh' income of sudi corporations, companies or associations is to 1k> f'alcnhited. Before doing this it will be ])roper to lay a firrri foiiii(hitic ascertained by an addition of a charge to the account of the cf»Ht of the goods as ni.'iriiif.icl iiicd (luting' tlic yi'iir of the sum of the iiuMMitory at beginning of the year and a credit to the account of the sum of tlio inventory at, th" end of the year. To tliis amount sliould be added all item"? of income received during the year from other sources, including dividends received on stock of other corporations, joint stock companies, associations and Fundamental Basis of Fedkraj. Corporation Act. 109 insurance companies subject to tliis tax. In the determination of the cost of goods manufactured and sold as above such cost shall comprehend all charges for maintenance and operation of manufacturing plant, but shall not embrace allowances lor depreciation of property nor for losses sustained which are to be taken account of in ascertaining the net income subject to tax under the proper heading in the authorized deductions. 4. Mercantile companies. — Gross amount of income received during the year from all sources consists of the total amount ascertained through in- ventory, or its equivalent, which shows the difference between the price re- ceived for goods sold and the cost of goods purchased during the year, witli an addition of a charge to the account of the sum of the inventory at beginning of the year. To this amount should be added all items of income received during the year from other sources, inclusive of dividends received on stock of other corporations, joint stock companies, associations and insurance com- panies subject to this tax. In determining this amount no account shall be taken of allowances for depreciation of property, nor for losses sustained, which are to be taken account of in ascertaining the net income subject to tax under the proper heading in the authorized deductions. 5. Miscellaneous. — Gross income consists of the gross revenue derived from the operation and management of the business and property of the operation and management of the business and property of the corporation making the return, together with all amounts of income ( including dividends received on stock of other corporations, joint stock companies, associations and insurance companies subject to this tax) derived from all other sources as shown by the entries on the books from January 1 to December 31 of the year for which return is made. It will be noted from these definitions that gross income is practically the same as gross profits, the only difference being that gross income is more inclusive, embracing as it does not only gross profits of the corporation, joint stock company and association itself, but also all amounts of income received from other sources. It is immaterial whether any item of gross income is evidenced by cash receipts during the year or in such other manner as to entitle it to proper entry on the books of the corporation from January 1 to December 31 of the year in which return is made. Sec. 60. Income From Business. — By " income from busi- ness " is to be understood all moneys received from the carrying on of the particular business for which the company subject to the tax was incorporated or organized. In this connection attention is called to the treasury department regulations (T. D. 1588) under date of January 24, 1910, see Appendix F.). Under the regula- tion here referred to the commissioner of internal revenue speaks as follows : Sir. — Your letter dated the 19th instant has been received, in which you ask certain questions relative to making returns under the provisions of sec- tion 38, Act of August 5, 1909. You state: 110 Federal Corporation Tax Law. In the first place, relative to a manufacturing company, in your paragraph 3 on page 8 of the laws and regulations, you say: "Cost of goods manufac- tured shall be ascertained by the addition of a charge to the account of the cost of goods as manufactured during the year of the sum in the inventory at the beginning of the year, and a credit to the account of the sum in the inventory at the end of the year." Does this mean that the cost must be ascertained from tlie price of tlie raw materials and the amount of labor expended, irrespective of overhead charges, or should overhead charges be included in the cost, and should the addition then be made to the total net worth of the concern as shown by the inventory of the previous year and that subtracted from the net worth of the concern at the end of the year; or in what way is this section construed ? " In reply, you are advised that for the purpose of making a correct return in accordance with the provisions of section 3 of the Act of August 5, 1909, it is necessary to follow closely the well-established commercial rules for keep- ing the accounts of the business of manufacturers. In keeping such accounts in a scientific manner it is well understood by all bookkeepers that if an in- ventory is taken on December 31, the end of the calendar year, the credits entered as balances in the several ledger accounts show the assets that such corporation has on hand, and hence the instructions in " Note A," at the bottom of the printed Form 637 state that " the cost of the goods manufac- tured shall be ascertained by an addition of a charge (debit) to €lie account of the goods as manufactured during the year of the sum of the inventory at the beginning of the year." All credit balances above referred to are trans- ferred to the debit side of such accounts when the same are reopened on com- mencing business on the first of the year, and the" addition of a charge," as noted above, is thus made to the several accounts that are debited with the cost of goods manufactured during the year. The credit to the account is then made at the close of the year when the inventory is taken. The provisions of the law require: 1. That the return shall show tlie gross income (profit) received during the year, whicli i.s reported in item 3 on Form 037). 2. All the necessary expenses in the maintenance and operation of the busi- ness and properties, wliich include labor, fuel, rentals, insurance, etc., shown in iU'm 4. 3. Losses Hustaiiied during tlic year and not eonipensatcd by insurance or otherwise, including a reasonable allowance for depreciation, shown in item r>A and I?. 4. Interewt on bondi-d or otlior indeljledness to an amount not exceeding the paid up ea[)ital stock shown in item (!. ."i. All sums imposed for taxes during tlie year, sliown in item 7. 0. All ;iiri(nin includcMl in making up the I. UK. Milt u\' the gross income. (T. I). March 29, 1910, No. 1606, see ApiK-ndix K.) Receipts during the year iroui lands sold on the installment Fundamental Basis of Federai. Cokpobation Act. 113 plan should be included in making up the gross income in that particular year. (T. R March 29, 1910, No. 1606, see Appendix K.) Mortgaged real estate should be inventoried at its full value and the amount of mortgage reported as indebtedness. Sec. 64. Income From Sale of Capital Assets. — With re- spect to the sale of capital assets, the commissioner of internal revenue has issued the following bulletin: (T. R. 1571, Decem- ber 3, 1909, see Appendix C.) In ascertaining income derived from the sale of capital assets, if the as- sets were acquired subsequent to January I, 1909, the difference between the selling price and the buying price shall constitute an item of gross income to be added to or subtracted from gross income according to whether the sell- ing price was greater or less than the buying price. If the capital assets were acquired prior to January 1, 1909, the amount of increment or deprecia- tion representing the difference between the selling and buying price is to be adjusted so as to fairly determine the proportion of the loss or gain arising subsequent to January 1, 1909, and which proportion shall be deducted from or added to the gross income for the year in which the sale was made. But for the purpose of determining the selling price, as provided in this section, there shall be added to the price actually realized on sale any amount which has already been set aside and deducted from gross income by way of depre- ciation as defined in article 4 and has not been paid out in making good such depreciation on the property sold. Where a corporation is engaged in carrying on more than one class of busi- ness, gross income derived from the different classes of business shall be as- certained according to the definitions abo'-e applicable thereto. The receipts from sales of patent rights should be included in making up a statement of gross income. (T. R. March 29, 1910, K"o. 1606, see Appendix K.) Sec. 65. Income From Property Constitutionally Exempt From Federal Taxation. — On January 18, 1910, the commis- sioner of internal revenue issued the following bulletin: (T. D. 1583, see Appendix E.) In view of the fact that the tax imposed by section 38 of the Act of August 5, 1909. is not upon the property or income of corporations, joint stock com- panies, etc., but is a special excise tax to be measured by the annual net income of such corporations, etc., it is held, conformably to the opinion of the hoii,!rable Attorney-General, to whom the question has been submitted. Fed. Corp. Tax — 8 114 Federal Corpokation Tax Law. That in computing the amount of the gross income corporations owning United States bonds should include the interest received thereon, and that such interest should not be deducted from the gross income for the purpose of ascertaining the net income, which serves as a basis for computing the amount of taxes to be paid. The opinion of the Attorney-General here referred to was given under date of January 13, 1910, and reads as follows: Sir. — I have the honor to acknowledge receipt of your communication of December 23, 1909, in which you request my opinion as to whether or not under section 38 of the Act of August 5, 1909 (36 Stat. 112), corporations subject to the tax provided for therein should include in the returns required to be made, as a part of their gross income, the interest on United States bonds held by them, and in reply thereto will say: By section 38 of said Act it is provided: First, that the corporations specified therein " shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation . . . equivalent to 1 per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations," etc. ; second, that the net income of a corporation shall be ascertained by deducting from the gross amount of the income: (First) The expenses described; (sec- ond) losses described: (third) interest paid on its indebtedness, not exceed jng the paid-up capital, and in case of banking and trust companies, interest paid on deposits: (fourth) all sums paid within the year for taxes; and (fifth) amounts received within the year a.s dividends upon the stock of other cor- porations subject to the tax imposed; and third, that there shall be deducted from tlic not income of such corporation, ascertained as provided, the sum of five thousand dollars, and the tax shall be computed upon the remainder of said net income. The tax here imposed is not a tax upon the property of the corporation, but is specifically designated as " a special excise tax with respect to the carrying on or doing business by such corporation." That is. it is in the nature of a tax imposed upon the privilege of carrying on the business; and the net in come, ascertained as is described, was adopted by Congress only as a basis for computing wlmt tlic iur.nimt of the assessment should l)o. In the passage of this act. Congress doubtless had in mind the decision of llic Supreme Court in the case of Pollock r. Farmers Loan and Trust Coini)any. IT)? U. S. 429. known as the income tax case; and it was no doubt its inten fioti fi) avnid every character of taxation that might be regarded as a direct tax; and, c(inH<'r|uently, it carefully avoided imposing a tax upon the property of the corporation, or upon its inconie. and fixed and designated it as a tax upon the carrying on or doinc of it^ tiuHiness. Furthernmrc. tin act is Hpccific in its terms and enters into minute detail- with ref«Tcnce to lif)w tlu- n<'t incnnic of the cfirporation, for the purpose of fixing the amount of (he tax, shall be computed; and this particulMrity neces- sarily excluded the intention that any other provision can, by implication, b© reara- tion Tax Act provides the following method for ascertaining the net income of foreign corporations, to wit: Provided, thai in the case of :i corporation, joint stock company or associa- tion or insurance company, organized under the laws of a foreign country, sucli net income shall be ascertained by deducting from the gross amount of ita income as received witliin tlie year from business transact«'d and capital in- vested within the I'nited States and any of its Territories. Alaska and ths District of ( 'oluinhin : ( First) All the ordinary and necessary evpenses actually paid within the year out of earnings in the maintenance and operation of its I'tisiiK'ss and property within the United States and its Territories, Alaska, ;in(l tlie District of Coliniibiii. iiuliKling all charges, such as rentals, or fran oIiIpc pavnu'iits, r<'i|uirc(l to Ix- iikhW' as a condition to tlie continued use or pjiSHession of [»ro|M'rty ; (secoinl) all losses actually sustain<'d within the year in iMisineHH condiict<'d by it within the United States or its T<'rritorieH. Alaska , 1910, No. UlOO, see Ajjjjcndix K.) FuNDAIiiENTAL BaSIS OF FeDEBAI- CORPORATION AcT. 123 Sec. 76. Deduction for Expense of Operation of Business and Properties. — Under the terms of the act, all ordinary and necessary expenses connected with the operation of business and property are a proper deduction. Thus, the treasury department holds that commissions allotted salesmen, even when paid in stock, may he deducted as expense of operation if so charged upon their books. (T. K. March 29, 1910, No. 1606, see Appendix K.) Sec. 77. Meaning of Ordinary Expenses. — Only those ex- penses actually paid are proper subjects for taxation (act, para- graph 2, line 5), In addition to requiring that the expenses shall have been actually paid, the act provides that such expenses must be part of the ordinary and necessary expenses. To permit of this being a basis for reduction an expense must be shovtm to be of this character. Betterments and repairs are not proper deductions as expenses, the former being additions to the capital assets of the company, and the latter being offset by allowance for depreciation. (T. R. March 29, 1910, No. 1606, see Appendix K.) Cost of replacing old rails, structures, etc., not to be regarded as ordinary and necessary expenses. Depreciation during the year will be allowed, however, in such cases. (T. R. March 29, 1910, No. 1606, see Appendix K.) Dividends paid employees in lieu of wages not proper deduction as expenses. (T. R. March 29, 1910, No. 1606, see Appendix K.) Sec. 78. Meaning of Necessary Expenses. — An expense may be a necessary expense and a proper subject for deduction, but under the statute, not one of the ordinary expenses of the com- pany. Pensions paid or gifts made to employees are gratuities, and not " ordinary and necessary expenses." (T. R. March 29, 1910, No. 1606, see Appendix K.) Where allowances on account of salaries are deemed excessive, and for the purpose of evading the tax due, investigation will be made, and if the facts warrant, prosecution will follow. (T. R. March 29, 1910, No. 1606, see Appendix K.) 124 FjiBEKAL COKPOKATIU.N TaX LaW. Sec. 79. Meaning of Expenses Actually Paid Out of Income. — In order to be a proper subject for deduction, the expense must be paid out of income. In other words, the expense must be paid from revenue and not out of capital stock account. The treasury department, while holding that sales of stock and l>onds are to be regarded as sales of capital assets has, nevertheless, held that pro- ceeds derived from the sales of bonds used in deferring ordinary and necessary expenses are a proper deduction in determining the company's net income. (T. R. March 29, 1910, ISTo. 1606, see Appendix K.) Sec. 80. What Are Proper Charges for Rentals or Franchise Payments? — The act permits the inclusion as operating expenses of all charges, such as rentals or franchise payments, required to be made as a condition to the continued use or possession of the property. Such charges as are here enumerated would seem to be both ordinary and necessary, and, therefore, the addition of this phrase would seem to have been made largely by way of definition rather than with any intention of enlarging the subject-matter of deductions themselves. The Attorney-General has rendered an opinion (February 21, 1910) to the effect that mortgage in- debtedness on real estate, if assumed by the coqioration acquiring such real estate may be included in the indebtedness of the cor- poration, but if it is not assumed, and remains only as a lien on the property, interest paid thereon may be deducted as a charge made as a condition to the continued use or possession of the property. Sec. 81. Deduction for Losses. — All losses actually sustained witliin the year and not compensated by insurance or otherwise, including ;i reasonable allowance for depreciation of property, if any, ;ind with insurance coiny>anies tlie vsums other tium dividends paid within the yciir on policy and annuity contracts, and the net additions, if any, r(!(jnire(l by law to l)e made within the year to reserve funds are proper deductions. (Act, section 2, lines 41- 49.) Fundamental Basis of Federal Corporation Act. 125 Sec. 82. Meaning of Losses. — Losses as used in the Federal Corporation Tax Act may be defined to embrace any transaction or things whereby the assets of the company have become thereby impaired. In the language of the treasury department, " the deduction for losses must be in respect of losses actually sustained during the year and not compensated by insurance or otherwise. It must be based upon the difference between the cost value and salvage value of the property or assets, including in the latter value such amount, if any, as has in the current or previous years been set aside and deducted from gross income by way of depreciation as defined in the following section and not been paid out in making good such depreciation," It is immaterial whether the deductions are evidenced by actual disbursements in cash or whether evidenced in such other way as to he properly acknowledged by the corporate officers and so en- tered on the books as to constitute a liability against the assets of the corporation, etc., making the return. Sec. 83. Meaning of Phrase " Losses Actually Sustained Within the Year." — The words " actually sustained " as herein used would seem to refer to liquidated liabilities and exclude con- tingent or possibo liabilities. In addition to the fact that the loss must be actually sustained, the act provides that it must have been sustained within the tax year which runs from January 1 to December 31. Sec. 84. Condition That Losses Must Not Have Been Coni= pensated By Insurance or Otherwise. — The purpose of insert- ing this particular exception from the general enumeration of deductions, is by way of recognition that a loss not only covered by insurance, but fully compensated by insurance, cannot properly be charged as a loss within the meaning of the act. It is somewhat difficult to know just what is meant by the word " otherwise " as used in the act (Act, paragraph 2, lines 9-11). The act reads ^' not compensated by insurance or otherwise." This might in- clude, for example, a loss caused by embezzlement of a clerk, or by fire caused by explosion from an engine. In both of these cases 126 Federal Corporation Tax Law. there might be a legal liability oii the part of some third person not only to make good the amount of the loss and such loss might have been made good in either of the cases cited. This undoubt- edly is the meaning of the word as used in the text of the act Sec. 85. Meaning of Reasonable Allowance for Deprecia= tion of Property. — With respect to the character of the depre- ciation which has been made a subject for deduction, the treasury department has issued the following bulletins : Depreciation. — The deduction for depreciation should be the estimated amount of the loss, accrued during the year to which the return relates, in the value of the property in respect of which such deduction is claimed that arises from <'xhaustion, wear, and tear, or obsolescence out of the uses to which the property is put, and which loss has not been made good by pay ments for ordinary maintenance and repairs deducted under the heading of expenses of maintenance and operation or in the ascertainment of gross income. Tliis estimate should be formed upon the assumed life of the prop- erty, its cost value, and its use. Expenses paid in any one year in making good exhaustion, wear, and tear, or obsolescence in respect of which any de duction for depreciation is claimed must not be included in the deduction for expenses of maintenance and operation of the property or in the ascertain- RK'nt of gross income, but must be made out of accumulative allowances deducted for depreciation in current and previous years. (T. R. Dec. 3, 1909, No. 31. See Appendix C.) 65. Unearned premiums set aside by insurance companies as reserve not to be included as income until earned. 70. Bad debts, if so charged off the company's books, during the year, are proper deductions. But such debts, if subsequently collected, must be treated as income. 71. Where increase or decrease during the year in the value of real estate acquired in previous years, sold or held for sale, cannot be accurately deter- mined, stieli increase or decrease may be i)rorated, as provided by regulations in cases of sab' of capital assets. 72. Depreciation in value of mines by the removal of ore, if not otherwise ascertainable, may be prorated as in the ease of sales of capital assets. 7'{. I)<'f)reciatinii in \;ihi(' of mines liy the reinoval r dejireciat inn. Unt eorfjorat ions owning mines are entitled to allowatny fi.r (jcfireciiit i(in bnsed on fair ostimate, etc. "f'l. Hcniov.il of tindxT from timber binds, while depleting the Innds to the ext^ent of Hiieli reinov.-il. is ret'iirded jis n ebnnge in the form uf nssets and not a depreciation within the mcMninL' of the jict. Fundamental Basis of Federal Corporation Act. 127 77. Deductions on account of depreciation of property must be based on lifetime of property, its cost, value, and use. 78. Voluntary removal of buildings, etc., for purpose of improvements not agarded .as loss or depreciation and no deduction therefor should be made. 79. Depreciation of company's stock a loss to the stockholders, not a loss to the company issuing the same, and tiierefore not a proper deduction. (T. R. March 29, 1910, No. 1606. See Appendix K.) Sec. 86. Deduction By Insurance Companies — What Are Permissible? — Two additional deductions are permitted in the case of insurance companies. The first of these is that which per- mits sums, other than dividends paid by insurance companies within the year on policy and annuity contracts to be deducted. The other is that which permits assessment insurance companies to deduct the actual deposit of sums made by them with State or Territorial officers, pursuant to law, as additions to guaranty or reserve funds. These will now be taken up for separate considera- tion. Sec. 87. Allowance for Sums Paid on Policy and Annuity Contracts. — Payments other than dividends, paid within the year on policies or annuity contracts, may be deducted by insur- ance companies in determining the amount of their net income. Such payments are to be treated as losses or fixed charges and as such are proper deductions. Sec. 88. Allowance for Net Addition Required by Law to Be Made to Reserve Funds. — The right is given insurance com- panies in ascertaining their net income to deduct from their gross income among other items the amount, if any, required by law to be made within the year to reserve funds. This has reference unquestionably to such additions to this reserve, as may be com- pelled of an insurance company, by State officials acting under competent statutory authority in the premises. Sec. 89. Deduction for Indebtedness. — Paragraph 2, lines 68-75, of the act provides as follows: '' There shall be deducted interest actually paid within the year on its bonded or other in- 128 Fedekal Corporation Tax Law. debtedness, to au amount of such bonded and other indebtedness, not exceeding the paid-up capital stock of such corporation, joint stock company or association or insurance compan}^ outstanding at the close of the year, and in the case of a bank, banking associa- tion or trust company, all interest actually paid by it within the year on deposits." (Act, section 2, lines 15-22.) Sec. 90. Deduction for Interest Actually Paid on the Bonded Indebtedness. — Interest on portions of bonded or other indebted- ness bearing different rates of interest, may be deducted from gross income during the year, provided the aggregate amount of such indebtedness does not exceed the paid-up capital stock of the corporation. (T. R. March 29, 1910, No. 1606, see Appendix Railroad companies operating leased or purchased lines to in- clude all receipts derived therefrom, and if bonded indebtedness has been assumed, may deduct interest thereon to an amount not exceeding its paid-up capital stock. If such subsidiary companies receive income in the way of rentals, etc., return to be also made by such companies. (T. R. March 29, 1910, No. 1606, see Appendix K.) Sec. 91. Deduction for Interest Actually Paid On Indebted- ness Other Than Bonded. — Interest paid during the year on notes given prior to .lanuarv 1, 1909, to be prorated. But interest nil notes given in 190!), atiaid-up capital stock of the company outstanding at the close of such year. (Paragraph 2, lines 68-73.) In computing the several amounts of interest to be deducted to the amount of paid-up capital it would seem to be proper to fix the same as of date December 31st of the preceding tax year. An important question in this immediate connection was sub- mitted to the Attorney-General of the United States with respect to what allowance should be made for interest paid by corporations on mortgages on their real estate. The opinion of the Attorney- General (Febniary 21, 1910) is here reproduced as follows: SIR: — I beg to acknowledge receipt of your communication of February 4, 1910, in which you ask my opinion whether, in ascertaining the net income of a corporation holding and dealing in real estate, the entire interest paid upon items of indebtedness secured by mortgages on such real estate, should be deducted from the gross income, without reference to the amount of capital stock of such company. This request is predicated upon a communication or brief presented by "Allied real estate interests of the State of New York, and of allied real estate interests in the city of New York," signed by certain attorneys of the city of New York. I gather from the communication that " allied real estate in- terests " is not intended as the designation of any corporation or joint stock company, but is intended to suggest that the inquiries propounded in this communication are of c indel)tedness is not " its "' bonded or other indcljiedncss, Imt an iiidrlitediK'ss by a thiid party aiid charged as a lion upon the land acquiied, subject thereto, by tlie ^lurchasimr corporation. The interest accruing upon such charge or incumbrance would certainly f;ill witliin the description in tlie first clause of the second para graph nf the si'ctjiiTi iiiider cniisidciat ion as one of the " cliarges required to he made as a comlition to the contiimcd use or possession of ])roperty " and therefr)re would I>o deductible as such. Sec. 93. Dctliiction In Case of Rankinj;: Institutions to the Amount of Interest Actually Paid By Them Within the Year On Deposits. — All li.iiikinir or trnsi iiist iliit idiis may dodnct !i]l iiitorcst !K'tnnIl\' p;ii'l liv tliciii witlnii tlic ycnr (ui dciiosits. It ha.s boon liold by llii- troa.sury dcpartiiicnt that iiitorost ]iaid on Fundamental Basis of Federal Corporation Act. 131 time deposits and deposits subject to check, constitute proper deduction from the amount of gross income during the year. (T. n. March 29, 1910, No. 160G, see Appendix K.) Sec. 94. Deduction for Taxes. — Deductions may be made tor all sums paid by companies within the year for taxes imposed under the authority of the United States or any State or Terri- tory thereof, or imposed by the government of any foreign countr;^ as a condition to carry on business therein. Interest or taxes accruing prior to the year for which return is made is not a proper deduction from the gross income for that year. (T. R. March 29, 1910, No. 1606, see Appendix K.) Import duties or taxes if included in arriving at cost of goods are not deductible under the head of taxes paid during the year. (T. R. March 29, 1910, No. 1606, see Appendix K.) Sec. 95. Meaning of the Word "Taxes" as Employed In the Act. — The word " taxes," as used in the act, should un- (piestionably be given a very broad and liberal meaning. That is, it should include all taxes on real and personal property, cus- toms, excises, licenses, special assessments, etc. (T. E, March 29, 1910, No. 1606, see Appendix K.) Sec. 96. What Species of Foreign Taxes May Be Deducted. — The Federal Corporation Tax Act specifically authorized de- duction on account of taxes imposed by the government of any foreign country as a condition imposed by such government upon American companies carrying on business within its territories. (Act, paragraph 2, lines 88-90.) The taxes here referred to are the ordinary license or occupation taxes imposed by foreign gov- ernments upon companies doing business within their jurisdiction. Sec. 97. Deductions to the Amount of Dividends Received Upon Stock of All Companies, Subject to the Payment of the Corporation Excise Tax. — The nmounts received by companies subject to the operation of the Federal Corporation Tax Law 132 Federal Corporation Tax Law. within the tax year, as dividends upon the stock of other corpora- tions, joint stock companies or associations, or insurance com- panies, are proper subjects of deduction. (Act, paragraph i\ lines 60-63.) If the foregoing provision had not been inserted in the Corporation Tax Law there would have been one inevitable result, and that would have been a plain case of double taxation. Sec. 98. Are Deductions Permissible for Dividends on Shares In a Company Whose Net Income Is Less Than $5,000? — The answer to this question is undoubtedly in the affirmative. In order that dividends of this character may be a proper subject for deduction, all that it is necessary for the com- pany making the return to show, is that the same must have been received from companies belonging to a class subject to tlie tax imposed by the Federal Corporation Tax Law. Sec. 99. Are Deductions Permissible on Account of Divi- dends on Shares in Foreign Companies? — Under the ruling of tlie treasury department (March 21), 1910, No. 1606, see Ap- pendix K.) dividends received on stock of foreign corporations which are not subject to the operation of the Federal Corporation Tax Law do not constitute a proper deduction. Sec. 100. Foreign Companies — Statutory Method of Cal- culating Tax on Income Thereof. — The Federal Corporation lax Law (section 1, lines 10-26) |)r<)vidc's (hat foreign companies sliall Ix' subject to the tax prescribed by tlie act ou\y with res])ect to the carrying on or doing business by such coiiij)any to an equiva- lent income of one jx-r cent, upon the amount of net income over and above $r),000 received by it from business transacted and ca[)ital in\-e.-te(| within ihe Fnited Stales and its Territories, Alaska and the District of ('olnnd>ia during the tax year. The act further provides (section 2, lines 35—63) that such net income shall 1m' ascertained hy (h'dnct inon any particular foreign company. These deductions are as follows: First. All the ordinary and necessary expenses actually paid within th«» year out of carninfis in the niaintonanco and operation of its bnsim'ss and property witliiii the I'nitod States and its Ts actually sustained within tlw year in business co.i ducted by it witliin the United Stat<'s or its Territories, Alaska, or tlie Di^ triet of Columbia, not componsateii by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, ami in the ease of insurance eomjianics tlie sums other tiian dividends paid witliin tlic year on policy and annuity enntracts, and tlie net addition, if any, rc(iuir<'d l)y law to l)f niadr- witliin th<' y<'ar to reserve funds; tliird, interest actually paid within the year to reserve funds; (third) interest aetnally paid within the year on its bonded or otlier indebti'iincss to an amount ratioii of tlio net, to t:ike the testimony of sneh {x^raons with roferenco to the matters re(|nired liy law to hv iiichM!en"lcs wnutod. 142 Federal Corporation Tax Law. Sec. 122. What Courts Have Jurisdiction to Punish Wit= nesses for Refusal to Attend Before Commissioners. — Juris- diction is expressly conferred upon the Circuit and District Courts of the United States for the district in which the persons summoned by a special commissioner under authority of the com- missioner of internal revenue to appear, testify or to produce books in connection with the making; of any return by any com- pany, shall reside, to compel such attendance, production of books with testimony by proper process. (Act, section 8, lines 19-24.) Sec. 123. What Witnesses May Be Compelled to Testify and to Produce Books. — The act apparently limits the right to compel the attendance of witnesses and the production of books before the commissioner to officers or employees of any company required by law^ to make a return to the commissioner of internal revenue, under the provisions of tlie Federal Corporation Tax Law. (Act, section 4, lines 20-29.) There seems to be no authority for requiring the testimony of any person before a com- missioner who either was not an officer or employee of such com- pany at the time, or who had not been such officer or employee at some previous time with respect to the production of books. It would appear that the same rules should he applied as are appli- cable in the case of the issuance of a suhpama duces tecum, to officers or employees of corporation. That is, tlwit llic orch'v in such cases should 1)0 directed to the ])nrticul;u' officer who has tlic custody and control of the jjooks and ddcnments which it is desired to examine. It it is not known what jiarticular officiM- has such custodv or control it would nndonhtcdly Ih' sniHcicnt for the order to issue against the cxccutiNc head or managing officer of the com- ])any, wlio would Ik* cotn|)('ll('(l to ('onij)ly with such order, pro- viding tlic lw)oks and docniucnts wanted were within the jurisdic- tion of the court issuing such an order, at Uie time the same was made. Sec. 124. Power of Commissioner of Internal Revenue to Make, Amend or Correct Returns Upon Hvidence Taken Under His Direction. — Sjx'cific autlioritv is conferred upon the com- missifitHT "f iiitiTiial rc\('iiu(\ upon information accpiirrd by liini Correction and Rkvision ok Rkturiv. 143 in the manner i)rescnb€d in tlic act (Act, section 4, lines 29-31) to amend any return or to make a return where none has been made. (Act, section 4, lines 29-81.) Sec. 125. Statutory Limitation of Time for the Correction of Returns. — Section 5 of the Federal Corporation Tax Law (lines 24-38) provides as follows: In the case of any company refusing or neglecting to make the return to the Commissioner of Internal Revenue required by law, as well as in the case of false or fraudulent returns, the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after such return is due, make a return upon information obtained in the manner prescribed by the act. Sec. 126. Penalties for Erroneous or False and Fraudulent Returns. — If any company subject to the operation of the Federal Corporation Tax Act shall render a false or fraudulent return, it is liable to a penalty of not less than one thousand dol- lars and not exceeding ten thousand dollars. (Act, paragraph 8, lines 1-14.) Any person, authorized by law to make, render, sign, or verify any return who make any false or fraudulent re- turn or statement with intent to defeat or evade the assessment required by the act to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars, or be im- prisoned not exceeding one year or both at the discretion of the ■court with the costs of prosecution. (Act, section 8, lines 8-14.) In addition to the foregoing it is provided that the commis- sioner of internal revenue shall in the case of any return being made to him with false or fraudulent intent, add one hundred per cent, to the amount of the tax as the same would be assessed by him in a truthful and correct manner. (Act, section 5, lines 1-4.) Sec. 127. Are the Returns Public Records? — The act pro- vides that when the assessment shall be made as provided therein, the returns, together with any corrections thereof, have been made by the commissioner, shall be filed in the office of the commissioner of internal revenue, and shall constitute public records, and are open to inspection as such. (Act, section 6, lines 1-5.) t 14-i Federal Corporation Tax Law. The returns, however, are subject to inspection only upon com- pliance with rules and regulations prescribed by the Secretary of the Treasury and approved by the President. (See T. D. 1665, November 28, 1910, Appendix X.) The regulation governing the returns of corporations are set forth in Treasury Department No. 1665, bearing date November 28, 1910, and read as follows: (Regulations Governing the Inspection of Returns of Corporations Made ia Accordance with Section 38 of the Tariff Act of August 5, 1909.) Teeasurt Department, Washington, D. C, November 25, 1910. Inspection of Returns. By section 38 of the Tariff Act of August 5, 1909, Congress imposed a special excise tax upon all corporations, joint stock companies, and associations, and insurance companies, foreign and domestic, with certain exceptions, engaged in business in the United States, with respect to carrying on or doing such business, and prescribed the method of handling the return of each corporation as follows: " 6. When the assessment shall be made, as provided in this section, the returns, together with any correction thereof which may have been made bv the Commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such." In the act making appropriations for the legislative, executive, and judicial departments of the government for the fiscal year ending June 30, 1911, there appears this language: " For classifying, indexing, exhibiting, and properly caring for the returnn of all corporations, required by section thirty-eight of an act entitled "An Act to provide revenue, equalize duties, encourage the industries of the United States, and for other purpdses." approved August fiftli, nineteen hundred and nin<', including the employmont, in the District of Columbia, of such clerical and other personal services and for rent of such quart<>rs as may be necessary, twenty-five thousand dollars; Provided, That any and all such returns shall Ik" open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President." For the purpose of making effective tlie legislative intent thus expressed, tlie President hiiH ordered that all sucli returns shall be open to inspection under till- following rules and regulations: 1. rill- return of every corporation shall 1m> open to the inspection of the proper ollieers ami employees of the Treasury IVpartment. \\'^ere access to any return is desin'd by an officer or employee of any other department of the (lovernment. an at)j)lication for permission to inspect such return, setting out the rensons therefor, shall be made in writing, signed by the head of the ex- ecutive department or oilier government establishment in which such officer or emjiloyee is einployrd. and transmitted to the Secretary of the Treasury. If. however, the retur?i is desired to tie iisrwl in any lejral proceedings, or to bf» used in any manner by which any information contained in the return could COREECTION AND REVISION OF ReTUBN. 145 be made public, or access to any return is desired by any oflficial of any State or Territory of the United States, the application for permission to inspect 8uch return shall be referred to the attorney general, and if recommended by him, transmitted to the Secretary of the Treasury. 2. The Secretary of the Treasury, at his discretion, upon application to him made, setting forth what constitutes a proper showing of cause, may permit inspection of the return of any corporation by any bona fide stockholder in such corporation. The person desiring to inspect such return shall make application, in writing, to the Secretary of the Treasury, setting forth th i reasons why he should be permitted to make such inspection, and shall attach to his application a certificate signed by the president, or other principal officer of such corporation, countersigned by the secretary, under the corporate seal of the company, that he is a bona fide stockholder in said company (Where this certificate cannot be secured, other evidence will be considered by the Secretary of the Treasury to determine the fact whether or not the applicant is a bona fide stockholder and therefore entitled to inspect the return made by such company.) The privilege of inspecting the return of any cor- poration is personal to the stockholders, and the permission granted by the Secretary to a stockholder to make such inspection cannot be delegated to any other person. 3. The returns of the following corporations shall be open to the inspection of any person upon written application to the Secretary of the Treasury, which application shall set forth briefly and succinctly all facts necessary to enable the Secretary to act upon the request: (a) The returns of all companies whose stock is listed upon any duly organ- ized and recognized stock exchange within the United States, for the purpos^j of having its shares dealt in by the public generally. (&) All corporations whose stock is advertised in the press or offered to the public by the corporation itself for sale. In case of doubts as to whether any company falls within the classification above, the person desiring to see such return should make application, supported by advertisements, prospectus, or such other evidence as he may deem proper to establish the fact that the stock of such corporation is oft'ered for general public sale. Returns can be seen only in the office of the Commissioner of Internal Rev- enue, in Washington, D. C. In no case shall any collector, or any other internal revenue officer outside of the Treasury Department in Washington permit to be seen any return or furnish any information whatsoever relative to any return or any information secured by him in his official capacity relating to such return. No provision is made in the law for furnishing a copy of any return to any person, and no copy of any return will be furnished except to the corporation making the return, or its duly constituted attorney. The provisions herein contained shall be effective on and after the 25th day of November, 1910. Franklin ilAcVEAon, Secretary of the Treasury. Approved : Wm. H. Tafi', The White House, November 25, 1910. Fed. Cobp. Tax — 10 146 Fedkral Corporation Tax Law. Sec. 128. Statutory Protection Against Disclosures of Con- tents of Returns. — Section 7 (lines 1-12) provides as follows, with reference to disclosures of contents of returns, to wit : It shall be unl.iwful for any collector, deputy collector, agent, clerk, or other officer or cnijjloyee of tlie United States to divulge or make known in any manner whatever not provided by law to any person any information obtained by him in the .lischarge of his official duty, or to divulge or make known in any manner not provided by law any document received, evidence taken, or report made under this section, except upon the special direction of the Presi- 1ent; and any oflfense against tht foregoing provision shall be a misdemeanor ind be punished by a tine not exceeding one thousand dollars, or by imprison- ment not exceeding one year, or both, at the discretion of the court. In this connection attention is called to Treasury Department Regulation dated February 17, 1910 (No. 594, see Api^endix H.), which has exclusive reference to this so-called publicity clause of the Federal Corporation Tax Act. The foregoing regulation reads as follows : Many commimications have been received at this office making inquiry as to how the returns of corporations, joint stock companies, associations, and insurance companies, made as required under the provisions of the Corporation Excise Tax Law (section 38 of the Tariff Act of August 5, 1909) were to be handled in the office of the Commissioner of Internal Revenue, and whether or not they were to be open to general inspection. The law, paragraph H. on this subject, is as follows: "6. When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the office of the Commissioner of Infernal Revenue, and shall constitute the public records and be open to inspection a.s such." Congress appropriated .$10,000 to carry into effect the provisions of the law. Under general statutes no portion of this appropriation is available for U9# in the District of Columbia. The returns cannot be open to general inspection in tlie District of Columbia witliout the exiM'nditure of a substantial s\im ^f money, if. thn'. it was the iiifciit of Congress to make these returns ofw'n to gj'ueral inspeetion, it will Ix' necessary for it to appropriate a sum sufficient to cover the neeessary expenses. Cntil this is done this bureau rulei that the return-; niiuh- undr('on at any time within three years after such return is due. (Act, section 5, lines 24—38.) Sec. 133. Notice of Assessment. — Tlic act, by implication at lea.st, seems to rc(|nirc that notice be given to the (roinpanics as- Assessment of the Federal Corporation Tax. 149 sessed. (Act, section 5, lines 32-34.) Under the Treasury Regu- lations (December 3, 1909, see Appendix C.) collectors of internal revenue of each district are required to give notice of assessment and subsequent demand under the forms prescribed by the com- missioner of internal revenue. (Forms 17, 21.) Section 3184 of the United States Kevised Statutes provides as follows, to wit : Where it is not otherwise provided, the collector shall, in person or by deputy, within ten days after receiving any list of taxes from the Commis- sioner of Internal Revenue, give notice to each person, in writing, to pay any tax stated therein to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such tax and demanding payment thereof. If such persou does not pay the tax within ten days after the service or sending by mail of such notice, it shall be the duty of the collector or his deputy to collect the said taxes, and the penalty of five per centum additional upon the amount of taxes and interest at the rate of one per centum per month. Sec. 134. When Assessment Becomes Due and Payable. — The assessment becomes due and payable at any time on or before June 30th of each tax year. (Act, section 5, lines 32-38.) The only exception defined in the act is in those cases of refusal or neglect to make the return, and also in cases of false or fraudulent returns, (Act, section 5, lines 24-38.) To any sum or sums due and unpaid after the 30th day of June in each year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of taxes paid and interest at the rate of one per centum per month upon such tax from the time the same becomes due. (Act, section 5, lines 33-38.) Sec. 135. Legal Effect of Making Payments of Assessments Under Protest. — Wherever any company upon whom a tax is sought to be imposed is desirous of disputing either the amount or the validity of the tax, it should pay the amount of the assessment under protest. This for the reason that by making the payment in this manner it lays the proper foundation for the bringing of an action of assumpsit against the collector receivins: the tax, to recover the amount so paid, for money paid to the government 150 Federal Corpokation Tax Law. without protest cannot be recovered back again in the absence of statutory provision therefor. Elliott r. Swarthout, 10 Peters 137 ; Wright r. Blakslee, 171 U. S. 174. Attention is called here to the language of the United States Supreme Court in Cheeseborough v. United States, 192 U. S. 253, 48 L. E. 432, where the court spoke as follows : The rule is firmly established that taxes voluntarily paid cannot be recov ered back, and payments with knowledge and without compulsion are volun- tary. At the same time when taxes are paid under protest that they are being illegally exacted, or with notice that the payor contends that they are illegal, and intends to institute suit to compel their repayment, a recovery in such a suit may on occasion be had, altliough generally speaking even a protest or notice will not avail if the payment be made voluntarily, with full knowledge of all the circumstances, and without any coercion by the actual or threatened exercise of power possessed, or supposed to be possessed, by the party exacting or receiving the payment, over the person or property of the party making the payment, from which the latter has no means of immediate relief than such payment. * * * In Union Pac. R. Co. v. Dodge County, Mr. Chief Justice Waite, speaking for tlie court, said : " There are, no doubt, cases to be found in which the language of the court, if separated from the facts of the particular case under consideration would seem to imply that a protest alone was sufii cient to show that the payment was not voluntary; but on examination it will be found tliat the protest was used to give effect to the other attending circumstances. Tiiua in p:iliott r. Swartout, 10 Pet. 1.37, 9 L. Ed. .373, and Bend v. Hoyt, 1.3 Pet. 266, 10 L. Ed. 1.55, which were customs cases, the pay roents were made to release goods held for duties on imports, and the protests l>ecam<' n<'cessary in order to show that the legality of the demand was not admitted when the payment was made. The recovery rested upon the fact that the payment was made to release property from detention, and the pro test saved the rights which grew out of that fact. In i'hiladelphia r. The (Collector, r* Wall. 7.30. 18 I., ed. 276, which were internal revenue tax cases, the actions were sustained " upon the ground that the special provisions in the internal revenue acta referred to warranted the conclusion as a necessary implication tliiil ('iiiiijress intended to give the taxpayer such remedy." It ifl so expressly stated in the last case, p. 14, T.. Ed. 276. As the case of Erskine v. Van Arsdale, \f} Wall. 7.'), 21 L. Ed. 63. followed these, and was of the same general rharneter. it is to be presumed that it was put uj)<)n the same f^ound. In such e!is<'s tlie protest phiyn (he same part as it does in customs casPH and gives notice that the payment is not to he considered as admittine thi- riglit to ni.ike the d'-mand. The wtampH in (|iie-!chalf, or by its attorney duly authorized to act in the premises. (T. R. March 29, 1910, No. IfiOO.) Cheeselxirough r. Uuited States, 192 U. S. 253, 48 L. E. 432; Wright v. Blakeslec, 101 U. S. 174, 25 L. E. 1048. Collection of Federal Corporation Tax. 153 CHAPTER IX. COLLECTION OF FEDERAL CORPORATION TAX. Sec. 137. Collection of the Tax — General Remarks Thereon. — It is made the duty of the several collectors of internal revenue throughout the United States, under the immediate direction of the commissioner of internal revenue, and under the general direc- tion of the Secretary of the Treasury, to see to the collection of the federal corporation tax. See United States Revised Statutes, ^§ 3172, 3183. Section 3183 of the United States Revised Statutes provides as follows : It shall be the duty of the collectors, or their deputies, in their respective districts, and they are authorized to collect all the taxes imposed by law, however the same may be designated. And every collector shall giv» receipts for all sums collected by him. The collection of the tax as assessed is subject to the same general statutory provisions as are other internal revenue taxes, this fact being based upon the provisions of section 8 of the Federal Corporation Tax Law (lines 15-18), to the effect that all laws relating to the collection, remission and refund of internal revenue taxes, so far as applicable to and not inconsistent with the provisions of the federal corporation tax, are extended and made applicable hereto. The Attorney-General of the United States in his opinion, dated April 2, 1910 (see Appendix), speaks as follows, with reference to the assessment and collection of the federal corpora- tion tax : On or before March 1 of each year returns are required to be made by th*! corporations, joint stock companies, and associations liable for the tax to the Collector of Internal Revenue of the district in which they have their principal places of business. These returns are forwarded by the collector to the Com- 154 Federal Corpokation Tax Law. niissioner of Internal Revenue, who shall make the assessments thereon. By section 3183, Revised Statutes, the duty of collecting all taxes in their re spective districts is imposed by law on the collectors or their deputies, and by section 3184 it is provided that the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, specifying the manner in which such notice shall be given. And in the fifth paragraph of section 38 of the Act of 1909 it is provided that assessments shall be made, and the several companies liable to the tax shall be notified of the amount for which they are liable on or before the 1st day of June of each successive year. Therefore it is the duty of the Commissioner of Internal Revenue to send to each collector a list of the companies liable for the tax in his district, showing the amounts for which they are liable, within such time that the collector may give the required notice to such companies on or before the 1st day of June, and upon such lists the collections are made. These are the only lists which by statute are required to be sent to the col- lectors; and under the provision of section 3186, Revised Statutes, as amended, which is above quoted, the lien is fixed upon the assets of the corporation when this list comes into the collector's hands." Sec. 138. To What Extent Is the Tax a Lien? — Section 3186 of the United States Revised Statutes reads as follows, to wit : If any person liable to pay any tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided, until paid with the interest, penalties, and costs that may accrue in addition thereto upon the property and rights to property belonging to such person. The question as to whether a tax assessed under the provisions of tlie Federal Corporation Tax l>aw l>ecomea a lien upon the property of the company against which the same is assessed, was considered hv the Attornev-Oeneral of the United States in his oj)inion of date April 2, 1910. After hohlinf]: that the company, conccrniiiir wliich liis ojjiiiioii h;id Im'cii invoked, was liable for the excise t;i\ created ]>y section .38 of th(> Act of Conjj^ress of August r>, l!)0!i, lie wiis iisked to render an opinion U|x>n the folhnving question : Whether m lien existed on the assets of the sjiid cor |x»r;itio(i to secure tlie p.'ivment of siiid feder;il corporntion tax, ;iiii| iiici(|ciit:ill\-, when (he lien iittachi^s to the pro])erty of n cor- por;itioii or joint stock conipiiny liiihh' for tiixes ntider said act. The oj»inion rendered on this quc^slion is as foMows, to wit: Collection of Fi^hjekal Corporation Tax. 155 It will Ik' observed tliat there is no express provision in this act which creates a lien upon the property of the corporation, joint stock company, or association to secure the payment of the tax. However, by section 3186, Re- vised Statutes, as amended by Act of March 1, 1879 (20 Stat. 331), it is provided generally with reference to internal revenue taxes, that " if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise pro- vided, until paid, with the interest, penalties, and costs that may accrue in addition thereto, upon all property and rights belonging to such person," and in the eighth paragraph of said section 38, Act of August 5, 1909, it is pro- vided that "all laws relating to the collection, remission, and refund of in ternal revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section." The method of assessing the tax and collecting the same, as provided for in the act itself and in the general statutes, appears to be as follows: On or before March 1 of each year returns are required to ba made by the corporation, joint stock companies, and associations liable for the tax to the Collector of Internal Revenue of the district in which they have their principal places of business. These returns are forwarded by the col- lector to the Commissioner of Internal Revenue, who shall make the assess- ments thereon. By section 3183, Revised Statutes, the duty of collecting all taxes in their respective districts is imposed by law on the collectors or their deputies, and by section 3184 it is provided that the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Com missioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, specifying the manner in which such notice shall be given. And in the fifth paragraph of section 38 of the Act of 1909 it is pro- vided that assessments shall be made and the several companies liable to the tax shall be notified of the amount for which they are liable on or before the Ist day of June of each successive year. Therefore, it is the duty of the Com- missioner of Internal Revenue to send to each collector a list of the com- panies liable for the tax in his district, showing the amounts for which they are liable, within such time that the collector may give his required notict> to such companies on or before the 1st day of June, and upon such lists the collections are made. These are the only lists which by statute are required to be sent to the collectors, and under the provision of section 3186, Revised Statutes, as amended, which is above quoted, the lien is fixed upon the assets of the corporation when this list comes into the collector's hands. Therefore if the corporation in question had distributed all of its assets and had become dissolved in the manner provided for by law prior to December 31, 1909, then when the list of assessments came into the hands of the collector there was neither corporation nor assets, and nothing upon which the lien could attach, and consequently no lien exists to secure the payment of the taxes. Sec. 139. Enumeration of Statutory Methods for Collecting the Tax. — With respect to tlie methods that raav he employed bv the federal government in collecting the federal corporation tax 156 Federal Corporation Tax Law. reference must be hrd to the revised statutes of the United States, providing generally for the collection of internal revenue taxes. This for the reason that the Federal Corporation Tax Act itself provides that " all laws relating to the collection, remission and refund of internal revenue taxes, so far as applicable to and not inconsistent with the provisions of the section, are hereby extended and made applicable to the tax hereby imposed." Turning now to the revenue laws applicable generally to the collection of internal revenue taxes we find the following methods open to the government as means for the collection of the annually imposed federal corporation tax, to wit: First, by distraint through levy and sale of the personal property of the corporation against whom the tax is imposed ; second, by attachment and sale of real property of tlie company against whom the tax is imposed ; third, by action of debt against the company against whom the tax is imposed. Sec. 140. Levy Upon and Sale of Personal Property. — The following sections of the revised statutes of the United States are applicable in case it becomes necessary to levy and sell per- sonal property of the company in order to secure payment of a specific tax assessed against it under the Federal Corporation Tax Law: Section 3187. If any person liable to pay any taxes neglects or refuses to pay the sanie within ten days after notice and demand, it shall l)c lawful for the collector or his deputy to collect the said tax, with five per centum addi- tional thereto and interest as aforesaid, by distraint and sale in the manner herein provided, of the poods, chattels, or otlier effects, including stocks, socu- rities and evidences of debt of tlie person delinquent as aforesaid; Provided, that tli of such sh<'ep shall not exceed fifty dollars; and necossary food for such cow, hogs and sheep for a period not exceeding tliirtv days; fuel to an amount not greater in value than twenty-five dollars; provisions to an amount not greater Hiaii fifty dollars; household furniture kf'j)t for use to an amount not gr<'ater than three hundred dollars; and the books, tools or implements of a trade or profession to an amount not greater than one Imndred ilollars shall also l>e exempt; and tlie officer making tha distraint slial! summon three disinterested householders of the vicinity, who shall njijiniise nnd set apart to the owner th« amouut of property herein declared to li» exempt. Collection of Federal Corporation Tax. 157 Section 3188. In such case of noglect or refusal the collector may levy or by warrant may autliori/e a dcpuly collector to levy upon all property and rights to property, except as are exempt by the preceding section, belonging to such person, or on which the said lien exists for the payment of the sum due as aforesaid, with interest and penalty for non payment, and also of sucn further sum as shall be sufhcient for the fees, costs and expenses of such levy. Section 3189. All persons and ofBcers of companies or corporations are re- quired on demand of a collector or deputy collector about to distrain, or having distrained on any property or rights of property, to exhibit all books containing evidence or statements relating to the subject of distraint on the property or rights of property liable to distraint for the tax due as aforesaid. Section 3190. When distraint is made as aforesaid the officer charged with the collection shall make, or cause to be made an account of the goods .)r eflfects distrained, and a copy of which, signed by the officer making such dis- traint shall be left with the owner or possessor of such goods or effects at his dwelling or usual place of business, with some person of suitable age and dis- cretion, if any such can be found, with a note of the sum demanded and the time and place of sale, and the said officer shall forthwith cause an injunction to be published in some newspaper within the county wherein said distraint is made, if a newspaper is published in said county, or to be publicly posted at the post office, if there be one within five miles nearest to the residence of the person whose property shall be distrained, and in not less than two other public places. Said notice shall specify the articles distrained and the time and place for the sale thereof. Such time shall not be less than ten nor more than twenty days from the date of such notification to the owner or possessor of the property, and the publication or posting of such notice as herein pro- vided, and the place proposed for the sale shall not be more than five miles from the place of making such distraint. Said sale may be adjourned from time to time by said officer if he deems it advisable, but not for a time to exceed in all thirty days. Section 3191. When property subject to tax, or upon which a tax has not been paid, is seized upon distraint and sold, the amount of such tax shall, after deducting the expenses of such sale, be first apportioned out of the pro- ceeds thereof, to the payment of the tax, and after any assessment of such tax has been made upon such property, the collector shall make a return thereof in the form required by law and the commissioner of internal revenue shall assess the tax thereon. Section 3192. When any property advertised for sale under distraint, as aforesaid, is of a kind subject to tax, and the tax has not been paid, and the amount bid for such property is not equal to the amount of the tax, the collector may purchase the same in behalf of the United States for an amount, not exceeding the said tax. All property so purchased may be sold by the collector under such regulations as may be prescribed by the commissioner of internal revenue. The collector shall render to the commissioner a definite amount of all charges incurred in such sales, and in case of sale shall pay into the treasury the surplus, if any there be, after defraying all lawful charges and fees. Section 3193. In any case of distraint for the payment of the taxes afore- said, the goods, chattels, or eflfects so distrained shall be restored to the owner 158 Federal Cokpokation Tax Law. or possessor if, prior to the sale, payment of the amount due is made to the proper officer charged with the collection, together with the fees and other charges; but in case of non-payment as aforesaid, the said officers shall pro ceed to sell the said goods, chattels or effects at public auction, and shall retain from the proceeds of such sale the amount demandable for the use of the United States and a commission of live per centum thereon for his own use, with the fees, charges for distraint and sale, rendering the overplus, if any there be. to the person wlio may be entitled to receive the same. Section 31'J4. In all cases of sale as aforesaid, the certificate of such sale shall be prima facie evidence of the right of the officer to make such sale and conclusive evidence of the regularity of his proceedings in nuiking the same, and shall transfer to the purchaser all right, title and interest of said de- linquent in and to the property sold, and where such property consists of stocks said certificate shall be notice when received, to any corporation, company or association, of said transfer, and shall be authority to such corporation, com- pany or association to record the same on their books and records in the same manner as if transferred or assigned by the party holding the same, in lieu of any original or prior certificates which shall be void, whether cancelled or not. And said certificates, where the subject of sale is securities or other evidences of debt, shall be good and valid receipts to the prson holding the same as against any person holding or claiming to hold possession of such securities or other evidences of debt. Section 3195. When anj-^ property liable to distraint for taxes is not divis- ible so as to enable the collector by a sale of part thereof to raise the whole amount of the tax with all costs, charges and commissions, the whole of such property shall be sold, and the surplus of the proceeds of the sale, after satisfying the tax, costs and charges, shall be paid to the person legally en- titled to receive the same; or if he cannot be found, or refuses to receive the same, shall be deposited in the treasury of the United States, to be there held for his use until he makes application therefor to the Secretary of the Treasury, who, upon such application, and satisfactory proofs in support thereof, shall, by warrant to the treasurer, cause the same to be paid to the applicant. Sec. 141. Attachment and Sale of Real Estate. — The follow- ing .sections of the revised statutes are applicable in case it be- comes necessary to lew and sell real property of the company in order to secure payment of a sjwcific tax assessed against it under the Federal Corporation Tax Law: Section .Tinn. When goods, chattels or efTects sufririont to satisfy . if Ik- has arvj' such witliin th«' collection district wh('r<' such estate is situated, a notice in writing, stating what particular estate is to be Bold, describing the same with Collection of Federal Corporation Tax. 159 reasonable certainty, and tlie time when and place where such officer proposes to bell the same ; whicli time shall not be less than twenty nor more than forty days from the time of giving said notice. The said officer shall also cause a notification to the same effect to be published in some newspaper within the county where such seizure is made, if any such there be, and shall also cause a like notice to be posted at the postoffice nearest to the estate seized and in two other public places within the county; and the place of said sale shall not be more than five miles distant from the estate seized, except by special order of the Commissioner of Internal Revenue. At the time and place appointed the officer making such seizure shall proceed to sell the said estate at public auction, offering the same at a minimum price, including the expense of making such levy, and all charges for advertising and the officer's fee of ten dollars. When the real estate so seized consists of several distinct parts 01 parcels, the officer making the sale thereof shall offer each tract or parcel for sale, separately, and shall, if he deem it advisable, apportion the expenses, charges, and fees aforesaid to such several tracts or parcels, or to any of them in estimating the minimum price aforesaid. If no person offers for said estate the amouni of said minimum price, the officer shall declare the same to be purchased by him for the United States, and in case the same shall be declared to be purchased for the United States the officer shall immediately transmit a certificate of the purchase to the Commissioner of Internal Revenue, and at the proper time, as hereafter provided, shall execute a deed thereunder to its proportion, and the instrument of approval as to its form by the United States District Attorney for the district in which the property is situate, and shall without delay cause to be duly recorded in the proper register of deeds, and immediately thereafter shall transmit such deed to the Commissioner of Internal Revenue. And said sale may be adjourned from time to time by said officer for not exceeding thirty days, in all, if he shall think it advisable so to do. If the amount bid shall not be then and there paid, the officer shall forthwith proceed to again sell said estate in the same manner. And it i'* hereby provided that all certificates of purchase and deeds of property put- chased by the United States under the internal revenue laws on sales for taxes, or not issuing from the United States courts which now are or may hereafter be found in the office of any collector. United States marshal oi United States District Attorney, shall be immediately transmitted by such officers respectively to the Commissioner of Internal Revenue, and it is herebv further provided that for the preparation and approval by the United States District Attorney of each deed as above required, a fee of $5 shall be al- lowed to that officer, to be paid by the United States, and which he shall account for in his emolument returns. Section 3198. Under sale of real estate as provided in the preceding sec- tion, and the payment of the purchase money, the officer making the seizur.^ and sale, shall give to the purchaser a certificate of purchase, which shall sot forth the real estate purchased, for whose taxes the same was sold, the nani> of the purchaser, and the price paid therefor: and if the said real estate shall not be redeemed in the manner and within the time herein provided tlie said collector or deputy collector shall execute to the said purchaser upon hi>^ surrender of said certificate a deed to the real estate purchased by him as aforesaid, reciting the facts set forth in said certificate, and in accordance 160 Federal Cokpokation Tax Law. with the laws of the Slate in which said real estate is situate, upou the sub- ject of sales of real estate under execution. Section 3199. The deed of sale given in pursuance of the preceding section shall be prima facie evidence of the facts therein stated; and if the proceed- ings of tlie otfer as set forth have been substantially in accordance with the provisions of law, shall be considered and operate as a conveyance of all the right, title and interest of the party delinquent in and to the real estate thus held at the time the lien of the United States attached thereto. Section 3200. Any collector or deputy collector may, for the collection of tax imposed upon any person committed to him for collection, seize and sell the lands of such person situated in any other collection district within the State in which such officer resides, and his proceedings in relation thereto shall have the same effect as if the same were had in his proper collection district. Section 3201. Any person whose estate may be proceeded against as afore- said sliall have the right to pay the amount due, together with the costs ami charges thereon, to the collector or deputy collector, at any time prior to the sale thereof, and all further proceedings shall cease from the time of such payment. Section 3202. The owners of any real estate sold as aforesaid, or their heirs, executors, administrators or any person having any interest thereon or a lion thereof, or any person in their behalf, shall be permitted to redeem the land sold, or any particular tract thereof, at any time within one year after the sale tiioroof upon payment tf the purchaser, but in case he cannot be found witiiin the county in which the land to be redeemed is situate, then to th" collector of the district in which the land is situate, for the use of the pur- chaser, his heirs or assigns, the amount paid by the said purchaser and interest thereon at the rate of twenty j)er centum jmt annum. Section 3203. It shall be the duty of every collector to keep a record of all sales of land made in his collection district, whether by iiimself or his depu- ties, or by any collector, in whicli shall be set forth the tax for which any such sale was made, the (hit<'s of seizure and sale, the name of the party as sessef ail iiis proceedings to the collector, and to certify the record thereof. In case of the death or removal of Ww collator, or expiration of his term of oHife. or from any other raus<'. said record shall be (hdivered to his succ«'HSor in ollice ; and a copy I'f <'vpry soch record, certified by tlie Cdilector, shall be evidence in any court ration Tax Law. Dollar Savings Bank v. United States, 19 Wall. 227. Under section 3214 of the United States Revised Statutes no suit for the recovery of taxes or of any fine, penalty or forfeiture can 1)0 commenced unless the conmiissioner of internal revenue authorizes and sanctions the proceeding. In this connection attention is called to the opinion of the Attorney-General of date April 2, 1910 (see Ajjjx'ndix II), wherein, after hohliii*: that the govermnciit in the particular case upf)n which his dpinioii was asked as to a general levy u]ion the property of a cori^oratioii against whom the fcnleral corporation tax was sought to be asse^ssed, rnnarkcd as foUows: 3. Notwithstanding the fact tliat tlic particular method of collecting this excise tax is jtn-sciiix'd in tiie st!itiit<', y<'t sucli remedy is not exclusive, and the government may ri'sr)rt to tin' iiiimiiini l:i\\ iiictliiid nf cdllf't't ing the .same. Such was the holding' df (lif Siiprt'm<' Court of tlu" I'liited Stales in Savings ]?!iT'k r. The Tnitid ^hitcs, 1<) Wall. 227, 240, with refen-nce to the collec- tion of a tax UfidiT ail t\ci which levied n tax of .'') per ci-ntum on all dividends in Bcrip or mo?i<'v dci-l:irci| due to stipcklnililrrs, ]iiilicyli<)ld('is or (h'positors as part nf tlic earnings, income or gains of any bank, trust company, savings institut inn, and of any insurance company. The di'^solution of a corporatio.i d'M'H not exlingiiisli its liabilities; and tlirough courts of e(]uity creditors nuiy purHUC ittt assets into the bands nf any jxTson who is not a tiiinn fidr j)ur- Collection of Federal CoRPOiiAxioN' Tax. 163 cliaser. Muniina v. Potomac Company, 8 Peters 281, 28G; Curran v. Arkansas, ir> Howard 304, 307; Railroad Company f. Howard, 7 Wall. 392, 410; Scara- mon v. Kimball, U2 U. S 3U2, 307. Ill Railroad Company r. Howard the court said: "Assets derived from the sale of the capital stock of the corporation, or of its property, bec(mu's, as respects creditors, the substitutes for the things sold, and as such they are subject to the same liabilities and restrictions as the things sold were before the sale, and while tliey remained in the possession of the corporation. Even the sale of the entire capital stock of the com- pany and the division of the proceeds of the sale among the stockholders will not defeat the tiust nor impair the remedy of the creditors, if any debts remain unpaid, as the creditors in that event may pursue the consideration of the sale in the hands of the respective stockholders, and compel each one, to the extent of the fund, to contribute pro rata toward the payment of their debts out of the moneys so received and in their hands." If the corporation in question engaged in business after the approval of the Act of August 5, 1909, then it was liable for the tax, though it may not have become due until after the corporation was dissolved ; and the govern ment may collect the tax by pursuing the assets of the corporation into the hands of the stockholders in the same manner as that by which any other creditor might obtain satisfaction of his debt. (See T. D. 1615, April 15, 1910, Appendix N.) Sec. 143. Powers of the Secretary of the Treasury In the Collection of the Tax. — In addition to his general power to superintend the collection of revenue, the Secretary of the Treas- ury has under section 251 of the United States Revised Statutes the following powers, to wit: The Secretary of the Treasury shall make and issue, from time to time, such instructions and regulations to the several collectors, receivers, depositaries, officers and others who may receive treasury notes. United States notes, and other securities of the United States, or who may be in any way connected or employed in the appropriation and issue of the same, as he shall deem best calcu'lated to promote the public convenience and security, and to protect the United States, as well as individuals, from fraud and loss or shall prescribe the terms of interest, oaths, bonds and other papers, and rules and regulations not inconsistent with law, to be used under and in the execution and enforce- ment of the various provisions of the internal revenue laws, or in carrying out the provisions of law relating to raising revenue from members or to duties on members, or to warehousing, or shall give such directions to collectors and prescribe such rules and forms to be observed by them as may be necessary for the proper execution of the law; he shall proscribe the forms of the annual statements to be submitted to Congress by him, showinir the actual state of commerce and navigation between the United States and foreign countries or coastwise, and between the collection districts of the United States in each year. (See section 146, post.) 104 Federal Corporation Tax Law. Sec. 144. Powers of Commissioner of Internal Revenue In the Collection of the Tax. — The powers of the commissioner of internal revenue with reference to the collection of the Federal Corporation Law are governed by section 321 of the United States Revised Statutes, which reads as follows: The Commissioner of Internal Revenue, under the direction of the Secretary of the Treasury, shall have general superintendence of the assessment and col- lection of all duties and taxes now or hereafter imposed by law, providing internal revenue; and shall prepare and distribute all the instructions, regu- lations, directions, forms, instruments and other matters pertaining to the collection and assessment of internal revenue, and shall provide hydrometers and proper and sufficient adhesive stamps and stamps or dies for expressing and denoting stamp duties, or in the case of personal duties, the amount thereof, and alter or renew or replace such stamps from time to time as occa- sion may require. He may also contract for or procure the printing of such forms, decisions and regulations, but the printing of such forms, decisions and regulations shall be done at the Public Printing Office, unless the Public Printer shall be unable to perform the work; Provided, that the Commissioner of Internal Revenue may, under such regulations as may be established by the Secretary of the Treasury, after public notice, receive bids and make con- tracts for supplying stationery, blank books and blanks to the collectors in the several collection districts, the expense of assessing and the expense of the collection of internal revenue. (See section 146, post.) Attention is called to tlie folhnving sections, United States Re- vised Statutes, which read as follows: Section 3152. The Commissioner of Tnternal Revenue may, whenever in his judgment the necessities nf the service so rociuire, em])loy competent agents not exceeding at any time tliirtyfive in number, to be paid such compensation as he may deem proper, not exceeding in aggregate any proportion made for that purpose, or he may, at his discretion, assign any such agent to duty under the direction of any officer of internal revenue, or to such other special duty as he may deem nwessary ; and no general or special agent or inspector, by what- ever designation lie may lie known, of the treasury department, in connection with the internal revenu<', exc«'pt inspectors of tobacco, sn>i(T and cigars, and except as j)rovi(led for in lliis title, shall be appointed, commissioned, employed fir cf)iitinue(l in offi(<\ Section '.Wi'i'A. Kv<'ry collector within liis cullrctiori district, and every in- ternal revenue agent, shall see that all laws and regulations relating to the cfdlection of internal taxes are faithfully complied with; and shall aid in tlie prevention, detection and punisliment of any frauds in relation thereto. i( shiill !"• (lie iliitv of <-vf;iin knowledge, with a statf-nieni of nil the f;ic)s in i'mcIi case sustain- ing the H.'inir. Tlic Coininissioncr may transfer any iiis|ii('lor. gauge or store- Collection of Federal Corporation Tax. 165 keeper, or storekeeper and gauger, from one distillery or other place of duty, or from one collection district to another. Sec. 145. Powers of Collectors of Internal Revenue In the Collection of the Corporation Tax. — To ascertain the powers of collectors of internal revenue in the collection of the federal cor- poration, tax reference must be had to those sections of the revised statutes of the United States applicable generally to the collec- tion of internal revenue taxes. The sections to which reference is here had read as follows, to wit : Section 3164. It shall be the duty of every collector of internal revenue to report within ten days to the District Attorney of the district in which any fine, penalty or forfeiture may be incurred for the violation of any law of th« United States relating to the revenue, a statement of all the facts and cir- cumstances of the case within his knowledge, together with the names of th? witnesses, and which may come to his knowledge from time to time, stating the provisions of the law believed to be violated, and if any collector shall in any case fail to report to the proper District Attorney, as prescribed in this section, his right to any compensation, benefit or allowance in such case shall be forfeited to the United States, and the same may in the discretion of tht; Secretary of the Treasury be awarded to such persons as may make complaint and prosecute the same to judgment or conviction. Section 3165. Every collector, deputy collector and inspector is authorized to administer oaths, and to take evidence touching any part of the administra- tion of the internal revenue laws with which he is charged, or where such oaths and evidence are authorized by law or regulation authorized by law, to be taken. Section 3172. That every collector shall, from time to time, cause his depu- ties to proceed through every part of his district, and inquire after and con- cerning all persons therein who are liable to any internal revenue, and all persons owning or having the eare and management of any objects liable to pay any tax, and to make a list of such persons and enumerate such objects. Section 3173. That it shall be the duty of any person, partnership, firm, as- sociation or corporation made liable to any duty, special tax. stamp or tax imposed by law, when not otlierwise provided for. in case of a special tax on or before the 31st day of July in each year, and in case of income taxes, on vT before the first IMonday in March of each year, and in other cases before the day on which taxes accrue, to make a list or return, verified by oath or affirmation, to the collector or deputy collector of the district where located, of the articles or objects, including tlio amount of annual income, cliarged with a duty or tax. the quantity of goods, wares and merchandise made or sold and charged witli a tax, the several rates and aggregate amount, accord- ing to the forms and regulations to be proscribed by the Commissioner of In- ternal Revenue, under the direction of the Secretary of the Treasury, for which such person, partnership, firm, association or corporation is liable: provided that if any person liable to pay any duty or tax or owning, pos- 16G Federal Corporation Tax Law. sessing or having the care or management of property, goods, wares and mer- chandise, articles or objects liable to any duty, tax or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares and merchandise, articles and objects liable to pay any duty or tax, or any business or occupa- tion liable to pay any tax aforesaid, then and in that case it shall be the duty of the collector or deputy collector to make such list or return, which being distinctly read, consented to and signed and verified by oath or aliinna- tion by the person so owning, possessing or having the care and management as aforesaid, may be received as the list of such person; Provided, furthec, that in case no annual list or return has been rendered by such person to the collector or deputy collector, as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit it in the nearest postoffice, a note or memorandum, ad dressed to such person, requiring hira or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum ; verified by oath or aflirmation. And i^ any person, on being notified or required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax, fails to do so at the time required, or delivers any return wliich. in the opinion of the collector is false or fraudulent, or contains any undervaluation or un- (ierstatement, it shall be lawful for the collector to summon such person, or any other person having possession, custody or care of books of account, containing entries relating to the business of such person, or any other person he may dwm proper, to appear before him and produce such books at a time and place named in the summons, and to give testimony or answer interrogatories under oath, respecting any objects liable to tax or the returns thereof. The collec tor may summon any person residing or found within the State, in which his district lies; and when the person intended to be summoned does not reside and cannot be found within such State, he may enter any collection district where such person may he found, and there make the examination herein authorized. And to this end he may there exercise all the avithority which he might lawfully exercise in the district for which he was Commissioner. Section :n74. Such summons shall in all eases be served by a deputy collec tor of the district where tlie ])ers()ii to whom it is directed may be found, by an attested copy delivered to such person in hand, or left at his last and usual place »)f abode, iillowing such p<"rHon one day for each twenty five miles he may \h' re(|uired to travi'l. eomputed from tlie place of service to the place of examination; antl n ecrtificMtr nf serviee signed by sueli deputy shall l>e evi- dene<- of tlie facts lie states on the hearing of an ai.plicjition for an attach- nu'nt. Wlu'ii the Hiimmons requires the jiroduction of books, it shall Iw suf- ficient if sueli books are described with reasonal>le eertainty. Section 317r». Whenever any person suiiinioTU'd imdcr tlw two preceding sec- tions nnt or f.ilse or fraiidiilent statement, together with tlie .•iinount for whicli sucli person niiiy be li;ilile fil)ove th<> nmount for which he nmv h;n<- been or shall lie ass<'Hsecl upon any return irinde us afore- said. ;ind li" -li;.ll (•iTtify and return such list to the collector as required by law. and all provi-ionH of law for the ascert ainineni of liability of any tax, Collection of I'ijjekal Corporation Tax, 109 or the assessment or collection thereof sliall Ik.' held to apply so far as may be necessary to the proceedings herein authorized and directed. Section 3183. It shall be the duty of the collectors or their deputies in their respective districts, and they are authorized to collect the taxes imposed by law, however the same may be designated. And every collector and deputy collector shall give receipts for all sums collected by them. Section 3184. Where it is not otherwise provided, the collector shall in preciation of \J. property, if any, and in tlio case of insurance comj)anics the I -'5 sums other than dividends, paid within the year on policy and 11 :itiiinity contracts ami the net addition, if any, required hv Imw 1.") to hi' iiindc within the year to reserve funds; (third) interest Appendixes. 177 16 actually paid within the year on its bonded or other indebted- 17 ness to an amount of such bonded and other indebtedness not 18 exceeding the paid up capital stock of such corporation, joint 19 stock company or association, or insurance company, outstand- 20 ing at the close of the year, and in the case of a bank, banking 21 association, or trust company, all interest actually paid by it 22 within the year on deposits; (fourth) all sums paid by it 23 within the year for taxes imposed under the authority of the 24 United States or of any State or Territory thereof, or imposed 25 by the government of any foreign country as a condition to 26 carrying on business therein; (fifth) all amounts received by 27 it within the year as dividends upon stock of other corpora- 28 tions, joint stock companies or associations, or insurance com- 29 panics, subject to the tax hereby imposed. Prov*ided, That in 30 the case of a corporation, joint stock company or association, 31 or insurance company, organized under the laws of a foreign 32 country, such net income shall be ascertained by deducting 33 from the gross amount of its income received within the year 34 from business transacted and capital invested within the 35 United States and any of its Territories, Alaska and the Dis- 36 trict of Columbia, (first) all the ordinary and necessary ex- 37 penses actually paid within the year out of earnings in the 38 maintenance and operation of its business and property within 39 the United States and its territories, Alaska, and the District 40 of Columbia including all charges, such as rentals, or franchise 41 payments required to be made as a condition to the continued 42 use or possession of property; (second) all losses actually sus- 43 tained within the year in business conducted by it w^ithin the 44 United States or its Territories, Alaska, or the District of 45 Columbia, not compensated by insurance or otherw^ise, includ- 46 ing a reasonable allowance for depreciation of property, if any, 47 and in the case of insurance companies the sums other than 48 dividends, paid wnthin the year on policy and annuity con- 49 tracts and the net addition, if any, required by law to be 50 made within the year to reser^^e funds ; (third) interest actually 51 paid within the year on its bonded or other indebtedness to an 52 amount of such bonded and other indebtedness, not exceeding 53 the proportion of its paid up capital stock outstanding at the Fed. Corp. Tax — 12 178 Federal Corporation Tax Law. 54 close of the year which the gross amount of its income for the 55 year from business transacted and capital invested within 56 the United States and any of its Territories, Alaska, and the 57 District of Columbia bears to the gross amount of its income 58 derived from all sources within and w^ithout the United States; 59 (fourth) the sums paid by it within the year for taxes im- 60 posed under the authority of the United States, or of any State 61 or Territory thereof; (tifth) all amounts received by it within 62 the year as dividends upon stock of other corporations, joint 63 stock companies, or associations and insurance companies, sub- 64 ject to the tax hereby imposed. In the case of assessment 65 insurance companies the actual deposit of sums with State or 66 Territorial othcers, pursuant to law, as additions to guaranty 67 or reserve funds shall be treated as being payments required 68 by law to reserve funds. 1 Third. There shall be deducted from the amount of the net 2 income of each of such corporations, joint stock companies, or 3 associations, or insurance companies, ascertained as provided 4 in the foregoing paragraphs of this section, the sum of five 5 thousand dollars, and said tax shall Ik^ computed upon the 6 remainder of said net income of sucn corporation, joint stock 7 company or association, or insurance com])any, for the year 8 ending December thirty-first, nineteen hundred and nine, and 9 for each calendar year thereafter; and on or before the first 10 day of IVIarch, nineteen hundred and ten; and the first day of 11 March in each year thereafter, a true and accurate return 12 under oatli or nffimiatidn of its jH'csident, vice president, or 13 ntlior priiid under the laws 21 of a foreign country, in the jilace where its |irincipal hnsiness 22 is carried on within the United States, in such form as the Appendixes. 179 28 Commissioner of Internal Revenue, with the approval of the 24 Secretary of the Treasury, shall prescribe, setting forth (first) 25 the total amount of the paid up capital stock of such corpora- 26 tion, joint stock company or association, or insurance company, 27 outstanding at the close of the year; (second) the total amount 28 of the bonded and other indebtedness of such corporation joint 29 stock company or association, or insurance comany at the close 30 of the year; (third) the gross amount of the income of such 31 corporation joint stock company or association or insurance 32 company, received during such year from all sources, and if 33 organized under the laws of a foreign country the gross amouni 34 of its income received within the year from business transacted 35 and capital invested within the United States and any of its 36 Territories, Alaska, and the District of Columbia ; also the 37 amount received by such corporation, joint stock company or 38 association or insurance company, within the year by way of 39 dividends upon stock of other corporations, joint stock com- 40 panics or associations, or insurance companies, subject to the 41 tax imposed by this section; (fourth) the total amount of all 42 the ordinary and necessary expenses actually paid out of eam- 43 ings in the maintenance and operation of the business and 44 properties of such corporation, joint stock company or associa- 45 tion, or insurance company, within the year, stating separately 46 all charges, such as rentals or franchise payments required to 47 be made as a condition to and continued use or possession of 48 property, and if organized under the laws of a foreign country, 49 the amount so paid in the maintenance and operation of its 50 business within the United States and its Territories, Alaska, 51 and the District of Columbia; (fifth) the total amount of all 52 losses actually sustained during the year and not compensated 53 by insurance or otherwise, stating separately any amounts 54 allowed for depreciation of property, and in the case of insur- 55 ance companies the sums other than dividends paid within the 56 year on policy and annuity contracts and the net addition, if 57 any, required by law to be made within the year to reserve 58 funds; and in the case of a corporation, joint stock company 59 or association or insurance company, organized under the laws 60 of a foreign country, all losses actually sustained by it during ISO Federal Corpokatiox Tax Law. 61 the year in business conducted by it within the United States 62 or its Territories, Alaska and the District of Columbia, not 63 compensated by insurance or otherwise, stating separately any 64 amounts allowed for depreciation of property, and in the case 65 of insurance companies the sums other than dividends, paid 66 within the year on policy and annuity contracts and the net 67 addition, if any, required by law, to be made within the year 68 to reserve fund; (sixth) the amount of interest actually paid 69 within the year on its bonded or other indebtedness to an 70 amount of such bonded and other indebtedness not exceeding 71 the paid up capital stock of such corporation, joint stock com- 72 pany or association, or insurance company, outstanding at the 73 close of the year, and in the case of a bank, banking association 74 or trust company, stating separately all interest paid by it 75 within the year on deposits ; or in case of a corjDoration, joint 76 stock company or association or insurance company, organized 77 under the laws of a foreign country, interest so paid on its 78 bonded or other indebtedness to an amount of such bonded and 79 other indebtedness not exceeding the proportion of its paid-up 80 capital stock outstanding at the close of the year, which the 81 gross amount of its income for the year from business trans- 82 acted and capital invested within the United States and any of 83 its Territories, Alaska, and the District of Columbia, bears to 84 the gross amount of its income derived from all sources within 85 and without the United States; (seventh) the amount paid by 86 it within the year for taxes imposed under the authority of the 87 United States or any State or Territory thereof, and separately 88 tlic iiiiKiiitit so paid by it for taxes imposed by the Government 80 of any foreign country as a condition to carrying on business 00 therein; (eiglith) tlie net income of such corjwration, joint 91 stock coini)any or association, or insurance company, after 02 making tiio deductions in this section authorized. All such 03 returns shall as received Ik- transmitted forthwith by the Col- 94 lector to the Commissioner of Interniil Tixivenue. 1 Fourth. Whenever evidence shall be ])roduced before the 2 Commissioner of Internal Itevcnuc which in the opinion of the 3 Commissioner justifies the belief that the return iiuide by any Appendixes. 181 4 corporation, joint stock company or association, or insurance 5 company, is incorrect, or whenever any collector shall report 6 to the Commissioner of Internal Revenue that any corporation, 7 joint stock company or association, or insurance company has 8 failed to make a return as required by law, the Commissioner 9 of Internal Revenue may require from the corporation, joint 10 stock company or association, or insurance company making 11 such return such further information with reference to its 12 capital, income, losses and expenditures as he may deem ex- 13 pedient; and the Commissioner of Internal Revenue, for the 14 purpose of ascertaining the correctness of such return or for 15 the purpose of making a return where none has been made, is 16 hereby authorized by any regularly appointed revenue agent 17 specially designated by him for that purpose, to examine any 18 books and papers bearing upon the matters required to be in- 19 eluded in the return of such corporation, joint stock company 20 or association, or insurance company, and to require the attend- 21 ance of any officer or employee of such corporation, joint stock 22 company or association, or insurance company, and to take his 23 testimony with reference to the matter required by law to be 24 included in such return, with power to administer oaths to 25 such person or persons; and the Commissioner of Internal 26 Revenue may also invoke the aid of any court of the United 27 States having jurisdiction to require the attendance of such 28 officers or employees and the production of such books and 29 papers. Upon the information so acquired the Commissioner 30 of Internal Revenue may amend any return or make a return 31 where none has been made. All proceedings taken by the 32 Commissioner of Internal Revenue under the provisions of 33 this section shall be subject to the approval of the Secretary of 34 the Treasury. 1 Fifth. All returns shall be retained by the Commissioner of 2 Internal Revenue who shall make assessments thereon ; and in 3 case of any return made with false or fraudulent intent, he 4 shall add one hundred per centum of such tax, and in case of a 5 refusal or neglect to make a return or to verify the same as 6 aforesaid he shall add fifty per centum of such tax. In case of 182 Federal Corporation Tax Law. 7 neglect occasioned by the sickness or absence of an officer 8 of such corporation, joint stock company or association, or 9 insurance company, required to make said return, or for other 10 sufficient reason, the collector may allow such further time for 11 making and delivering such return as he may deem necessary, 12 not exceeding thirty days. The amount so added to the tax 13 shall be collected at the same time and in the same manner as 14 the tax originally assessed, unless the refusal, neglect or falsity 15 is discovered, after the date for payment of said taxes, in 16 which case the amount so added shall be paid by the delinquent 17 corporation, joint stock company or association, or insurance 18 company, immediately upon notice given by the collector. All 19 assessments shall be made and the several corporations, joint 20 stock companies or associations or insurance companies shall 21 be notified of the amount for which they are respectively liable 22 on or before the first day of June of each successive year, and 23 said assessments shall be paid on or before the thirtieth day of 24 June, except in cases of refusal or neglect to make such return, 25 and in cases of false or fraudulent returns, in which cases the 26 Commissioner of Internal Revenue shall, upon the discovery 27 thereof, at any time within three years after said return is due, 28 make a return upon information obtained as above provided 29 for, and the assessment made by the Commissioner of Internal 30 Revenue thereon shall 1k' paid by such corporation, joint stock 31 comj)anv or association or insurance company immediately 32 upon notification of the amount of such assessment; and to any 33 sum or sums due and unpaid after the thirtieth day of June 34 in any year, and for ten days after notice and demand thereof 35 by the collector tiiere shall be added the sum of five per centum 36 on the amount of tax nnj)aid and interest at the rate of one 37 per ccmtum per month upon said tax from the time the same 38 becomes due. 1 Sixth. When the assessment shall be made, as provided in 2 this section, tlie returns, together with any corrections thereof 3 which may have liecn made 1»\' the couiinissioner, shall be filed 4 in the oilice of ihe ( 'oniuiissioner of Internal I{(!venue and shall r> constitute public records and be open to insjx'ction as such. Appendixes. 183 1 Seventh. It shall be unlawful for any collector, deputy 2 collector, agent, clerk or other officer or employee of the United 3 States to divulge or make known in any manner whatever not 4 provided by law to any jK^rson any information obtained b}" 5 him in the discharge of his official duty, or to divulge or make 6 known in any manner not provided by law any document re- 7 ceived, evidence taken or report made under this section, 8 except upon the special direction of the President ; and any 9 offense against the foregoing provision shall be a misdemeanor 10 and be punished by a fine not exceeding one thousand dollars. 1 1 or by imprisonment not exceeding one year, or both, at the 12 discretion of the court. 1 Eighth. If any of the corporations, joint stock companies 2 or associations or insurance companies aforesaid, shall refuse 3 or neglect to make a return at the time or times hereinbefore 4 specified in each year, or shall render a false or fraudulent T) return, such corporation, joint stock company or association, or 6 insurance company, shall be liable to a penalty of not less than 7 one thousand dollars and not exceeding ten thousand dollars. 8 Any person authorized by law to make, render, sign or 9 verify any return who makes any false or fraudulent return, 10 or statement required by this section to be made, shall be 11 guilty of a misdemeanor, and shall be fined not exceeding one 12 thousand dollars, or be imprisoned not exceeding one year or 13 both, at the discretion of the court, with the costs of prosecu- 14 tion. 15 All laws relating to the collection, remission, and refund of 16 internal-revenue taxes, so far as applicable to and not incon- 17 sistent with the provisions of this section, are hereby extended 18 and made applicable to the tax imposed by this section. 19 Jurisdiction is hereby conferred upon the circuit and dis- 20 trict courts of the United States for the district within which 21 any person summoned under this section to appear to testify 22 or to produce books, as aforesaid, shall reside, to compel such 23 attendance, production of books and testimony by appropriate 24 process. 184 Pedeeal Corpokation Tax Law. APPENDIX B. (T. D. 1534.) TREASUEY DEPARTMENT REGULATION. Special Excise Tax. Treasury DBa»ARTMENT, Office of Commissioner of Internal Revenue, Washington, D. C, August 21, 1909. To collectors of internal revenue: Attention is especially called to section 38 of the act of August 5, 1909, imposing on certain corporations, joint stock companies, associations, and insurance companies a special excise tax to be paid annually. In view of the large number of corporations, companies, and association? subject to this tax, collectors of internal revenue will, on receipt of this cir- cular, at once proceed to thoroughly canvass their districts, and as soon as possible furnish this office with a list of all such corporations, companies, and associations organized in their districts, setting forth the amount of capital stock and principal place of business of each. They will also furnish a sepa- rat-e list of all corporations, companies, and associations organized elsewhere (including sucli as are organiz<'(l under tlie laws of a foreign country) having their principal place of business in the district where such list is prepared. Duplicates of such lists will be made by each collector, one copy thereof to be retained in his office, and the other, when completed, forwarded to the Com-i missioner of Internal Revenue. Blanks to be used in sucii cases will be fur- nished collectors; and, for statistical purposes and convenient reference, all such corporations, companies, and associations will be classified and listed according to the nature of the business carried on, as follows: Class A — Fiixmrial and commercial. — Including banks, banking associa- tions, trust companies, guaranty and surety companies, title insurance com- panies, building associations (if for profit), and insurance companies, not specifically exempt. (LASS li — I'uhUr srrrirr. — Such as railroads, steamboat, ferryboat, and stage line (•ninj);mir the laws of a foreign country, " the proportion of its paid-up capital stock outstanding at the close of the year which the gross amount of its income for tlie year from business transacted and capital invested within tho Triiti'd States and any of its Territories, Alaska, and tlie District of Co- lumbia licars to the gross amount of its income derived from all sources within and without the United States"]" (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any Slnte or Territory thereof, or imposed by the government of any foreign country as a condition to carrying on business therein; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, "The matter iiiclii(l<'(l in brnckrts \ ] relntes to iiiterrst notiially p.'iid within the year on " bomlrd (tr other in'^btrdnrNs," and slioiihl be road in connection with the precedinc provision (art. .3) relating to sneh interest paid by corpo- rations, joint stork companies, etc., organized in the United States, APPENDIXES, Igjj joint stock companies or associationa, or insurance companies, subject to the tax hereby imposed. Section 38 further provides: That in the case of a corporation, joint stock company or association, or insurance company, organized under the laws of a foreign country, such net income shall be ascertained (by making like deductions) from the gross amount of its income received within the year from business transacted and its capital invested within the United States and any of its Territories, Alaska, and the District of Columbia. Also that: In the case of assessment insurance companies the actual deposit of sums with state or territorial officers, pursuant to law, as additions to guaranty or reserve fund, shall be treated aa being payments required by law to reserve fund. Also (third paragraph) that: There shall be deducted from the amount of the net income of each of such corporations, joint stock companies or associations, or insurance companies, ascertained as provided in the foregoing paragraphs of this section, the sum of five thousand dollars. The net income, therefore, is the remainder of the gross income after making the specified deductions. Abticle 4. — Deductions. The specified deductions actually paid within the year, set forth in the statute and as described in article 3 preceding, shall include all proper items of expenses and charges under the respective heads as designated. Tlie amount returned for ordinary and necessary expenses actually paid within the year out of income in maintenance and operation of the business and properties of tlie corporation should not, however, embrace allowances for depreciation of fixed property which are otherwise to be taken account of under the proper heading in the authorized deductions, nor expenses paid Avithin the year and charged to such allowances for depreciation credited in the current year or in previous years. In ascertaining expenses proper to be included in the deduc- tions to be made under this article, corporations carrying materials and sup- plies on hand for use should include in such expenses the charges for materials and supplies only to the amount that the same are actually disbursed and used in operation and maintenance during the year for which the return is made. It is immaterial whether the deductions are evidenced by actual disburse- ments in cash, or whether evidenced in such other way as to be properly acknowledged by the corporate officers and so entered on the books as to con- stitute a liability against the assets of the corporation, joint stock company, association, or insurance company making the return. Losses. — The deductton for losses must be in respect of losses actually sus- tained during the year and not compensated by insurance or otherwise. It must be basad upon the difference between the cost value and salvage value of the property or assets, including in the latter value such amount, if any, as has in the current or previous years been set aside and deducted from gross 190 Federal Cokpokation Tax Law. income by way of depreciation as defined in tlie following section and not been paid out in making good such depreciation. Depreciation. — The deduction for depreciation should be the estimated amount of the loss, accrued during the year to which the return relates, in the value of the pro))erty in respect of which such deduction is claimed that arises from exliaustion. wear and tear, or obsolescence out of the uses to which the property is put. and which loss has not been made good by payments for ordi- nary maintenance and repairs deducted under the heading of expenses of maintenance and operation or in the ascertainment of gross income. This csLiniate should be formed upon the assumed life of the property, its cost value, and its use. Expenses paid in any one year in making good exhaustion, wear and tear, or obsolescence in respect of which any deduction for deprecia tion is claimed must not be included in the deduction for expense of mainte- nance and operation of the property or in the ascertainment of gross income, but must be made out of accumulative allowances deducted for depreciation in current and previous years. Article 5. — Inventories. It will be noted thai an inventory or its equivalent of materials, supplies, and merchandise on hand for use or sale at the close of each calendar year is essential in the case of certain corporations in order to determine the gross income, and in case of other corporations to determine their expenses of operation. Wliere such inventory or its equivalent was not taken at the close of the year 1908. a supplemental statement showing such inventory approxi- mately must be submitted with the return on the regular form. Such supple- mental statement shall he verified under oath by the treasurer or principal financial ofiicer in submitting the sanu'. Where any item under any of the deductions is of an unusual nature a special explanatory note referring to such item shall be made and attached to the form at the appropriate place and made a part thereof by proper reference. Paragraph 3 of said section .'J8 also provides: And said tax shall be computed upon the remainder of said net income of such corporation, jnint stock company or association, or insurance company, for tlic year ending Decemi)er tliirty-first, nineteen hundred and nine, and for each cnlciidar year tliereafter; mihI on or before the first day of Marcli, nine t^'cii huiulred and ten, and I lie lirst day of Marcli in each year thereafter, a tru.' and aeeiirate icliiiii iiiilcr mitli or ^illirinal ion of it^< president, vice-presi- dent, or otiicr pritici|i:il olliccr. and its trcasur^'r or assistant treasurer, shall bi' made liy <'a.'h of the corporations, joint stock comjiaiiies or associations, and insurance companies, sid)jcct, to the tax iinposcd by tliis .section, to the Cdllcctnr of iM'criial r<'\('tinc for the district in which sncli corporation, joint stock comy)ariv or associutiori. or insniancc company, has its principal plac» of busin<'ss, or, in the case of n corpoi;it ion. joint stuck company or associa- tion, or iriHur.ince company. orf;ani/ed niKh-r tlw laws of a foreign country, in the [il:ice where its priii(i|i;il l)usiness is carri«'d o!i within the Hnited States, in such form as the (!om?nisHioncr of Internal Revenue, with the approval of the Secretary ction to be in.-iilc, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars or be Appendixes. 195 imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. ARTICLE 13. — Certain revenue laws made applicable, and jurisdiction con- ferred on United States courts to compel attendance of ivitnesses, etc. Paragraph 8 further provides : All laws relating to the collection, remission, and refund of internal-revenue taxes, so far as applicable to and not inconsistent with tlie provisions of this section, are hereby extended and made applicable to the tax imposed by this section. Jurisdiction is hereby conferred upon the circuit and district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books, as aforesaid, shall reside, to compel such attendance, production of books, and testimony by appropriate process. ARTICI.E 14. — Collection of tax. The tax assessed under the provisions of this act will be collected and will be receipted for on Form 1, as in the case of other assessed taxes. Unless paid within the time fixed by the statute, notice and demand should be at onoe issued, and, in case of nonpayment, distraint proceedings should be instituted without delay. Royal E. Cabell, Commissioner. Approved : Franklin MacVeagh, Secretary of the Treasury. 196 Federal Coepoeation Tax Law. APPENDIX D. (T. D. 1578.) TREASURY DEPARTMENT REGULATION. Excise Tax. Trbl\suby Department, Office of Commissioner Internal Revenue, Washington, D. C, January 4, 1910. To collectors of internal revenue and others interested : Many inquiries have been made at this office concerning the requirements of section .38, act of August 5. 1909, levying an excise tax of 1 per cent of the total net income over $.5,000 of corporations, as to the time that must me covered by the returns of such corporations. In order that the position of this office may be known to all interested in this subject, attention is invited to the language of the act bearing on this point. Subdivision 3 reads, in part, as follows : * * * and said tax shall be computed upon the remainder of said not income of such corporation, joint stock company or association, or insurance company, for the year ending December thirty-first, nineteen hundred and nine, and for each calendar year thereafter. From this it will be seen that the law fixes the calendar year as the period to be covered by these returns, and no one is vested with discretionary power to change it. Many inquiries have been submitted as to the manner of arriving at an in- ventory .lanuary 1, 1909. when none was taken on that date and whore the fiscal year of the corporation ends with a date other than December 31. In article r* of Regulations No. 31 it is stated that an inventory or its equivalent of materials, Hupplies, and merchandise on hand for use or sale at the close of each calendar year is essential in the case of certain corjmrations in order to determine the gross income, and in case of other corporations to determine their expenses of o])eration. Where sucli inventory or its equiva- lent was not taken at the close of the year 1908, a sui)|)lemental statement showing such inventory approximately must be submitted with the return on the n'guhir form. Such supplemental statement shall be verified under oath, etc. I'nder the «tatute no return for a peri()n item 4. 200 Federal Corporation Tax Law. 3. Losses sustained during the year and not compensated by insurance) br otherwise, including a reasonable allowance for depreciation, shown in item 5, a and b. 4. Interest on bonded or other indebtedness to an amount not exceeding the paid-up capital stock, shown in item 6. 5. All sums imposed for taxes during the year, shown in item 7. 6. All amounts received by it as dividends upon stock of other corporations, etc., subject to the tax imposed, as shown in item 8. To make a correct return it is necessary for the accountant to know — 1. The exact resources and liabilities of the corporation, both on January 1 and December 31 of the year covered by the same. 2. A full statement of tlie business transacted during the year. For example: if a manufacturing corporation has on hand at the beginning of the year as resources, raw materials, materials in process, finished product, cash, bills receivable, accounts receivable, etc., making up the total assets of the company, a business transaction that results in exclianging these assets, or any part of tliem, for anything of equal value does not produce income. Raw materials, being of the capital assets of the company, are changed 5n form by the addition of different items of expense to produce another form of asset, the finished product, and hence the method of making up the return isi as follows: The gross income from the manufacturing business reported in item 3 consists of the difference between the cost of the assets as material and the selling price of the assets as finished product. The selling price of the finished product is ascertained as follows: The cost of the raw material plus all expenses shown in items 4, 5, fi, and 7, plus per cent of profit, and while all these items of expense are as surely a part of the finished product as is the value of the raw material, yet as such items are expenses and not assets they are segregated and reported as dedtictions in items 4, .5, G, and 7 in order to assist the government ofiicer in his comparison and verification of the accuracy of the return. In making up the gross income to be reported in item 3, the cost of the goods manufactured shall be ascertained by the addition of a charge to the account of the cost of the goods as manufactured during the year of the sum of the inventory at the beginning of the year, and a credit to tlio account of the sum of the inventory at the rnd of the year. To tliis amount should 1k< added all items of income received during the year from oilier .sources, includ- ing diviilends received on stock of otlier eorjiorations subject to this tax. In making the inventory on December \\\ of each year th<' ajipreeiation or rlcpreciation in t'n' v.iliic of the r;uv material on hand .sliouM be ascer- tained, as well as tliat of the fiiii-^lnMl prndiict. and this loss or gain, as the case may be, is ineliuhMl in the aeeouiit of the closing calendar year. These articles, tin- raw mat<'riMl. iiia1d ; Inter- nal Revenue Circular No. 583, October 10. 1!)00 (T. D. 226). - Forbidding dis- closure of information contained in official record." (juoted. Boske t'. Comin- gore, 177 U. S. 450, referred to.) It tiKiv lie proper to incpiire. first, wliether these regulations are authorized by law, and in accordance with law. It is fully settled in many eases that the regulations issued by the Secretary (if the Treasury with reference to the question of intcrniil revenue, niid for the governnicTit (if the officers of the Revenue Departimiit. Imvc tlic f'lrcc and effect of law, and are as binding ns if incorporated in (lie statute law of the United States. United States r. Bar- rows, 1 Abb. {['. S.) 351; 24 Fed. Cas. No. I4,.52n: United States v. Ilutton, 10 Ren. (U. S.) 208; 20 Fed. Cas. No. 15.433; In re Iluttman (D. C). 70 Fed. Rep. (i!l!t; In ic Weeks (O. C). 82 Fed. Kcp. 729; United States ex rel. Flynn r. lMirl!li;irt iC. {'.). 100 Fed. Rep. '.ill; In re l.aniberton ( D. C), 124 Fox\. Rep. 4 10; I'.oskc r. Comin'jore, supra; \',\ parte I'ecd, 100 U. S. 13; 25 L. Ed. 5.38; Crati.d r. United States, 4 How. 80, II L. Kd. 884. In concluding the opinion in I'.oske v. Comingore. Hupra, Mr. Justice Harlan Appendixes. 21 says, in reference to the promulgation of regulations by the Secretary of the Treasury for collectors of internal revenue: In determining whether the regulations promulgated by him are consistent with law, we must apply the rule of decision, which controls when an act of Congress is assailed as not being within tiie powers conferred upon it by the Constitution — that is to say, a regulation adopted under section 101 of tlie Revised Statutes should not be disregarded or annulled unless, in the judg- ment of tlie court, it is plainly and palpably inconsistent with law. Those who insist tliat such a regulation is invalid must make its invalidity so mani- fest that the court has no choice e.xcept to hold that the secretary has ex- ceeded his authority, and employed means that are not at all appropriate to the end specified in the act of Congress. I do not understand it to be contended here, however, that these regula- tions are inconsistent with law. No attack is made in argument upon these regulations. What is insisted strongly and earnestly is that the individual may be separated, as it were, from the official. What he discovers by the use of his senses, what he sees with his eyes, it is urged, he may tetify to; that he knows it as an individual, although as an official he was on the spot and acting in the discharge of his duty as such official. In the last regulation referred to (No. 12, of April 18, 1004) it will be per- ceived that, among other things, it is said: They will decline to testify as to facts contained in the records, or coming to their knowledge in their oflicial capacity; and this prohibition is hereby extended to include also internal revenue storekeepers and gaugers and agents. Assuming this regulation to be within the authority of the Secretary of the Treasury under the statute, and thereby becoming law and controlling on storekeepers and gaugers, can a storekeeper and ganger testify to facts he ascertains at a distillery, when he is there only in his capacity as a store- keeper and ganger? The District Courts have passed on similar questions on several occasions. Jn re Huttmann, supra, was decided by Judge Williams in the District Court of Kansas. This was a habeas corpus case, Huttmann being a deputy collector of internal revenue and having been committed for contempt for declining to answer certain questions propounded to him in the State court. * * * In re Weeks, supra, was a decision by Judge Wheeler in the District Court of Vermont. This was a habeas corpus case also. Weeks being a deputy col- lector of internal revenue in Vermont. He was called upon to testify in the State court as to the purchase by certain persons of a retail liquor dealer's tax stamp. Weeks, declining to answer, was committed for contempt. . . . In re Land)erton. supra, was also a habeas corpus case before Judge Rogers in the western district of Arkansas. * * * The Comingore case was originally decided by Judge Evans in the District Court of Kentucky (In re Comingore (D. C), 90 Fed. 552), and was affirmed by the Supreme Court in Boske r. Comingore (177 U. S. 459, 20 Sup. Ct. 701; 44 L. Ed. 840). In re Hirsh (C. C.) (74 Fed. Rep. 928) is not in harmony with the fore- going decisions, in that it holds that a deputy collector of internal revenue should be required to produce his records before the court; but this case is 216 Federal Corpoeation Tax Law. undoubtedly overruled by the decision of the Supreme Court in Boske v. Comingore, supra. The foregoing authorities seem conclusive of the present inquiry. They establish the proposition, undoubtedly, that information obtained by a person solely in his official capacity as internal revenue officer cannot be divulged by him even when called as a witness in the state court. The method pre- scribed by the Secretary of the Treasury for courts obtaining this information is an application to the Secretary of the Treasury by the judge of the court in which the information is desired as to the operation of a distillery, when a certified copy may be obtained of the reports of the distiller, which will show fully and accurately all that has been done in any given distillery. * * * The whole question comes to this: When a distillery is being operated, a storekeeper and ganger is placed there to ascertain the quantity of distilled spirits made at the distillery, in order that the Government may collect the taxes. They are under the provisions of the statute (R. S., sec. 3167) and the? regulation of the Treasury Department, having the effect of law, as stated, that they shall not produce any records or testify as to the contents of records and, further, that they shall not testify as to facts " coming to their knowl- edge in their official capacity ; " but the same regulation provides that infor- mation desired as to the operation of a distillery will, \ipon request of the court desiring such information, be furnished under the seal of the Treasury Department. If a change is needed, it must be made by Congress or by the Secretary of the Treasury. The courts cannot make or change law. Stegall was placed in jail by the judge of the state court and fined $300 for declining to testify as to what was being done at Cureton's distillery, as stated above. He was actually in jail when tlie application for writ of habeas corpus was made and when the writ was issued. » * * I have given this case the most careful examination and consideration, be- cause its importance merits it. The courts of the United States will not lightly interfere with the action of the state court, and a case must be presented to make action imperative before such action will be taken. I am compelled to enter an order that the petitioner be discharged. Appendixes. 217 APPENDIX 0. (T. D. 1617.) TREASURY DEPARTMENT REGULATION. Examination of Books, Etc., Belonging to Corporations, Etc. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, April 19, 1910. To Internal Revenue Agents. The following instructions are issued for the guidance of internal revenue agents in the matter of examining the books and papers belonging to corpo- rations, joint stock companies, associations and insurance companies subject to the special excise tax imposed by section .38, Act of August 5, 1909. On receiving from the collectors, or from this office, a list of corporations, etc., which have failed to file the required returns, or which have filed defec- tive or unsatisfactory returns, agents will at once proceed to make the investigation provided for in the fourth paragraph of said section 38. They will, in each case, after calling the attention of the proper officer of the cor- poration to the provisions of the statute, request the production of such " books and papers bearing upon the matters required to be included in the return of such corporation," as may be found necessary to make the examina- tion here directed. In most cases the errors in the returns rendered are probably due to mis- apprehension on the part of the officers of the corporation as to requirements of the law and regulations respecting the preparation of such returns. See T. D. 1606 for list of the various questions which have arisen under the law and the decisions thereunder. In conducting their examination the agents will, except in glaring cases of misrepresentation, proceed on the assumption that all errors in the roturn3 rendered are unintentional; and they will, so far as possible, make their examination in such matter as not to interfere with the company's business, either as to the use of its books, or in the general conduct of its officers. Con- tentions with officers, employees or representatives of corporations are to be carefulh' avoided, and no action that may cause friction, that is not necessarv in the proper performance of their duties, must be indulged in by officers making these examinations. Ordinarily no very extended examination of the company's books will he necessary as the verification of the particular items to which attention hasj been called will be sufficient. Where, however, an extended examination is found to be necessary, and the accounts are so kept as to involve mucli labor in tlirir examination, the agent may assign two assistants for this purpose. \\''here discrepancies between the company's books and the return made are discovered, the officers of the company should be given full opportunity to explain the same, and to furnish if 'so desired, a sworn statement in reference thereto. In such cases the agent will, if deemed necessary require the assist- ance of any officer or employee of the company, and there examine such officer 21S Federal Corporation Tax T>aw. or employee respecting the matter under investigation as provided in section 38. The witnesses in such cases shouki be duly sworn by the agent, as espe- cially provided in said section 38; anil in case of refusal of any such officer or employee to testify, or in case of refusal to produce books or papers called for, the agent will at once report the fact to this office. A separate report of the investigation of each case should be made and whore an additional tax is found to be due, a copy of such report should ha furnished the collector of the district. The attention of agents and their assistants is specially called to paragraph 7 of said clause 38, making it unlawful for any officer or employee of thft United States to divulge or make known in any manner not ])rovidpd by law, any information obtained from any document received, evidence taken or report made under the provisions of that section. Royal E. Cabell, Commissioner. Approved : Franklin MacVeagh, Secretary of the Treasury. Appendixes. 211) APPENDIX P. (T. D. 1633.) (Additional Notice (Form 17) to Be Sent to Delinquent Corporations.) Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, May 27, 1910. As there appears to be some misunderstanding on the part of certain col- lectors in the matter of sending notices on Form 17, to corporations failinf* to pay their special excise tax on or before June 30, the attention of such collectors is specially called to mimeograph letter No. 660 of January 27, 1910. As noted in that letter, notice on a modified Form 17 should be sent to each corporation assessed, on receipt of tlie assessment list, on or before June 1, 1910, as provided in paragraph 5, section 38, act of August 5, 1909; also a further notice on the regular blank Form 17, in case the assessed tax is not paid on or before June 30, 1910. This additional notice is necessary by reason of the fact that the section further provides : * * * " and to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due * * * " Collectors will therefore, in all cases, cause such additional notice to be sent to delinquent corporations immediately upon the expiration of the time fixed for the payment of the tax due, namely June 30. Royal E. Cabell. Commissioner. 220 Federal Corporation Tax Law. APPENDIX P^ (T. D. 1634.) State, County and Municipal Corporations Not Liable to Tax under tiie FEDEitAx Corporation Tax Law. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, May 27, 1910. SIR: — Yours of 24th instant is received, inquiring whether municipal cor- porations — that is, corporations absolutely owned by municipalities, and in which no shares are sold — are liable to tax under the federal corporation tax law. In reply you are advised that in the opinion of this office it is clear that such corporations are not suliject to this tax. As a general rule, public property, whether belonging to the Federal Gov- ernment, the various States, or the political subdivisions of such States or municipalities, is not subject to taxation. It has been held frequently tliat the exemption in favor of municipalities extend to gas works, water works, and electric light i)lant8. While these public utilities may be and frequently are conducted by niuiiicipalities at a profit, the making of profit is not tlie main purpose, but rather the public service. They are not corporations " organized for profit." ^Moreover they are not corporations " having a capital stock represented by shares." In order to render a corporation taxable under the act of August 5, 1900. it is necessary that it be such a corporation as is primarily organized for profit and has a capital stock represented by shares. Therefore, a State, county, or city furnisliing its population with water, gas, or electric li^lit would not, although charging for such service and acquiring a profit therefrom, be taxable under tliis act. Respectfully Royal E. Cabell, Comrnissioner. Mr. H. A. Rtcker. C'olkctor Internal Revenue, Atlanta, Ga. APPENDIXJiS. 221 APPENDIX Q. (T. D. 1639.) (All Regular Lists and All Corporation Tax Lists Requirbh) to Be Taken Up Separately Hereafter on Forms 5 IB, 79, and 325.) Treasury Departme:nt, Office of Commissioner of Internal Revenue, Washington, D. C, June L3, 1910. To Collectors of Internal Revenue. Hereafter on Form 51B collectors will report separately all regular lists and all corporation tax lists on which there are. outstanding taxes at the bo- ginning of the month. The collections on the corporation tax lists reported thereon must agree in the aggregate with the amount of corporation taxes reported collected on Form 22 and with the total of amounts indorsed on the certificates of deposit for the month. In taking up a list, either corporation tax or regular, for the first time, the full amount thereof should be entered in the margin of the Form 51 B for the month in which the Form 23 V> is receipted, the amount of advance collections thereon previously reported should be placed underneath, and the net amount carried into the column headed " Taxes unaccounted for in previous report, new list, etc." (See first three paragraphs on page 22 of Regulations No. 2, revised July 1, 1908, and Note A on Form 51B.) Lentil a list has been made up in this office, returned to a collector and receipted for by him on Form 23%, he should report on Form 51B the advance collections only. If a collector should not receive from this ofBce his list for the first or second month, of a quarter before the end of that quarter, he should immedi- ately, on the first day of the succeeding quarter, sign and forward to this office a report on Form 476 for the amounts collected in advance on that list. as under such circumstances he is properly chargeable on his quarterly account with the advance collections only. ( See instructions relative to receipt on Form 476 for February, 1910, corporation tax list in Mini. 672, dated March 19, 1910. Hereafter on Form 79 there should be interlined on line 3 immediately after the words " On Form 492 " the amount of corporation taxes deposited during the quarter and the amount of other internal revenue collections deposited, and the total of these two items carried into the money column. The amount of corporation taxes deposited must agree with the total of the amounts reported on Forms 22 for the three months of that quarter. On line 24 of Form 79 there should be entered separately each Form 23% receipted during the quarter and each Form 476 receipted for advance collec- tions made during that quarter. Instructions herein given relative to 51B should be followed in the prepara- tion of reports on Form 325. Royal E. Cabell, Commissioner. 222 ±'edejjal Corpokation Tax Law. APPENDIX R. (T. D. 1651.) FrvE Per Cent Penalties. Tbeasuby Department, Office of Commissioner of Internal Revenue, Washington, D. C, August 27, 1910. SiB: — Your letter of the 19th instant relative to the collection of 5 per cent penalty from the F Bank of D , the 1' Cotton ]Mills, and the D Cotton Manufacturing Company, all of , North Carolina, has been received. This matter has been given further and careful consideration and with the facts now presented to this office, in connection witii an examination of the records and accounts on file, it appears that the taxes assessed against these corporations were not paid within ten days after mailing the prescribed notice within the meaning of the law. The checks tendered you in payment of the taxes due were drawn by the corporations named above on the ¥ Bank of D , one of the tax- payers involved. While it may be true, as asserted by the taxpayers and as stamped by the F Bank, tluit these checks were paid to the collecting bank at Releigh, July 2, 1910, there is no evidence tliat the proceeds wore placed in your hands or to the account of the Governinent until July 13tli. This is shown by your Form 325 for July, 1910, the stubs of receipts Form 1, numi)ered 876658, 87600, and 870663, and your certificate of deposit for July 13, 1910, No. 3093. If tlie Citizen's National Bank of Raleigh received the amount of tlie taxes due, but failed to turn tlie same over to you to be placed to tlie credit of the Treasurer of the United States in time to avoid the liability to 5 per cent penalty as imposed by section 3184, Revised Statutes, holding the same eleven days, this unusuiil neglect on the bank's part is no valid reason why the penalty sliduld not l)e (li'iuitiided. The Citizen's National ]5ank is not an agency for the collection of internal revenue taxes. This ofTice, therefore, upon thorough consideration of tlie matter, can not hold with fairness that, liecause this bank is a (iovernment depository, any laches on its ji.-ut in ( 1h' performance of Imsiiiess duties out- side of its fiinctiims as such shall alTert the interests of the Ciovernment. and therefore the rule laid down for your guiibinpe in tins matter in letter to you (lilted tlif lltli instant is hereby revoked. The 5 yper nnt [icnrilt i<'s ^lioulil lie (•(ill<'rt<'(i in tliesc nrid the other cases to which you refi-r in your letter of tiir lIHIi insiunt, and to which the same yirincijilr will apply. Respectfully, J. C. Wheeler, Acting Commiasioner. Mr. Wmf.ei.f.r Marttn. Collector Fourth IH.itrict, Raleigh, N. C. Appejvdixes. 223 APPENDIX S. (T. D. lt)54.) Heal Estate Sold under Warrant of Distr.vint. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, September 16, 1910. 8iB: — Upon examination of your report on Form 325 for August it ap- pears from proper memoranda following balances outstanding against your September, 1909, list, that distraint sales were made on IMay 19, 1910, and July 15, 1910. In each of these cases there being no personal property be- longing to the delinquents, real estate owned and occupied by said delinquents was seized under warrant of distraint, advertised and offered for sale to tlie highest bidder. There being no bidders, the deputy collector, acting for the collector, in conducting the sale, bid the said real estate in for the use of the United States, naming as the amount bid the amount of assessed taxes, accrued penalty and interest on the same and the cost of the sale. By this action the delinquents' debt to the United States was extinguished (see United States V. Triplitt, 22 Int. Rev. Rec. 207), and credit on the list and Form 325 should be taken. In purchasing for the United States property offered for sale under dis- traint proceedings the offer making the sale is not required and should not bid the full amount due the United States unless the appraised or estimated cash value of the property exclusive of all prior liens, approximate at least double that amount. As stated on page 36 of Regulations No. 12 revised — Real estate seized under distraint and offered for sale should be offered at a minimum price, ordinarily one-half the cash value of the land, but in no case more than the tax, interest, and penalty, and all expenses of levy and sale, including all charges for advertising. If no person offers for said estate the amount of the minimum price the officer making the sale should bid the prop- erty in for the United States for no larger sum than is necessary to effectuate the object which is to prevent the sale for an inadequate price. Respectfully, J. C. Wheeler, Acting Commissioner. 224 !Fjedekal Corpoeation Tax Law. APPENDIX T. (T. D. 1655.) When So-called Mutual Building and Loan Associations Should Make THE REQUIBED RETUBN AND WiLL Be HELD SUBJECT TO THE TaX IMPOSED BY Section 38 of the Act of August 5, 1909. ^ee Item 30, T. D. 1606. Tbeasuby Department, Office of Commissioner of Internal Revenue, Washington, D. C, September 24, 1910. SiB: — Your letter of the 20th instant relative to the special excise tax on corporations, has been received, in which you give a list of building associa- tions in your district which have made affidavit that they are purely mutual associations ; that they have not loaned, nor do they loan, to otliers than their members; and that their shareholders, both borrowers and non borrowers, have credited to their several accounts their pro rata of all dividends declared by the associations, and that they are therefore exempt from the provisions of the act of August oth, 1909, providing for the special excise tax on corporations, and in which letter you request permission to strike those corporations from the schedule in your office. In reply, you are informed that it woukl appear that further information is necessary in some, if not all, of these cases. It has been held that buikling and loan associations are not exempt, if they loan money to others than their members, thus doing a business similar to that engaged in by banks or trust companies. It is also held that building and loan associations which receive sums of money on deposit which is not in payment of stock, and on which the depositor receives a fixed rate of interest regardless of the earnings of the association, are conducting a business similar to a banking business, and ar(> tlwrcforo subject to the s])ooial <>xcise tax on corporations and should be required to make a return showing their net income. In your list is given lln' name of the , which is known to receive deposits from 8harelK>l(lcrs and others on whicli a fixed rate of interest for the use of the money so deposited is paid. The money so received is loaned again at a rate of interest higher than that paid to depositors, from which it appears that a business for profit is being conducted. The practice of receiving ♦ioposits and paying a fixed rate of interest thereon also destroys the purelj* mutual nature of the association. It is quite probable that there are others in the list conducting business along similar lines, and further inquiry should be made to ascertain the facta in caeh rase, and a return should be required where your inquiry shall discloee the necessity therefor. Respertfully, J. C. Wheeleb, Actinp Commixaioner. Mr. r. L. r.ornsnoROUOii, Collector Internal Reveruc, lialtimorr, Md. Appejjdixes. 225 APPENDIX TJ. (T. D. 1656.) insteuctions relative to preparation of account on fobm 79. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, October 6, 1910. To collectors of internal revenue. There has been sent to each collector a supply of Forms 79, revised July 28, 1910, in accordance with 1907 Department Circular No. 52. All old blank Forms 79 should be destroyed as required by Regulations No. 2, revised, page 19, last paragraph, under " General Instruction Relative to Reports." Beginning with the quarter ended September 30, 1910, the quarterly revenue accounts will be made out on the new form, even if accounts have been ren- dered on the old prior to the receipt of this letter. On the new form separate columns are provided for the regular and the corporation tax lists, thus requiring an accounting for regular taxes, etc., and a distinct accounting for regular taxes, etc., and a distinct accounting for corporation taxes, etc. On line 4 there will be entered in column 1 the amount of deposits on account of regular taxes collected, in column 2 the amount on account of cor- poration taxes collected, in column 3 the amount on account of special tax stamps sold, etc., and in the last column the total amount of deposits for thft period for which the account is rendered. On line 5 there will be entered in column 1 the amount of abatements on regular lists, and in column 2 the amount on corporation tax lists, and the total of the abatements for the period in the last column. The method of making entries on the other lines will be similar to that for lines 4 and 5 Care must be taken to have each column in balance. In the accounts of the various stamps no fractions should be used and amounts entered should state the actual value of stamps sold, returned, on hand, etc., to the nearest cent. All excesses arising in the sale of stamps on account of fractions should be carried to Form 58 of the regular list each month as directed in paragraph 5 of instructions on Form 79. The amounts entered on line 11 should be verified by actual count. The certificate at the bottom of the form and the first indorsement should be properly signed. Record No. 32 will be revised to conform to new Form 79, and as soon aa printed will be sent to each collector. Royal E. Cabexl, Commissioner. Fed. Corp. Tax — 15 226 Fp:dkkai. Cokporatioh- Tax Law. APPENDIX V. (T. D. 1659.) Five Feb Cent Penaltt and Interest on Delayed Payments of Assessed Taxes. Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, October 20, 1910. To collectors of internal revenue. In view of the provisions of the State (section 3184, and paragraph 5, sec- tion 38, act of August 5, 1909) for the collection of a 5 per cent penalty and interest, as to all assessed taxes not paid within ten days after notice and demand, collectors will, where such notice and demand (Form 17) ia to be forwarded by mail, enter therein, as the date on which such assessed tax be- comes due and payable, a date ten days subsequent to that of actual mailing, and not as reckoned from the date of the notice as now required in the footnote on said Form. Where a notice so sent is not delivered in due time, by reason of delay in the mail, and satisfactory evidence of that fact is furnished, the penalty and interest in such cases will not be collected, provided the full tax is paid to the collector within ten days of the actual receipt of the notice. In such cases the envelope enclosing the notice and bearing the postmark of the receiving office should be forwarded to the collector and by him transmitted to this office,, with his Form 325, as evidence of delay in the delivery of the notice 80 sent. So much of the instruction contained in the first paragraph on page 111 of Regulations No. 1 as is inconsistent herewith is hereby revoked. RoYAi. E. Cabetx, Commissioner, Approved : Charles D. TTillis, Assistant Secretary of the Treasury. AppE.vDixEii. 227 APPENDIX W. (T. D. 1664.) Blank Fobms fob Returns to Be Furnished by Collecttobs Onlt to Corporations Making Returns. Tbeasuby Department, Office of Commissioner of Internal Revenue, Washington, D. C, November 17, 1910. SiB: — Your letter of the 15th instant has been received, in which you call attention to the constant demand from lawyers, accountants, etc., for any- where from 25 to 150 blank forms for the returns of corporations for the special excise tax on corporations, and inquire if the same shall be furnished such applicants. In reply, you are informed that the supply of new forms furnished you was intended to supply only the corporations making return for the special excise tax on corporations in your district, and all persons not connected with or actually representing such corporations should be instructed to make their requests for these blank forms direct to this office, where proper action on each such request will be taken. Respectfully, RoYAi, E. Cabell, Commiaaioner. Mr. Charles W. Anderson, Collector, Second District, New York. 228 Federal Corpokation Tax Law. APPENDIX X. (T. D. 1665.) Inspection of Retubns of Corporations — Executive Obdeb, Etc. Treasury Department, Office of Commissioner of Internal Re\t:nue, Washington, D. C, November 28, 1910. To internal revenue officers and others concerned. The following executive order, together with regulations signed by the Sec- retary and approved by the President, relative to the publicity feature of section 38 of the act of August 5, 1909, and amendments thereto, imposing a special excise tax on corporations, etc, is hereby published for your infor- mation. Royal E. Cabell. Commissioner. Executive Order. Pursuant to the provisions of an act entitled "An Act making appropria- tions for the legislative, executive and judicial expenses of the Government for the fiscal year ending June thirtieth, nineteen hundred and eleven, and for other purposes," providing among other things an appropriation for classify- ing, indexing, exhibiting and properly caring for the returns of all corpora- tions required by section thirty eight of an act entitled. "An Act to provide revenue, equalize duties, encourage the industries of the United States and for other purposes," approved August 5, 1909, and further enacting that any and all such returns shall be open to inspection only upon the order of the President under rules and regulations to be prescribed by the Secretary of the Treasury, and approved by the Prcvsident (30 1 Stat. 494). It is hereby ordered, that all such returns shall be subject to inspection upon compliance with rules and regulations prescribed by the Secretary of the Treasury, and approved by the President, bearing even date herewith. Wm. H. Taft. The White House, November 25, 1910. Reoulations Governing the Inspection of Returns of Corporations Made IN Accordance with Section 38 of the Tatiff Act of August 5, 1909. Treasury Department, Wnshinfitnn, D. C, November 25, 1910. In.ipccdon of h'rtiirns. By section 38 of the tnrifT act of August .'), 1009. Congress imposed a special excise tax upon all corporations, joint stock companies, and associations, and insnrnnoe rnnipanies. fnrei such return should make application, supported by advertisements, prospectus, or such other evidence as ho may deem proper to establish the fact that the stock of such corporation is offered for general public sale. Returns can be seen only in the office of the Commissioner of Internal Rev- enue, in Washington, D. C. In no case shall any collector, or any other internal revenue officer outside of the Treasury Department in Washington, permit to be seen any return or furnish any information whatsoever relative to any return or any information secured by him in his official capacity relating to such return. No provision is made in the law for furnishing a copy of. any return to any person, and no copy of any return will be furnished except to the corporation making the return^ or its duly constituted attorney. The provisions herein contained shall be effective on and after the 25th day of November, 1910. Franklin MacVeagh, Secretary of the Treasury. Approved : Wm. H, Taft, The White Howe, November 25, 1910. Appendixes. 231 APPENDIX Y. (T. D. 1675.) Special Excise Tax. (Synopsis of decisions relating to special excise tax on corporations, etc., imposed by section 38, act of August 5, 1909. — T. D. 1606 of March 29, 1910, revised.) Tbeasuby Department, Office of Commissioneb of Internal Revb^^ub, Washington, D. C, February 14, 1911. The following synopsis of decisions made, from time to time, on questions relating to the special excise tax imposed by section 38, act of August 5, 190!t, on corporations, joint stock companies, associations, and insurance companies, is published for the information of internal revenue officers and others con- cerned. Royal E. Cabell, Commissioner. CLASS of corporations, ETC., SUBJECTT TO TAX. 1. The tax imposed by the act applies to all corporations, etc., described, except those specifically exempted, without reference to the kind of business carried on. 2. Every corporation, etc., not specifically enumerated as exempt shall make the return required by law, although its net income during the year may not have exceeded $5,000. 3. Corporations claiming special exemption should nevertheless make return (in blank, if desired) accompanied by a statement setting forth the ground 0!i which exemption is claimed. 4. Charitable institutions supported by voluntary contributions or State appropriations are held to be exempt from the payment of the special excise tax on corporations, but should file a return in blank as provided in para- graph 3 hereof. 5. Corporations, etc., organized during the year or going into liquidation during the year should nevertheless render a sworn return on the prescribed form. The tax imposed, however, is held not to apply to corporations whica went out of existence prior to the passage of the act. 6. Where company has dissolved and the required return is not made by its oflicers, such return will be prepared by commissioner. 7. Where corporation has gone into bankruptcy, returns in such cases to be made by trustee in bankruptcy. 8. Railroad companies operating leased or purchased lines to include all receipts derived therefrom, and if bonded indebtedness has been assumed may deduct interest thereon to an amount not exceeding its own paid-up capital pfnrk. If such subsidiary companies receive income in the way of rentals, etc., return to be also made by such companies. 9. Corporations, etc.. organized under the authority of the Ignited States or any State or Territory thereof, or Alaska or the District of Columbia, to in- 232 Federal Corporation Tax Law. elude in their returns not only the income derived from the business carried on within the confines of the United States, but income received from busi- ness transacted in any foreign country as well. 10. Corporations having branch or subsidiary companies to include in their returns the income of all such companies when no distinction is made in operating and accounting by reason of the separate incorporation of such subsidiary companies; otherwise, a return by each corporation should be made. 11. Foreign companies having several branch offices in the United States should each designate one of such branches as its principal office and should also designate the proper officers to make the required return. 12. Where a consolidation of two or more corporations has been effected during the year, and each or any such corporation subsequent to such consoli dation collects prior existing debts, each such corporation should make separ ate return and include therein all such collected debts, as also all income received during the year prior to the date of consolidation. 13. " Principal place of business " is held to mean the principal office where the company keeps its books from which the required return is to be pre- pared and not the place where the operating plant is located. 14. As the law specifically provides that the tax imposed shall be computed on the net income during each calendar year, returns of income based on any period other than the calendar year cannot be accepted. 15. Full amount of stock, as represented by the par value of the shares issued, to be regarded as the paid-up capital stock, except when such stock is assessable on account of deferred payments, in which case the amouat actually paid on such shares will constitute the actual paid-up capital stock of the corporation. 16. Capital stock held to include both preferred and common stock, 17. Surplus and undivided profits not to be included in capital stock. 18. Holding companies known as "voting trusts," receiving only dividends on stock lield, and having no capital stock, etc., not liable. 19. Mutual savings banks having no capital stock not liable to tax imposed. (Opin. Atty.-Gen. Feb. 14, 1910.) 20. Co operative dairies not issuing stock and allowing patrons dividends based on butter fat in milk furnisliod not liable. 21. Foreign steamship companies having no office in the United States, whose vessels only occasionally touch at ports in the United States, not regard«'d as dniiig business in fliis country witliin the meaning of the statute. 22. Companies organized in Porto Rico and not engaged in business in th.» United States not subject to tax. 2.3. Corporations owning sugar or other plantations and disposing of the products thereof not entitled to exemption as agricultural organizations. 24. Corporations organized to sell provisions, etc., to stockholders and others not exempted. 25. Corporations organized for the purpose of holding real estate to make return of income derived from the projierty so held. 20. National hanks do not come within any of the exemptions named in the act. 27. "Aprieullur.il or^'niii/n t ions " Iiehl not to come within the stntutory exemption. unU-»s their chief object is the promotion or advancement of agri- Appendixes. 233 cultural interest, and no part of the net income inures to the benefit of their stockholders. 28. Mutual Hail Association regarded as an insurance company and not as an agrocultural association, and therefore liable to tax. 29. Exemption in favor of fraternal beneficiary associations does not apply to mutual fire insurance companies. 30. Limited partnership, if organized for profit and having a capital stock represented by shares, although no " certificates of stock " are issued, are liable to the tax imposed. (Opin. Atty. Gen. Feb. 14, 1910.) 31. Interest received on government bonds to be included in gross income. (Opin. Atty.-Gen. Jan. 13, 1910.) 32. Returns should be signed and verified by two of the officers designated in the law. Signing of one person holding two such offices not permitted. Agents for foreign steamship companies may sign the required returns, if io authorized by their companies. 33. Returns not required to have corporate seal affixed. 34. Returns filed with deputy collector regarded as having been filed with collector. 35. No form of protest prescribed. Any form of protest sufficient if filed before payment of tax. Right of protest not to be denied. Inventories. Accounts, etc. 36. Where an inventory or its equivalent was not taken at the close of th<» year 1908, a supplemental statement showing such inventory approximately must be submitted with the return on the regular form. Such supplemental statement shall be verified under oath by the treasurer or principal financial officer submitting the same. (T. D. 1578.) 37. Profits realized on sale of real estate during the year, also increase in value of unsold property, if taken up on the books of the corporation, to be included in income. 38. Cost of manufactured articles, or articles in process of manufacture, held to include original cost of materials used, plus cost of labor, etc. 39. Mortgaged real estate should be inventoried at its full value and amount of mortgage reported as indebtedness. 40 Receipts from sale of patent rights to be included in income. 41. No particular system of bookkeeping or accounting will be required by the department. However, the business transacted by corporations, etc., must be so recorded that each and every item therein set forth may be readily verified by an examination of the books and accounts where such examination is deemed necessary. Deductions, Expenses, etc. 42. It is immaterial whether the deductions are evidenced by actual dis- bursements in cash or whether evidenced in such other way as to be properly acknowledged by the corporate officers and so entered on the books as to constitute a liability against the assets of the corporation, etc., making the return. 43. Mortgage indebtedness on real estate, if assumed by the corporation acquiring such real estate, to be included in the indebtedness of the corpora tion. But if not so assumed and remains only as a lien on the propertv. interest paid thereon may be deducted as a charge " made as a condition to 234 Federal Corporation Tax Law. the continued use or possession of the property." (Opin. Atty.-Gen. Feb. 21, 1910.) 44. Cost of erecting building, if included in lease under which property i» held by company, is a proper deduction, to be prorated according to time fixed by lease. 45. General expenses, vsuch as coal, ship stores, etc., of foreign steamship companies, to be prorated as provided in act for interest deductions. 4(i. Amount received by nursery companies from sales of trees, etc., less amount expended for seedlings and young trees, to be included in gross income. Amount expended for labor, salesmen, etc., to be deducted as expenses. 47. Commissions allowed salesmen, paid in stock, may be deducted as ex- pense if so charged on books. 48. Sales of stock and bonds are regarded as sales of capital assets and should be so accounted for. (Art. 2, regs. 31.) But proceeds derived from sale of bonds used in defraying ordinary and necessary expenses are a proper deduction in determining the company's net income. 49. Stock issued in payment of property purchased represents capital in- vestments, and notes issued during the year represent indebtedness. Corpor- ate funds applied to the payment of outstanding notes not a proper deduction in ascertaining net income. 50. Amounts expended in additions and betterments which constitute an increase in capital investment not a proper deduction. 51. Dividends received by corporations on stock of other corporations whose net income does not exceed $5,000 is nevertheless a proper deduction under the law. (Opin. Atty.-Gen. Jan. 24, 1910.) 52. Dividends received on stock of foreign corporations not subject to tax not a proper deduction. 53. Dividends paid employees in lieu of wages not proper deduction as expenses. 54. Royalties on patent rights to be reported as income. Allowance for depreciation of patents expiring during year, however, will be allowed. 55. Lands bought previous to January 1, 1909, and sold during the year 1010, should have the profits arising from such sale prorated in accordance with the number of years the land was held by the corporation and the num- ber of years the law was in effect, if no accounting of increased value of land was made in returns for previous years. 56. Banks paying taxes assessed against their stockholders because of their ownerliip of the sliares of stock issued by such bank cannot deduct the amount of tax so paid in making their return for the special excise tax on corporations. 57. Amounts paid for pensions to retired employees, or to their families or otiiers dependent npon them, or on account of injuries received by employees, are proper deductions as "ordinary and necessary expenses;" gifts or gratui- ties to employees in the service of a corporation are not properly deductible in ascertaining net income. Donations made for purposes connected with the operation of the property when limited to charitable institutions, hospitals, or efinentional iiistitiitions, conducted for tlie benefit of its employees, or their depf-ndcnts. shall be proper as a deduction under the same head. 58. Where allowances on account of salaries are deemed excessive and for the piirpoH<- of rvadintr the tax (hie, investigation will be made, and if the facts warrant [)ros<'cution will follow. Appejtdixes. 235 69. Interest paid on time depoaits and deposits subject to check constitutes a proper deduction from tlio auioiuil of gross income during the year. 60. Interest on portions of bonded or other indebtedness bearing difTerent rates of interest may be deducted from gross income during the year, pro- vided the aggregate amount of such indebtedness does not exceed the paid-up capital stock of th corporation. 61. Interest paid during the year on notes given prior to January 1, 1909, to be prorated. But interest on notes given in 1909, and payable subsequent to December, 1909, unless charged on the company's books, is not a proper deduction from the income of that year. 62. Interest, taxes, or other items allowable as deductions, accruing prior to January 1, 1909, are not allowable deductions from the gross income of years subsequent thereto. 63. Unearned premiums set aside by insurance companies as reserve not to be included as income until earned. 64. Funds set aside by company for insuring their own property not a proper deduction. 65. As the tax imposed is measured by and is not a tax upon the net receipts of corporations, etc., interest received during the year on government bonds is not a proper deduction from such income in determining the amount of tax due. (Opin. Atty.-Gen. T. D. 1583.) 66. State, county or municipal taxes paid during the year a proper deduc tion in ascertaining the net income of corporations. 67. Import duties or taxes if included in arriving at cost of goods are not deductible under the head of taxes paid during the year. 68. Bad debts, if so charged off the company's books during the year, are proper deductions. But such debts, if subsequently collected, must be treated as income. Depreciation. 69. Where increase or decrease during the year in the value of real estate acquired in previous years, sold or held for sale, is taken up on the books and the rate cannot be accurately determined with respect to individual years, such increase or decrease may be prorated as provided by regulations in cases of sale of capital assets. 70. Premiums on stocks and bonds arbitrarily charged off on the books of a corporation do not constitute a proper deduction on account of depreciation, unless there shall have been an actual shrinkage in value of such stocks and bonds to the extent of the deduction claimed during the year for which the return is made. 71. Net income on uncompleted contracts may be estimated on the basis of the percentage of the work completed as compared with the contract price of the whole work. 72. Cost of drilling new wells by oil corporations is considered betterments and additions to the capital assets of the corporation. The expense of drilling dry wells may, however, be charged to profit and loss. 73. " Good will " represents the value of a business over and above the value of the property, and is chargeable only to capital investment account and is not an allowable deduction from the income of a corporation. 74. Discounts, other than bank discounts on notes executed by a corpora 236 Fedekal Cokpoeation Tax Law. tion, should be segregated from the interest item on the return, and should be included under expenses, item 4. 75. The mere removal of timber by cutting from timber lands, unless the timber is otherwise disposed of through sales or j'laiit operations, is consid- ered simply a change in form of assets. If said timber is disposed of through sales or otherwise it is to be accounted for in accordance with regulations gov- erning disposition of capital and other assets. 7G. Deduction on account of depreciation of property must be based on life lime of property, its cost, value, and use. 77. Loss due to voluntary removal of buildings, etc., incident to improve- ments is either a proper charge to the cost of the new additions or to depre- ciation already provided, as the facts may indicate, but in no case is it a X^roper deduction in determining net income, except as it may be reflected in the reasonable amount allowable as a deduction for depreciation. 78. Depreciation of company's stock a loss to the stockholders, but not a loss to the company issuing the same, and therefore not a proper deduction. Publicity. 79. A person who as trustee or in any other fiduciary relation has the ownership or possessory right to stock in a corporation is a stockholder in such corporation within the equity of the rule set down in Treasury Decision No. 1665, governing the publicity of returns. (Opin. Atty.-Gen. Dec. 27, 1910.) Depreciation in ^finerals, Oils, etc. 80. In case of corporations whose business consists in part or wholly .)f mining, producing, and disposing of deposits of nature (ores, coals, gas, petro- leum, and sundry minerals) the conduct of such business will be understood to comprehend two classes of gains or losses, viz.: (a) The gain or loss resulting from the sale of capital assets, i. €., either the increment, or the loss, arising tlirough possessing over a period of time the investment in the same. (6) The trading or commercial gain attached to the conduct of the indus- try, the employment of working cajJital, the effort and risk involved. 81. In the ascertainment of net income deduction will be allowed for depre- ciation ariHJng from exhaustion of deposits of ore, mineral, etc., and for de- preciation and obsolescence of improvements, in accordance with general regu- lations respi'cting dejireeiation allowances, on tlie basis of the original capital investment cost of the properties concerned to tlie company reporting. 82. A further deduction will also l)e allowed, through not including the same at all in the item of gross income (item 3, Form 6.'}7), for the unearned incre mi-nt re|)resented in such prop«'rties as at January 1, 1909, which will l)e determined in general as follows: 83. An estimate should be made as nf January 1, 1909, of the fair market valur at tliat date of the minerals, etc., in deposit. This estimate should be fonned nn tlie basis of tlie disposal value of the minerals in total and exclnsive of value of improvements and development work. Tliis valuation sliould also he reduced to a unit value — per ton, barrel, etc. \oTF. — Vnhies as nforesnid slioiild not be estimated on the bnsis of the asHumed salabh' value of the output under current operative conditions, less APPEJSfDIXES. 23Y the actual coat of production, because, as hereinbefore stated, the selling price under such conditions comprehends a profit both for carrying the investment in minerals, improvements, and vi^orking capital, and for conducting opera- tions in respect of production and disposal of product. The value to be de- termined as stated must be on the basis of the salable value of the entir«j deposit of the aggregate units of minerals considered en bloc if disposed of in that form. Nor must such valuation comprehend any speculative value which might attach to a sale of the minerals en bloc, i. e., a value which might be obtained on the ground that the future would develope a much greater reserve of mineral deposits than were believed to exist at the time estimate as of January 1, 1909, was formed. Any value of this latter character would attach obviously to such additional reserves when developed in future. 84. The unit value as of January 1, 1909, ascertained as above outlined, would indicate the value to be attached at that date to the capital assets dis- posed of during any calendar year succeeding, and should be used in deter- mining the unearned increment at January 1, 1909, which may be excluded entirely from the item of gross income, as before explained, in following man- ner, viz: Value at January 1, 1909, determined in manner outlined, of minerals, etc., which may be removed and disposed of in any year subsequent thereto $ Less the following: (o) Proportion of depreciation charge applying to exhaus- tion of minerals disposed of, ascertained as first ex- plained herein on basis of original cost $ (6) Royalty paid, if any, on minerals disposed of Balance, being unearned increment at January 1, 1909, to be excluded from gross income item 85. The precise detailed manner in which the estimate of value of mineral, etc., as at January 1, 1909, shall be formed, must naturally be determined upon by each corporation interested, but formal record of such estimates, together with all sustaining information, should be carefully filed so as to be readily accessible for reference. Values as stated, as determined at January 1, 1909, should be used in compilation in all subsequent years' excise-tax returns. The question as to whether it subsequently develops the property possessed a greater quantity of mineral, etc., reserve than was in the aggre- gate estimated as of January 1, 1909, is immaterial. Any excess which may be developed will be considered as possessing the same value at January 1, 1909, as that which then may have been known to be in the property. 86. Each excise-tax return (Form 637) should be accompanied with memo- randum setting forth the extent in amount of the exclusion made from the item gross income for unearned increment realized during the year, as above outlined. 87. As the amount to be deducted for depreciation (paragraph 2 preceding) is to be formed on basis of the estimated reserve of minerals, etc.. it follows that if it develops such estimate is understated, the cost investment in tlif capital asset may be wholly extinguished before all mineral reserves are removed. When this is reached, further deductions for exhaustion or Tnjinrnln should be discontinued, but in such event, it will be noted, the allowa-icc fir 538 Federal Corporation Tax Law. unearned increment which is to be excluded entirely from gross income will be correspondingly increased. 88. In case of corporations leasing mines and paying royalties on minerals, etc., removed, the royalties paid are to be treated as expenses and deducted in ascertaining net income, as provided in general regulations. Any leasehold investment which the operating corporation may have in such properties, either through a payment originally made for acquirement thereof or for im- provements made upon the property, to be accounted for in accordance with regulations governing depreciation allowances and disposition of capital assets. 89. In respect to properties of the character in question which may be acquired by a corporation after January 1, 1909, a deduction will be allowed only as to depreciation arising from exhaustion based on original cost; no exclusion from gross income can be made for unearned increment, as profit arising in sale of such capital assets applies wholly to the period subsequent to January 1, 1909. Appk.xdixes. 239 APPENDIX Z. (T. D. 1685.) This circular contains a copy of the United States Supreme Court decision in Flint v. Stone Tracy Co. et al., decided March 13th, 1911, and is given in full, ante, pages 22-42. 240 Fedebal Cokpokation Tax Law. APPENDIX AA. (T. D. 1686.) Special Excise Tax on CoBPoaAxiONs — Opinion of the United States Supreme Coubt. It was the intention of Congress to embrace within the statute, imposing a special excise tax on corporations, only such corporations and joint stock asso- ciations as are organized under some statute, or derive from that source some quality or benefit not existing at the common law. Treasuby Department, Office of Commissioner of Internal Revenue, Washington, D. C, March 20, 1911. The appended decision of the Supreme Court of the United States in the cases of Amory Eliot, appellant, v. James G. Freeman et al., and Maine Bap- tist Missionary Convention, appellant, r. Charles E. Cotting et al., is pub- lished for the information of internal-revenue officers and others concerned. Royal E. Cabell, Commissioner. Supreme Coubt of the United States. October Tebm, 1910. Nos. 448 and 496. Amory Eliot, appellant, v. James G. Freeman, Robert A. Boit, Nathaniel Thayer, and Robert H. (iardnrr, and Maine Baptist Missionary Conven- tion, appellant, v. Charles E. Cotting and Charles F. Adams, 2d, Trustees, etc. Appeals from the Circuit Court of the United States for the district of Massa- chusetts. [March 13. 1911.1 Mr. .Justice Day delivered the opinion of the court: These cases present facts difTprin<; from those involved in the consideration of the corporation tax ci\s<"s just (iccidcd. Flint r. Stone Tracy Co., ante. In No. 448 the question is raisod as to the right to lay a tax under this statute upon a certain trust formed for tlu> purpose of purchasing, improving, holding, and si'lling lands and hiiildings in Boston, known as "the Cusliing real estate trust." Hy the terms of tlic (nisi tlic prop-rty was conveyeil to certain trustees, who executed a triist agreement whereby the management of flic propcrfy was vested in tlic trustees, who had absolute control and author- it v over the san:c. with ri^'lit to sell for cash or credit, at public or private sjile, and with full power to tunniigc the |)ropcrty as tliey dccTiicd Iwst for the interest of the Mli.uclinldcrs. I'lic sluirclidldcrs arc to be paid dividends frcMi time to time frmn the net inrome or net proceeds of the j)ropertv, and 20 yi'.'irH after tlie t( rmin.at inn of lives in being tbr property to be sold nn* required of the association, and it is also re- quired that there shall be elected not less than three nor more than five man agers, who shall manage the affairs of the association, and it is prohibited from contracting any liability except by one or more of the managers. The association may divide the profits of the business in such manner and amounts as the majority of its managers may determine, whicli division shall not '■ diminish or impair the capital stock of the said association." It is pro- hibited from loaning its credit, name or capital to any member of the asso- ciation. It may be dissolved by the expiration of the period fixed for its duration, or by a majority vote of its members in number and value of in- terest, and when dissolved, after paying its liabilities, the remainder of its assets shall be distributed in proportion to the interests of the members. It is authorized to adopt and use a common seal; and contributions to the capital may be made in real or personal property, at a valuation to be ap- proved by all the members. All real estate is held and owned in the name of the association, and it must " sue or be sued " in the association name, and when suit is brought against any such association, service thereof shall be made upon the chairman, secretary and treasurer thereof, which service shall be as complete and effective as if made upon each and every member of such association ; " and service of process may also be had upon any agent, chief, or any other clerk or upon any director or manager of such association in any county where the association may maintain or keep an office for the transac tion of business. The excise tax created by section 38 of the act of August 5, 1909, is made to apply to " every corporation, joint stock company or association organized for profit and having a capital stock represented by shares * » • organized under the laws * * * of any State." 1 have no doubt that an association organized as above shown falls within the provisions of this act. Its organization is perfected under statutory authority, and while it is denominated a partnership association yet it 5s given, as a sej)arate entity, every privilege and power that is essential to con- stitute an incorporate body. In fact some privileges are conferred which might have been omitted and still it would fall within the provisions of the act. A similar (piestion arose in the case of Liverpool Insurance Company r. Massachusetts, 77 U. S. flfWi. A statute of the State of Massachusetts imposed a tax upon "each fire, marine, and lire and marine insurance company incor porat<'(l or associated under Ihc laws of any government or State other than one of the United States." It was insisted that tliis insurance company was not a corporation or association within the meaning of the statute. It ap jK'ared frojii an analysis of its articles of association as authorized by the Parliament of (Jreat Uritaiii that ( I ) it liad a distinetive and artificial name by which it could make contract-*: (2) that it could sue and be siu'd in the name of one of its officers, and the whole body was bound by the judgment : ( :! ) tliat it li:i(l a priivisimi Ucriirt iial succession by transfer and trans iiiission of its shares of eaj)ital stock; and (1) that its e\isfeii(<- as an entitv. ajiart fnmi its shareholders, was reco<.rni/.ed by the act of Parliament, wliich enabled it to sue its shfireholders and be sued by them. On tlie other hand, its inilividniil rvmbers wic Ii:ililc fnr the debts of the company, and it could not be sued in its artificial name, and I h<' act of Parliannwit iind<'r which it Appendixes. 251 was organized, expressly declared that such organization should not " be held to constitute the body of a corporation." The court held tliat tlie organiza- tion was an artificial body which possessed all the essential elements of a corporation, and that the declaration in the act under wliich it was organized, that it should not be so considered, cuuld not alter the fact, and therefore held that it was liable to the tax specified in the Massacliusetts 8tatut<'. An association organized under the Pennsylvania statute has an artificial name in whicli all of its business is transacted, and by which it can sue and be sued; it has perpetual succession for the length of time specified in the articles of association, and while there is no positive provision which author- izes it to sue and be sued by a member of the association, yet there can be no doubt that any member of the association is at liberty to make a separate con- tract with it as a person, and that an action thereon could be maintained by either party, and that a right of action of any other kind might arise and be litigated between them. In addition to this, a member of the association is exempt from liability for its indebtedness, except as to the amount of capital subscribed by him. Such an association clearly falls within the definition of a corporation given by Mr. Justice Field in B. & P. R. R. Co. v. Fifth Baptist Church, 108 U. S. 330, to wit: " Private corporations are but associations of individuals united for some common purpose, and permitted by law to use a common name and to change its members without a dissolution of the association." And also the definition given by the Supreme Court of New York in People V. Assessors of Watertown, 1 Hill, (520, which was quoted with approval by the Supreme Court of Maine in Sibley v. Lumber Association, 93 Me. 401 : "A corporation aggregate is a collection of individuals united in one body under such a grant of privileges as secures the succession of members without changing the identity of the body, and constitutes the members for the time being one artificial person, or legal being, capable of transacting some kind of business like a natural person." And within the definition given by Chief .Justice Marshall in the Dartmouth College Case, 4 Wheat. 517, 636, that "A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law." The law creating this tax contains no special requirements as to what powers this artificial person shall possess, the only essentials being that it shall be organized under a law, that its object shall be for profit, and that it shall have a capital stock represented by shares. The capital of these asso- ciations is subscribed for in the usual way. and the members own an interest in the capital stock in proportion to the amount subscribed by them. In 1 Cook on Corporations, section 12, it is said that a share of stock may b<> defined as — "A right which its owner has in the management, profits, and ultimate assents of the corporation." The interests of the members of the associations in question certainly falls within this definition. It is true that the issuance of certificates of shares is not required, but a certificate of stock is but a mere muniment of title, a mere evidence of ownership, and not tlie share itself. " It operates to transfer nothing from the corporation to the stockholder, 252 Fedekal Corporation Tax Law. but merely affords to the latter the evidence of his rights ( 1 Cook on Corpo- rations, 13)." I am of the opinion, therefore, that associations organized under this Penn- sylvania statute are liable to the tax imposed under section 38 of the act of August 5, 1909. 2. Mutual savings banks organized under an act for the incorporation of savings banks, passed by the legislature of West Virginia February 21, 1887, and amended by the act of February 24, 1899. Such a bank may be organized by not less than thirteen persons, citizens of the State, whose fitness for the proposed trust is certified to by the judge or judges of the Circuit Court of the county wherein the proposed savings bank is to be located. The form of the charter, and the method of procuring the same is particularly set forth. From the incorporators, and those subsequently added thereto, fifteen are selected by the body, on the approval of the judge or judges of the Circuit Court of the county, who constitute a board of trus- tees, and who have power to act for the corporation. These trustees elect from their number a president and vice-president, and appoint all necessary officers to transact the business of the bank. The bank, when organized, is authori/^ed to receive any sum of money for deposit and to invest the same as authorizefl by the act, and the deposits, with dividends accrued thereon, are required to be paid to the depositors under rules and regulations to be adopted by the board of trustees. By section 24 it is provided that the income or profit of any such savings bank, after the deduction of all reasonable expenses incurred in the management thereof and the guaranty fund, shall be divided among its depositors or their legal representatives, at such times as may be fixed by its by laws. There is no capital subscribed and the business consists in re ceiving deposits and investing the sum so received in accordance with the pro- visions of the charter and the by-laws adopted thereunder, and of repaying the depositors; and all the profits, after the payment of the necessary expenses are divided among the depositors. There is no question that such a concern is a corporation; but it is a cor- poration " organized for profit and having a capital stock represented by shares," as is required by the statute. In a certain sense, such a banking institution is organized for profit — that is. it affords a reasonably safe meanR for the investment of one's capital; but its organization and the transaction of its business is not for the profit of those who constitute its managing body, except insofar as they may be depositors. But the more serions question is, whether such an instit)itinn has a capital stock represented by shares. Can the depositors who place their money temporarily with such an institution, having no right whatever to participate in the management, be regarded as ahareholders, and the respective amounts deposited bo considered as shares? I think an answer to these questions may be found in the following authorities. The case of Huntington v. Savings Bank. 06 U. S. .188, involved an institu- tion of precisely the same character. The suit was brought by an adminis trator of a deceased trustee, on the theory that he was entitled to a pro rata of the accumulated profits. In discussing the natiire of the corporation, the Supreme Court, among f>ther thincrs, sai Ia-xenipt from personal liability on account of contracts entered into or torts conunitt«'d by the trustees. Tli«' shareholders meet annually, and they have also special meetings as may be (nll'd by tlu- trustees. The sliareholders at such meetings fill vacarifies in the niinilicr of tnistecs and may depose' any or all of the trUHt('<'H and elect others in their jilace. The trustees ar<' empowered to exe cute instruments which are efinclnsive iijum (lie associates. The trust shall continue for twenty yearn after (he death of the last surviving original sub Hfrilx'r ; [irovidr'd (hat a riiaiori(y in iii(eres( of (he (o(al Tiniiiber of shares may direct a sale of the property at any (inie, and upon such sale and distri- Appendixes. 263 bution among the shareholders in proportion to their interest tlie trust shall he terminated. The trustees are vested witli full power of leasing and letting, and have money for temporary exigencies, which shall bind the assets of the trust but not the shareholders individually. They also have the power to mortgage the property for a sum not exceeding $100,000 for the purpose of making improvements or to extinguish liens; and they determine the amount (if net income and declare such dividends as in their opinion may be judicious, and invest in such manner as they see fit any moneys which they may hav<« on hand. This association possesses all of the essential elements of a common-law joint stock company, which is defined to be: "An association of persons for the purpose of business, having a capital stock divided into shares and governed by articles of association which pre- scribe its objects, organization and procedure and the rights and liabilities of the niemlwrs, except that the articles cannot release the members from their liability as partners, to the creditors of the company;" and is otherwise defined as: "An association of individuals possessing a common capital divided into shares of which each member possesses one or more. These shares represent the interests of the members and are transferable by the owners without the consent of the other members, or the creditors of the association." (2 Cook on Corporations, 504.) In Spotswood V. Mooris (2 Idaho 360) it was held that any corporation, association or joint stock company may be formed by individuals for the pur chase of a single tract of real estate, the title to which may be taken in the trustee. There can be no doubt that this concern is an association organized for profit and having a capital stock represented by shares. But it is earnestly insisted (in behalf of these companies that the statutory requirements that a company, in order to be amenable to the tax, shall be "organized under the laws of the Tnited States or of any State or Territory of the United States," has refer ♦Mice to statutory laws which prescribe specifically a method or plan of organi- zation, and which confer franchises upon the body when organized ; in other words, that the joint stock companies and associations contemplated by the act are only such as have some form of corporate existence. If this were tnie, then the phrase " joint stock company or association " would be sur- jdusage, but I am not willing to give assent to such a construction. That this company has an organization goes without saying. Its trustees cimipose a board of managers, upon whom rest the same duties as those im- posed upon the board of directors of a corporation. The trustees may be discharged and their successors elected in the same way or in a way similar to that by which the directors of a corporation may be discharged and their successors elected. A change of trustees affects the business of the concern no more than the change of directors of a corporation. Trustees come and go. but the title to the property remains with those having charge of its affairs, and its business is still conducted by them precisely the same as the business affairs of a corporation continue with it after a change of directors. The same ci'iiditioiis exist as to the shareholders. The shares are transferable by as signment in like manner as the shares of a corporation. Such assignment has no effect whatever on the business of the company, and the shareholders possess 264 Fbdekal CoiiPORATiON Tax Law. only the rights of drawing dividends and participating indirectly by vote in the management of the concern, the same as are enjoyed by the shareholders of a corporation. Under its organization, the period of its existence is fixed just as is that of a corporation by statute, and the death of its trustees or shareholders do not terminate or affect its existence any more than do the death of the directors or shareholders of a corporation ; and in the period fixed for its existence by the articles of association it can be dissolved only by vote of its shareholders, which power is likewise possessed by the shareholders ot a corporation. It is true that its shareholders cannot by contract free them- selves from personal liability; but in Liverpool Insurance Co. r. Massachu- setts (77 U. S. 566, 575) it was held that the fact that the shareholders of a joint stock company organized under an act of Parliament, which expressly declared that such company should not constitute a corporation, were indi vidually liable for its debts, did not relieve it from taxation under a statute which imposed a tax upon "each fire, marine and fire and marine insurance company incorporated or associated under the laws of any government or State other than one of the United States." In short, the organization of this company is just as compact, and in fact, is practically the same, as that of an ordinary corporation organized under a general or special statute. Nor can it be denied that its organization is sanctioned by the laws of Massachusetts and that it obtains its vitality from those laws, just as much as a corporation organized under a special act of the legislature of that State derives its vitality from such act. Such an association, therefore, is based on the laws of Massachusetts, and, in fact, is organized thereunder. By the expression " laws of a State," as used in statutes, reference may be had to the common law, as well as the statutory law of such State (Lycom ing Fire Insurance Co. v. Medad Wright & Son, 60 Vt. 515; State v. Dyer, 67 vt. eno, 697 ) . I am of tlie opinion, therefore, that these various business organizations are "joint stock companies or associations organized for profit and having a cap ital stock represented by shares," organized under the laws of the state of Massachusetts within the meaning of the excise law enacted by section 38 of the act of August 5, 1909, and that they are amenable to the tax created thereby. Respectfully, Geobge W. Wickebsham. The Secretary of the Treasury. Appendixes. 265 APPENDIX II. Department of Justice, April 2, 1910. SiB: Your letter of March 26, 1910, was received. You state therein that a corporation, which was engaged in business on August 5, 1909, and for some time thereafter, but prior to December 31, 1909, became legally dissolved in compliance with the provisions of the statutes of the state under which it was organized, contends that it is not liable for the excise tax created by section 38 of the revenue act of August 5, 1909, and you ask my opinion upon the following questions: First. Whether or not such corporation is liable for the excise tax created by said section 38 of the act of August 5, 1909. Second. If so liable, whether a lien exists on the assets of said corporation to secure the payment of said tax, and incidentally when the lien attaches to the property of a corporation, joint stock company or association liable for taxes under said act; and Third. If no such lien exists, by what method the tax can be collected from such corporation. In answer to these questions I will say: 1. In the first clause of section 38, act of August 5, 1909, it is pro- vided " that every corporation * * * now or hereafter organized under the laws of the United States, or of any State * * ♦ shall be subject to pay annually a special excise tax with respect to the carrying on or doin» business by such corporation * » * equivalent to 7 per centum of the entire net income over and above $5,000 received by it from all sources during such year." That is, the tax is payable annually, and it is imposed " with respect to the carrying on or doing business by such corporation." and the amount of tax is fixed at 1 per centum upon its net income above $5,000 re- eeived during such year — that is, the year during which the business is transacted with reference to which the tax is imposed. By the third para graph it is provided that the income of the corporation shall be computed for the year ending December 31, 1909, and for each calendar year thereafter Therefore, the assessment of the tax is always for the year preceding its col- lection and not for the year within which the collection is made, and the present assessment is for the year 1909. It follows, therefore, that any corporation which was engaged in business after the approval of the act on August 5, 1909, is amenable to this tax. 2. It will be observed that there is no express provision in this act which creates a lien upon the property of the corporation, joint stock company o»- association to secure the payment of the tax. However, by section 3180 Revised Statutes, as amended by the act of March 1, 1879 (20 Stat. 331) it is provided generally with reference to internal revenue taxes that "if any [)er son liable to pay any tax neglects or refuse-! to pav the same after demand, the account shall be a lien in favor of the United States from the time whoa 266 Federal Corporation Tax Law, the assessment list was received by the collector, except when otherwise pro- vided, until paid, with the interest, penalties, and costs that may accrue in addition thereto, upon all property and rights belonging to such person;" and in the eighth paragraph of said section 38, act of August 5, 1909, it is provided that " all laws relating to the collection, remission and refund of internal revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section." The method of assessing the tax and collecting the sam<>, as provided for in the act itself and in the general statutes, appears to be as follows: On or before March 1 of each year returns are required tn be madi' by the corporations, joint stock companies and associations liable for the tax to the collector of internal revenue of the district in which they have their principal place of business. These returns are forwarded by the collector to the Commissioner of Internal Revenue, who shall make the assessment thereon. By section 3183 Revised Statutes, the duty of collecting all taxes in their respective districts is imposed by law on the collectors or their depu- ties, and by section 3184 it is provided that the collector shall in person, or by deputy, within ten days after receiving any list of taxes from the Commis sioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, specifying the manner in which such notice shall be given. And in the fifth paragraph of section 38 of the act of 1909 it is provided t'lp.t assessments shall be made, and the several companies liable to the tax shall be notified of the amount for wliich they are liable on or before the 1st day of June of each successive year. Therefore it is the duty of the Commis- sioner of Internal Revenue to send to each collector a list of the companies liable for the tax in his district, showing the amounts for which they are liable within such time that the collector may give the required notice to such companies on or before the' 1st day of June, and upon such lists the collec ti'ins are required to be made. These are the only lists which by statute are n'(]iiirfd to bo sent to the collectors; and under the provision of section 31 SB Revised Statutes, as amended, which is above quoted, tlie lien is fixed upon the assets of the corporation when this list comes into the collectors' hands. Therefore if the corporation in (piostion had distributed all of its assets and had l)econie dissolved in tli<' manner provided for by law ])ri()r to December 31, 1909, then when the list of assessments came into tlie liands of the collec tor there was neither corporation nor assets, and nothing upon which the lien could attach, and consequently no lien exists to secure the payment of the taxes. 3. Notwithstanding the fact that the particular method of collecting this excise tax is prescribed in the statute, yet such remedy is not exclusive, and the government may resort to the common-law method of collecting the same. Such was the holding.' of flic Siipreinc Court of tlic United States in Savings Rank r. The Unit<>d Stati-s (19 Wall. 227, 240), with r<'ference to the collec- tion of a tax tmder an act which levied a tax of .'> per centum on all divi- dends in Hcrij) or money decland due to stockholders, policyholders or deposi tors as |)art of the earnings, income or gains of any bank, trust company, sav ings institution, and of any insurance company. The dissolution of a cor poration df)eH not extinguish its liabilities; and through courts of equity creditors may piirsne its assets into the hamls of any person who is not a bona fide purchaser. (Mumma r. Potomac Co., 8 Pet. 281. 28(1; Cjirran v. Appendixes. 267 Arkansas, 15 How. 304, 307; Railroad Co. v. Howard, 7 Wall. 392, 410; Scanimon '.'. Kimball, 92 T'. fS. ;Ut2. 367.) In Railroad Company /•. Howard the court said: "A8H<'ts derived from the sale of the capital stock of the corporation, or of its property, become, as respects creditors, the substitutes for the things soM, and as such they are subject to the same liabilities and restrictions as the things sold were before the sale, and while they remained in the possession of the corporation. Even the sale of the entire capital stock of the company and the division of the proceeds of the sale among the stockholders will not defeat the trust nor impair the remedy of the creditors, if any debts remain unpaid, as the creditors in that event may pursue the consideration of the sale in the hands of the respective stockholders and compel each one, to the extent of the fund, to contribute pro rata toward the payment of their debts out of the moneys so received and in their hands." H the corporation in question engaged in business after the approval of the act of August 5, 1909, then it was liable for the tax, though it may not have become due until after the corporation was dissolved; and the government may collect the tax by pursuing the assets of the corporation into the hands of the stockholders, in the same manner as that by which any other creditor might obtain satisfaction of his debts. Respectfully, The Secretary of the Treasury. Geobge W. Wickebshajh. 268 Federal Corporation Tax Law. APPENDIX JJ. Form of Return by Insurance Companies. Form No. 634. To bo filled in by Internal Revenue To be filled in by Collectors. Bureau. List No Assessment List 19. . . . Class Page Line District of Date Received 19. . . . UNITED STATES INTERNAL REVENUE. Return of Annual Net Income. (Section 38, Act of Congress, approved August 5, 1909.) Insurance Companies. Retu'rn of Net Income received during the year ending December 31, 19. ., by , a corporation, the principal place of business of which is located in , in the State of 1. Total amount of paid-up stock outstanding at close of year. $ 2. Total amount of bonded or other indebtedness outstanding at close of year 3. Gross Income ( See Note A ) Deductions. 4. Total amount of all the ordinary and necessary expenses of maintenance and operation of the business and prop- erties of the corporation ( See Note B) 5. (a) Total amount of losses sustained January 1 to December 31 $ (6) Total ii mount of depreciation January 1 to December 31 (c) Total amount other than dividends paid within the year on policy and annuity contracts (d) Total amount of net addition required by law to be made within the year to re- serve fund Total (See Note B) $. . 6. Total amount of interest January 1 to Decem- ber 31 on bonded indebtedness to an amount not to exceed amount of paid-up cajiitnl at close of year ( Se<' Note B) . . . $ 7. (") Total taxes paid January 1 In nnctiilicr 31 imposed under authority of the Tnited States or any State or Territory ther«'f)f. ( h ) Foreiprn taxes paid Total (See Note B) $. . Appendixes. 269 8 Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and in- surance companies subject to this tax $ Total Deductions 9. Net Income $ 10. Specific deductions from net income allowed by law $5,000 00 11. Amount on which tax at one per centum is to be calculated for assessment $ . STATE OF. County of ;,„ , President, and , Treasurer, of the corporation, whose return of annual net income i? set forth above, being severally duly sworn each for himself, deposes and says, that the foregoing report and the several items therein set forth are, to his best knowledge and belief and from such information as he has been able to obtain, true and correct in each and every particular; that the amount of gross income therein set forth is the full amount of gross income, without any deductions whatsoever, received from all sources by said corporation during the year stated, and that the net income therein set forth is the full amount on which the tax proper is to be assessed. President. f Treasurer. Sworn and subscribed to before me ) this . . day of , 19 . . ) (Seal.) (Note A.) — The gross income shall consist of the total of the gross revenue derived from the operation and management of its business and properties, together with all amounts of income, including dividends on stock of organi- zations to this special excise tax from other sources as shown by the entries on its books from January 1 to December 31 of the year for which the return is made. (Note B.) — The deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered on its books from January 1 to December 31. (Note C.) — This form, properly filled out and executed, must be in the hands of the Collector of Internal Revenue for the district in which is located the principal office of the corporation making the return, on or before March 1, 270 Federal Cokpobation Tax Law. APPENDIX KZ. FOKM OF RETUBN by BANKS AND OtHEB FINANCIAL INSTITUTIONS. Form No. 635. To b« filled in by Collector. List No Class District of ... . To be filled in by Internal Revenue Bureau. Assessment List 19 ... . Page Line Date Received 19. . . . UNITED STATES INTERNAL REVENUE. Return of Annual Net Income. (Section 38, Act of Congress, approved August 5, 1909.) Banks and Other Financial Institutions. Return of Net Income received during the year ending December 31, 19. ., by , a corporation, the principal place of business of which is located at in the State of 1. Total amount of paid up stock outstanding at close of year. 2. Total amount of bonded or other indebtedness outstanding at close of year 3. Gross Income ( See Note A ) $. Deductions. 4. Total amount of all the ordinary and necessary expenses of maintenance and operation of the business and prop- erties of the corporation (See Note B) 5. (a) Total amount of losses sustained January 1 to December 31 $ (6) Total amount of depreciation January 1 to December 31 Total (See Note B) $. 6. (a) Total amount of interest January 1 to December 31 on bonded or other indebt- edness to an amount not to exceed amount of paid up capital at close of y<'ar ( See Note B) (6) Total amount f)f interest paid within the year on deposits Total $■ 7. («) Total (axes paid January 1 to Dooember 31, imposed under aiitliority of the United States or any authority thereof $ (h) Foreign tnxes paid Total (See Note B) $ Appendixes. 271 Amount leeeived by way of dividends upon stock of other corporations, joint stock com- panies, associations and insurance companies subject to this tax $ . Total Deductions 9. Net Income $ 10. Specitic deduction from not income allowed by law $5,000 00 11. Amount on wliich ta.\ at one per centum is to be calculated for assessment $ STATE OF > CO County of ) , President, and , Treasurer of the corporation, whose return of annual net income it set forth above, being severally duly sworn, each for himself deposes and says, that the foregoing report and the several items therein set forth, are to his best knowledge and belief and from such information as he has been able to obtain, true and correct in each and every particular; that the amount of gross income therein set forth is the full amount of the gross income, without any deduction whatsoever, received from all sources by the said corporation during the year stated, and that the net income therein set forth is *Jie full amount on which tax is proper to be assessed. President. Treasurer. Sworn and subscribed to before me ) this . . day of , 19. . ) (Seal.) (Note A.) — Gross income shall consist ol the total amount of gross revenue derived from the operation and management of its business and properties, together with all amounts of income, including dividends on stock of other corporations, joint stock companies and associations subject to this tax, de- rived from all sources, as shown by the entries on its books from January 1 to December 31 of the year for which return is made. (Note B.) — The deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered as such on its books from January 1 to December 31. (Note C.) — This form, properly filled out and executed, must be in the hands of the Collector of Internal Revenue for the district in which is located the principal office of the corporation making the return, on or before March 1. 272 Fedeeux Cokpoeation Tax Law. APPENDIX LL. FoBM OF Retubn by Transpobtation Corporations. Form No. 636. To be filled in by Internal Revenus To be filled in by Collector. Bureau. List No Assessment List 19 ... . Class Page Line District of Date Received 19 ... . UNITED STATES INTERNAL REVENUE. Return of Annual Net Income. (Section 38. Act of Congress, approved August 5, 1909.) Transportation Corporations. Return of Net Income received during the year ending December 31, 19. ., by , a corporation, the principal place of business of wliich is located at , in the State of 1. Total amount of paid-up stock outstanding at close of year. $ 2. Total amount of bonded or other indebtedness outstanding at close of year 3. Gross Income ( See Note A ) Deductions. 4. Total amount of all the ordinary and necessary expenses of maintenance and operation of the business and proper- ties of the corporation (See Note B) 6. (a) Total amount of losses sustained January 1 to December 31 $ (6) Total amount of depreciation January 1 to December 31 Total (See Note B) $ 6. Total amount of interest January 1 to December 31 on bonded indebtedness to an amount not to exceed amount of paid up capital at close of year (See Note B) 7. (a) Total tax<'s paid January 1 to December 31, imposed under autliority of the United States or any State or Territory thereof (b) Foreign taxes paid Total (See Note B) $ 8. Amount received by way "f dividends upon Ktork of «)the Note B) $ 8. Amount reeeived by wav of dividends upon Htf'ck of oth companies, associations, and insurance com- panies subject to tliis tax $ $. Total Deductions $ 9. Net Income $ 10. Specific deduction from net income allowed by law 5, 000 00 11. Amount on which tax at one per centum is to be calculated. $ STATE OF ) V ss ' County of S President, and Treasurer of the corporation, whose return of annual net income is set forth above, being severally duly sworn, each for himself deposes and says tliat the foregoing report and the several items therein set forth are, to hi« best knowledge and belief anr"-aid and which it now owns and has a rigiit to enjoy and will be oliligol to diH|)oae of its aMHcts, wind u]> its afTairs and go into voluntary dissolution. AppexXdixes. 281 "'•Thirteenth. Your orator further avers that the said provisions of the Act cif Congress aforesaid are unconstitutional, null and void and in violation of the Fiftli Amendment to the Constitution of tlie United States in that under said provisions of law the private property of the defendant corporation will be taken for public use without just compensation and without any compen- sation whatever, and especially in this: That the private affairs, books, papers, records, business and trade secrets of the defendant corporation and the con- tents of its books, papers, and records are taken for publication and will be given to the Collector of Internal Revenue and to the Commissioner of Internal Revenue and to the public in the form of public records. " Fourteenth. Your orator further avers that the said provisions of the Act of Congress aforesaid are unconstitutional, null and void and in violation of the Fifth Amendment to the Constitution of the United States and violate the right of the defendant corporation to be secure in its papers, effects, books, records, business, private affairs, and trade secrets, against unreasonable searches and seizures in this: That by said provision of law the defendant corporation will be obliged to disclose to its chief competitor, the said firm of Dwight, Tuxbury & Sons, and also to the Collector of Internal Revenue and to the Commissioner of Internal Revenue, and to the public its papers, effects, books, records, business, private affairs, and trade secrets and the contents of its papers, books, and records in the respects hereinbefore specified, and as specified in said act. " Fifteenth. Y'our orator further avers that the said provisions of the Act of Congress aforesaid are unconstitutional, null, and void, and in violation of the Constitution of the United States, in that the depriving of the de- fendant corporation of its property without due process of law and the taking of the private property of the defendant corporation for public use without just compensation and the violation of the right of the defendant corporation to be secure in its papers and effects against unreasonable searches and seizures as hereinbefore set forth are a burden upon the said charter and franchises granted as aforesaid by the State of Vermont and upon the right and power of the State of Vermont to grant, maintain, and preserve the same to the defendant corporation, and are an invasion and burden upon a pre- rogative, power, instrumentality, and function of sovereignty belonging to the State of Vermont and which were never agreed to either expressly or by im- plication by the State of Vermont or the people of the State of Vermont at the time the said State was admitted into the Union or before or since that time. " Sixteenth. Your orator further avers that the said provisions of the Act of Congress aforesaid are unconstitutional, null, and void and in violation of the Tenth Amendment to the Constitution of the United States in that the requirements of said provisions are a burden and tax upon and in interference with the powers of the State of Vermont and the other States of the I^nion expressly reserved to charter and incorporate corporations and to grant char- ters and franchises to such corporations. " Seventeenth. Y'our orator further avers that the said provisions of the Act of Congress aforesaid are unconstitutional, null, and void and in violation of the Constitution of the United States in that the said so called special excise tax with respect to carrying on or doing business is not in reality a special eveise tnx with respect to carrying on or doing business by the dofendRnt ror poration or by any corporation or joint stock company or association, oxcept 282 Fedekal Corpokation Tax Law. insurance companies, but is iu reality a direct tav upon the said cliartor md franchise of the defendant corporation and the charters and franchises 3f all other corporations within the provisions of said act, and is not "pportioned among the several States according to their population as required by tli" Constitution of the L'nited States. •• Eighteenth. Your orator further avers tliat if the said tax ^hall be ' eld nnt to be a direct tax upon the charter and franchise of the defendant corpo ration and u])nu the cliartcrs •iiid franchises of -ill ither corporations, except insurance companies witliin the provisions of said Act, then the said provi- sions are unconstitutional, null, and void in that the provisions and the said tax are not uniform throughout the United States or throughout any one of tlie Ignited States or its Territories or the District of (\ilumbia or Alaska, and your orator avers that such provisions and the said tax are not uniform within the class or in respect to the property or subjects selected for taxation, except insurance companies, and that the said provisions and tax, while stated to embrace and afl'ect and be levied upon the carrying on and doing business in realty, touch only corporations and joint stock companies, and leave free from the operation of said provisions and tax all individuals and copartner- ships, firms, although carrying on and doing the same business or the same kind of business or the same class of business as the corporations and joint stock companies. And your orator further avers that in many other respects the said provisions and the said tax are not uniform throughout the United States and that the said provisions and tax are theretofore unconstitutional, null, and void. " Nineteentli. Your orator further shows that this suit is not a collusive (me to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance, and that she has duly requested the defendant corporation and each of them in writing to omit and refuse to prepare and lile the said return and to refrain from paying the said tax and to contest the constitutionality of the said provisions of law and to apply ■ to a court of competent jurisdiction to determine the liability under the said |)rovisioMs, and that a copy of said request is liereto annexed and marked •■ Exliil)it A" and made a part of tliis bill of complaint ; l)ut tiiat the di'fendaiit corporation and a majority of its directors have refused and still refuse and iiit in any way connected or employed in the appropriation and issue of the same, as he shall deem best calculated to promote the public convenience and security and to protect the United States as well as individuals from fraud and loss, or shall prescribe terms of interest, oaths, bonds and other papers, and rules and regulations not inconsistent with law, to be used under and in the execu tion and enforcement of the various provisions of the Internal Revenue laws, or in carrying out the provisions of law relating to raising revenue from members, or to duties on members or to warehousing, or shall give such direc- tions to collectors and prescribe such rules and forms to be observed by them as may be necessary for the proper execution of the law; he shall prescribe the forms of the annual statements to be submitted to Congress by him, show- ing the actual state of commerce and navigation between the United States and foreign countries or coastwise and between the collection districts of the United States in each year. U. S. R. S. sec. 321. The Commissioner of Internal Revenue under the direc- tion of the Secretary of the Treasury shall have general suj>printendence of the assessment and collection of all duties and taxes now or hereafter imposed by law, providing internal revenue; and shall prepare and distribute all the instructions, regulations, directions, forms, instruments and other matters pertaining to the collection and assessment of internal revenue, and shall provide hydrometers and proper and sufficient adhesive stamps and stamps or dies, for expressing and denoting stamp duties, or in the case of personal duties, the amount thereof, and alter and renew or replace such stamps from time to time as occasion may require. He may also contract for or produce the printing of requested forms, decisions and regulations, but the printing of such forms, decisions and regulations shall be done at the Public Printing Office, unless the Public Printer shall be unable to perform work; Provided that the Commissioner of Internal Revenue may under such regulntions as may be established by the Secretary of tiie Treasury after due public notice, receive bids and make contracts for supplying stationery, blank books and blanks to the collectors in the several collection districts, the expenses of assessing and the expense of the collection of internal revenue. 284 Federal Corporation Tax Law. Sec. 3152. The Commissioner of Internal Revenue may whenever in hiH judgment the necessities of the service so require, employ competent agents, not exceeding at any time thirty-five in number, to be paid such compensation as he may deem proper, not exceeding in aggregate any appropriation made for that purpose; and he may at his discretion, assign any such agent to duty under the direction of any officer of Internal Revenue, or to such other special duty as he may deem necessary ; and no general or special agent or inspector, by whatever designation he may be known, of the treasury department in connection with the Internal Revenue, except inspectors of tobacco, snuff and cigars, and e.xcept as provided for in this title, shall be appointed, commis- sioned, employed or continued in oHice. The agents whose employment is authorized by this section shall be known distinctly as internal revenue agents, and they shall have all the powers of entry and examination conferred upon any officer of internal revenue, by sections 3177, 3277, 3286, and 3318 of the Revised Statutes and all the provisions of said sections, including those im- posing fines, penalties, forfeitures or other punishments for the enforcement thereof are hereby made applicable to the action of internal revenue agents in the same manner as if such agents were especially named in each of said sections. U. S. R. S. sec. 3163. Every collector within his collection district and every internal revenue agent shall see that all laws and regulations relating to the collection of internal taxes are faithfully executed and complied with ; and shall aid in the prevention, detection and punishment of any frauds in rela- tion thereto. It shall be the duty of every collector and of every internal revenue agent to report to the Commissioner in writing any neglect of duty, incompetency, delinquency or malfeasance in office of any internal revenue officer of which he may obtain knowledge, with a statement of all the facts in each case and any evidence sustaining the same. The Commissioner may transfer any inspector, ganger or storekeeper, or storekeeper and gauger from one distillery or other place of duty, or from one collection district to another. Sec. 3164. It shall b^,' the duty of every collector of internal revenue to report within ten days to the District Attorney of the District in which any fine, penalty or forfeiture may be incurred for the violation of any law of the United States relating to the revenue, a statement of all the facts and cir- cumstances of the case within his knowledge, together with tlie names of the witnesses and which may como to his knowledge, from time to time, stating the provisions of the law believed to be violated, and if any collector shall, in any case fail to report to the proper district attorney as prescribed in this Hpction his right to any compensation, l)onefit or allowance in such case shall Ix- forfeited to the United States, and the same may, in llu' discretion of the Secretary «f the Treasury be awarded to such persona as may make complaint and protM-cute the same to jndirnient or conviction. See. 310.''). Every collector, deputy collector and inspector is auiliori/^d to administer oaths, and to take evidence touching any part of the administra- tion of tiif internal revenue laws with wliich lie is charged, or where such oaths and evid<'nro ar<' iiutliori/cd by law. or regulation, authorized by law, U} Ik* taken. Sec. 3172. That every collector shall, from tim<' to time, cause his dcputicfl to proceed through every part of bin district, and inquire after and concern ing all pcrsonn thenin who are liable tf) pay any int4«rnal revenue and nil Appendixes. 285 persons owning or having the care and management of any objects liable to pay any tax, and to make a list if such persons and enumerate such objects. Sec. 3173. That it shall be the duty of any person, partnership firm, asso- ciation or corporation made liable to any duty, special tax, stamp or tsm imposed by law, when not otherwise provided for, in case of a special tax on or before the 31st day of July in each year, and in case of income taxos, on or before the first Monday in March of each year, and in other cases iK-fovo the day on which taxes accrue, to make a list or return verified by oath ur affirmation, to the collector or deputy coTlector of the district where locatc'l, of the articles or objects, including the amount of annual income, charged with a duty or tax, the quantity of goods, wares and merchandise, made or sold and charged with a tax, the several rates and aggregate amount according to the forms and regulations to be prescribed by the commissioner of internal revenue, under the direction of the Secretary of the Treasury, for which such person, partnership, firm, association or corporation is liable; provided, that if any person liable to pay any duty or tax or owning, possessing or having the care or management of property, goods, wares and merchandise, articles or objects liable to any duty, tax or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares and merchandise, articles and objects liable to pay any duty or tax, or any business or occupation liable to pay any tax aforesaid then and in that case it shall be the duty of the collector or deputy collector to make such list or return, which being distinctly read, consented to and signed and verified by oath or affirmation by the person so owning, possessing or having the care and management as aforesaid, may be received as the list of such person; Provided further, that in case no annual list or return has been rendered by such person to the collector or deputy collector, as required by law and the person shall be absent from his or her residence or place of business at the time the collector or deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit it in the nearest post office, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum ; verified by oath or affirmation. And if any person on being notified, or required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax, fails to do so at the time required, or delivers and return which, in the opinion of the co'. lector, is false or fraudulent, or contains any undervaluation or understate- ment, it shall be lawful for the collector to summon such person or any other person having possession, custody or care of books of account, containing entries relating to the business of such person, or any other person he may deem proper to appear before him and produce such books at a time and place named in the summons, and to give testimony or answer interrogatories under oath, respecting any objects liable to tax or the returns thereof. The collector may summon any person residing or found within the state, in which his dis- trict lies; and when the person intended to be summoned does not reside nnd cannot be found within such state, he may enter any collection district wliore such person may be found, and there make the examination herein authorized. 286 Federal Corpobation Tax Law. And to this end he may there exercise all the authority which he might law- fully exercise in the district for which he was Commissioner. Sec. 3174. Such summons shall in all cases be served by a deputy collector of the district where the person to wliom it is directed may be found, by an attested copy delivered to such person in hand, or left at his last and usu.il place of abode, allowing such person one day for each twenty live miles he may be required to travel, computed from the place of service to the place of examination ; and a certificate of service signed by such deputy shall be evi- dence of the facts he states on the hearing of an application for an attach- ment. When the summons requires the production of books, it shall Im* sutlifient if sucli books are described with reasonable certainty. Sec. 3175. Whenever any person summoned under the two preceding sections neglects or refuses to obey such summons, or to give testimony, or to answer interrogatories, as required, the collectors may apply to the judge of the dis- trict court, or to a commissioner of the circuit court of the United States for the District within which the person so summoned resides for an attachment against him as for contempt. It shall be the duty of the judge or commis- sioner to hear the application, and if satisfactory proof is made to issue an attachment directed to some proper officer for the arrest of such person, and upon his being brought before him to proceed to a hearing of the case and upon such hearing the judge or commissioner shall have power to make such order a.s he shall deem proj>er, not inconsistent with existing laws for the punishment of contempts, to enforce obedience to the requirements of the summons, and to punish such person for his default or disobedience. Sec. 3176. When any person, corporation, company or association refuses or neglects to render any return or list, the collector or any deputy collector shall make, according to the best knowledge which he can obtain, including that derived from the evidence elicited by examination of the collector and on his own view and information, such list or return, according to the form pre- .scribed of the income, property and objects liable to taxation owned or pos- sessed or under the care or management of such person, or corporation, com- pany or association, and the Commissioner of Internal Revenue shall assess all taxes not paid by stamps, including the amount, if any, due for special tax, income or other tax. and in cas<' of any return of a false or fraudulent list or valuation intentionally, he shall add one hundred jht centum to such tax; and in case of a refusal or neglect, except in cases of sickness or absence, to make a list or return, or to verify the same as aforesaid, he shall add fifty per cent to such tax. In case of neglect oc<'asiiin<'(l by sickness or .absenet> i? aforesaid, the collector may allow such furtlier time fur making and delivering stich list or return as he may deem necessary, not exceeding thirty days. Tli- amount so added to the tax shall in all cases be collected at the .same time and in the same manner as the tax. unless the neglect or falsity is discovered aft property shall be sold, and the surplus of tlie proceeds of the sale, after satis- fying the tax, costs and charges, shall be paid to the person legally entitled to receive the same; or if lie cannot be found, or n'fuses to receive tlie same, sliall Ik! deposited in the treasury of tlie riiiteil States to lie there held for liis use until be makes application therefo- to tlie Secretary of the Treasiny, who iijKjn such ;i|i|ilicnt ion and satisfactory proofs in support thereof, sliall by warrant on the treasury cause the same to be paid to the applicant. Sec. 3I!t(i. W'lK-n goods, cliattels or effects sullieient to satisfy the tax im poRcd upon any person are not found by th<' eolleetor or deputy collector, he is authorized to collect the same by seizure and sale of real estate. Sec. 3107. The ollicer making the seizure mentioiK'd in the preceding section shall give notice to the jierson whose <'state it is projiosi'tl to sell by giving him in hand, or leaving at his last or usual pliici- of abode, if lie has any such within the collection district where such estate is situated, a notice in writin;j, statinir what particular estate is to bo sold, describinir th«' same with reason able certaintv, and the time when and y)lace whore such ofliccr proyiosos to sell th«> Bnme; which time h!>.i1I u"I !"• less tli.ni Iweiity unr more than forty recovered by any suit, unless it ifl proved that the snid list, statement or return was not false nor fraudn lent and did not contain any understatement or undervaluation. Sit. .322(5. No suit shall be maintained in any conrt for the recovery of any internal tax ailegeii to have been erroneously or ilh-gally assessed or collected, or of any penalty claimed to have been collected without nulliority, or of any sum alleged {a tiavc Ix'cn excessive, or in .any manner wrongfully collected, until apfieal shall have bf-en dnly mad*- to the Commissidner of Intern.il Rev enue according to IIk- [irovi^ions nf law in that r^'gnnl. and tin- rcgulatiims of tlio Secretary of tin- '["rc'iuiirv estnblislicd in |imsii:iTicr fliorcnf. and a decision of the ConimisHioner has been h.id tlK-rein; provided that if said decision in Appendixes. 29 delayed more than six months from the date of said appeal, tlun llie said suit may be brought without first having a decision of tlie Commissioner at any time within the period limited in the next section. Sec. 3227. No suit or proceedings for the recovery of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without authority, or of any sum alleged to hav<- U'cn excessive or in any manner wrongfully collected, shall be maintained iii any court unless the same is brought within two years next after the causo if action accrued; Provided tliat actions for euch claims which accrued prim to June six, eighteen hundred and seventy two may be brought within the year from said date, and that where any such claim was pending before the com missioner, as provided in the preceding section, an action thereon nuiy be brought within one year after such decision and not after. But no right of action which was already barred by any statute on the said date shall be revived by this section. Sec. 3228. All claims for the refunding of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without authority, or of any sum alleged to have been excessive, or in any manner wrongfully collected, must be presented to the Commissioner of Internal Revenue within two years next after the cause of action accrued; provided that claims which accrue prior to June six, eighteen hundred and seventy two, may be presented to the Commissioner at any time within one year from said date. But nothing in this section shall be con- fttrued to revive any right of action which was already barred by any statute on that date. Sec. 3229. The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or crim- inal case arising under the Internal Revenue laws instead of commencing suit thereon; and with the advice and consent of the said Secretary and the recom mendation of the attorney-general, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the Commissioner, the opinion of the Solicitor of Internal Revenue or of the officer acting as such with bis reasons therefor, with a statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed and the amount actually paid in accordance with the terms of the compromise. 296 .b'EDKRAl. COKPOKATION TaX LaW. APPENDIX RR. THE TUCKER ACT. (ACT OF MARCH 3RD, 1887 U. S. COMP. STAT. 1901, PAGES 752-758). An Act to Provide for the Bringing of Suits against the Government of the United States. Be it enacted, etc., that the court of claims shall have jurisdiction to hear and determine the following matters: First. All claims founded upon the Constitution of the United States or any law of Congress, except for pensions, or upon any regulation of an Executive Department, or ujx)n any contract, express or implied, with the Government of the United States, or for damages liquidated or unliquidated, in cases not sounding in tort, in respect of which claims the party would be entitled to redress against the United States either in a court of law, equity or admiralty if the United States were suable; Provided, however, that nothing in this section shall be construed as giving to either of the courts herein mentioned jurisdiction to hear and determine claims growing out of the late civil war. commonly known as " war claims," or to hear and determine other claims which have heretofore 1)€en rejected or reported on adversely by any Court. Department or Commission authorized to hear and determine the same. Second. All set ofTs, counterclaims, claims for damages, whether liquidated or unliquidated, or other damages whatsoever on the part of the Government of the I'niled States against any claimant against the Government in a stato court, provided that no suit against the Government of tlie United States shall be allowed under this act unless the same shall have been brought within six years after the right accrued for which the claim is made; Provided further, that no suit against the Government of the United States, brought by any ofTicor of the United States to recover fees for services alleged to have been performed for the United States shall be allowed under this act, unless an account for said fees shall have been rendered and finally acted upon accord iii<» to the provisions of the act of July .31, 1804 (chapter 174, 28 Stat, at Uarge. p. 102), and unless the projjcr county oiTicer fails to finally act thereon within six months after the account is received in said office. See. 2. That the District Court of the United States shall have concurrent jnriHe the duty of the District Attorney upon whom service of petition is made as afore- said, to appear and defend the interests of the government in the suit. nn j);t\Tnf'iit of the jiidgtiicnt or decree. Sec. II. That the attorney general shall report to Congress at the Wginning of each session of Congress the suits under this act in whieli a final judgment nr decree has been rendered, (he ilat<' of cacli and a slatenictit <>f (lie costs taxed in each case. Sec. 12. That when any claim or matter may be pending in any of the executive departments which involves controversies, questions of fact, or loss, the head of such department, willi the consent of the claimant, may transmit the same with the vouchers. pap4'rs. j)roofs and documents pertaining thereto Appendixes. 299 to said court of claims, and the same shall be there proceeded in under such rules as the court may adopt. W hen the facts and conclusions of law shall liave been found the court shall report its findings to the department by which it was transmitted. Sec. 13. That in every case which shall come to the court of claims or is now pending therein, under the provisions of an act entitled "An Act to afToid assistance and relief to Congress and the executive departments in tlie in vestigation of claims and judgments against the Government," approved Marcli ;i, 1883, if it shall appear to the satisfaction of the court upon the evidence established that it has jurisdiction to render judgment or decree thereon under existing laws or under the provisions of this act, it shall proceed to do no, giving to either party such further opportunity for liearing as in its judgment justice shall require, and report its proceedings thereunder to either House of Congress or to the department by which the same was referred to said court. Sec. 14. That whenever any bill except for pensions shall be pending in either house of Congress, providing for the payment of a claim against the United States, legal or equitable, or for a grant, gift, bounty, or any present, the House in which such bill is pending may refer the same to the court of claims who shall proceed with the same in accordance with the provisions of an act approved March 3rd, 1883, entitled "An Act to afford assistance and relief to Congress and the executive departments in the investigation of claims and judgments against the Government," and report to said House the facts in the case and the amount where the same can be liquidated, including any facts bearing upon the question whether there has been delay or laches in presenting such claim or applying for such grant, gift or bounty, and any facts bearing upon the question whether the bar of any statute of limitation should be removed, or which shall be claimed to exclude the claimant for not having resorted to any original legal remedy. Sec. 15. If the Government of the United States shall put in issue the right of the plaintiff to recover the court may in its discretion allow costs to the prevailing party from the time of joining such issue. Such costs, however, shall include only what is actually incurred for witnesses, and for summoning the same and fees paid to the clerk of the court. Sec. 16. That all laws and parts of laws not inconsistent with this act are hereby repealed. INDEX INDEX. [References are to pages.] A Account instructions relative to preparation of 22.> Action ag.'vinst officer making levys remedy by 173 Action of debt 162 Action to recover taxes paid under protest 174 Additional information Power of Commissioner of Internal Revenue to require 139 Affirmation returns to be made upon 92 Agricultural association definition of 69 Allowance for deprt>ciation of 126 for net income required by law to be made to reserve funds 127 for sums paid on policies and annuity contracts 127 Appeal to Commissioner of Internal Revenue remedy by 171 Appeals what courts have power to hear 172 Assessment and collection of special excise tax, regulation concerning. 186 [303] o 04 IXDEX. I References are to pages.] Assessment insurance companies deductions permitted in case of 136 Assessment of federal corporation tax legal effect of making under protest 149 notice of 143 powers of commission in making 147 statutory definition of amount of 14S time within which to make 148 when becomes due and payable 149 Assistant treasurer may make returns 137 Association definition of 64 Attachment of real estate 158 Attorney General, opinions by. 240, 243, 245, 247, 249, 255, 257, 262, 265 B Bad debts proper deduction 126 Banks and financial institutions form of returns by 95, 270 returns by 94 Banking institutions deduction of interest by 130 Bill of f(iiiiiil;iint foriri for 280 Bondtil indobtodnoHH deductions for interest paid on 128 Books f'x.'t mi nation of — how secured 141 what witnesHCfl may Iw conipnlli'd to produce 142 Index. 305 [References are to pages.] Building and loan association definition of 72 Business and properties expense of maintenance of 122 expense of operation of 123 Business transacted meaning of 133 C Capital assets income from sale of 113 Capital invested in personal property income from 112 within United States — meaning of 13 J Character of corporation how determined 87 Charitable organizations definition of 73 Charter effect of designation in, of principal place of business 137 Classification of the elements which go to make up the gross income of corporations and companies subject to the tax 108 Collection of tax 153 by action of debt 1 (52 by attachment and sale of real estate 153 by levy upon personal property 15fi enumeration of statutory methods for 155 powers of the secretary of the treasury in 16."] Collector of Internal Revenue powers of, in collection of tax 1 fi5 power to reject incomplete returns 138 returns to he transmittod to 137 Fed. Corp. Tax — 20 306 Index. [References are to pages.] (Commissioner of Internal Revenue how to secure examination of corporation's books by 141 power of in taking testimony 140 power to examine books of corporation 140 power to make, amend, or correct returns 142 power to make assessments 14 < power to require additional information 139 power to require corrected returns • 13!* power to secure attendance of witnesses 141 power to take testimony 1*0 remedy by appeal to 1 • * Companies affected by the tax • 61 joint stock 6" Condition that losses must not have been compensated by insurance or otherwise 1"* Constitutionality of the federal corporation tax 22 Construction of Act ** Corporation character and purpose of — how determined 67 definition of 52 principal place of business of 137 Corrected returns evidence required upon which to base an order for 139 power of commissioner of internal revenue to require 138 Corporation tax. (See Federal Corporation Tax.) Corporation tax law text of 175 County corporations not liable to tax 210 Court procrdiire '' ' remarks tlnroon 171 Index. 307 [tteferences are to pages. J Courts jurisdiction to punish witness for refusing to attend before com- missioner 142 D Debts action of 162 bad 126 Deductions by insurance companies 127 for dividends on shares in a company whose net income ia less than $5,000 132 for expense of maintenance of business and properties 122 for expense of operation of business and properties 123 for indebtedness 127 for interest actually paid on bonded indebtedness 128 for interest actually paid on indebtedness other than bonded. . . . 128 for losses 124 for taxes 131 from gross income by foreign companies 134 for interest 135 in case of banking institutions to the amount of interest actually paid by them within the year on deposits 130 on account of shares in foreign corporations 132 permitted to assessment insurance companies 136 to be made from gross income — statutory li.st of 120 to the amount of dividends received upon stock of all companies subject to the payment of the corporation excise tax 131 what losses are proper subjects of, by foreign corporations 135 Definitions of agricultural organizations 69 of association 54 of building and loan association 72 of charitable organization 73 of corporation 52 of educational corporations 74 of foreign corporations 76 of fraternal beneficial association 71 of horticultural corporations 70 of income 105 308 Index. [References are to pages.] Definition — continued. of joint ^tock companies 52 of labor organizations . 6® of lodge system ' * of necessary expenses 123, 135 of ordinary expenses 123, 135 of organization for profit «» of religious corporations 73 Delinquent corporations, notice to be sent to, regulations concerning. . 219 Depreciation of property meaning of reasonable allowance for 124 Disclosure of returns statutory protection against "* Dissolved corporations when subject to payment of tax 75 Dividend on stock held in other companies income from 1 *" Dividends deductions for 131, 132 what may be deducted by foreign companies from gross income. . 135 Domestic companies manner of ascertaining net income of H' Domiciliary oflice of corporations 1" E Educational corporation definition of Elements claHHifirntion of elementn which pn to mnko up prnss income of corporations and companirs nuhjoct to the paynx-iit of the tax. . 103 Index. 309 [References are to pages.] Enumeration of deductions from gross income by foreign companies 134 of statutory methods for collection of tax 155 Erroneous returns penalties for 1*3 Evidence required upon which to base an order for corrected returns. . 139 Examination of company's books how secured 1*' regulations concerning 217 Excepted classes 68 Excise tax, regulations concerning 196, 202, 203 Expenses meaning of necessary in case of domestic companies 123 meaning of ordinary in case of domestic companies 123 meaning of necessary in case of foreign companies 135 meaning of ordinary in case of foreign companies 135 meaning of those paid out of income 124 of maintenance of business and properties 122 of operation of business and properties 123 F Failure to make return penalty for 1*' False returns 138 penalties for ^^^ Federal corporation tax assessment of l*** constitutionality of "' docs not infringe upon power of states to authorize formation of corporations • does not require officers of corporations to incriminate them- selves "^ 310 Index. [References are to pages.] Federal corporation tax — continued. does not subject corporations to unreasonable search 20 exemptions from the operation of 68 fundamental basis of 104 is an excise tax 2 is not a direct tax upon shares nor income thereof 5 is not a franchise tax 3 is not an income tax 2 is not imposed upon state or municipal bonds 14 is uniform 16, 18 operates upon public service corporations 11 text of 176 Five per cent, penalties regulation conceraing 222, 226 Foreign business income from 117 Foreign eompaniea business of — where carried on 137 manner of ascertaining net income of 118 statutory enumeration of deductions from gross income of 134 statutory method of calculating tax on income thereof 132 what dividends may be deducted from gross income by 135 what interest may lawfull\ be deducted from gross income by. . . . 135 what losses are proper subjects of deduction by 135 what taxes may lawfully be charged against gross income 135 Foreign corporations <|{'finitioii of 76 how shall business transacted by foreign corporations within the United States be distinguished from that transacted in foreign rountries 133 Foreign countries businesH in, distinguished from that transacted within United States 133 Foreign invoHtmonts inromc from 117 Foreign stenmship companies rogiil.if iniT* rf)rn»'rninp 205 Index. 311 I References are to pages.] Form of bill of complaint 280 of protest 152 of return by banks and other financial institutions 270 of return by insurance company 269 of return by manufacturing corporation 273 of return by mercantile corporation 276 of return by miscellaneous corporation 278 of return by transportation corporation 272 Franchise payments proper charges for 124 Fraternal beneficial societies definition of 71 Fraudulent returns 138 penalties for 143 From all sources meaning of 107 Fundamental basis of corporation tax 104 G Gross income deductions to be made from 120, 134 of corporations — regulations concerning 198 statutory enumeration of — deductions by foreign companies from 1 3-* what dividends may be deducted from, by foreign corporations.. 135 what interest may lawfully be deducted from, by foreign com- panies 135 what taxes may properly be charged against, by foreign com- panies 136 H Horticultural corporation definition of 70 312 Index. [References are to pages.] Income definition of 105 expenses paid out of 124 from business — meaning of 109 from capital invested in personal property 112 from dividends on stock held in other companies 115 from foreign business and foreign investments 117 from investments 117 from property constitutionally exempt from taxation 113 from real estat« 112 from sale of capital assets 113 meaning of net 117 Income received by a company in a representative capacity 117 meaning of H' Incomplete returns power of collector of internal revenue to reject 138 Indebtedness bonded 1^^ deduction for 127 other than bonded ^^^ secured by mortgage on real estate purchased by corporation — regulations concerning 204 Injunction remedy by 1 ' " Inspection of returns of corporations rcgvilations concerning 22S Instructions to collector of internal revenue 206, 211, 212, 221,225 Insurance companies allowano*' for sums paid on policies and annuity contracts 127 aBHosnmont ' deductions by ' " ' form of return by ^•'> 2^'^ returns by ^* Index. 313 [References are to pages.] Insurance losses compensated by 125 Interest limitation upon allowance for 128 paid by banking institutions during year on deposits — deduc- . tions for 130 paid on bonded indebtedness 123 what may l)e lawfully deducted from gross income 135 Internal revenue commissioner of 138 Interpretation of Act 43 " phrases 44, 46 Inventories 86 Investment income from 117 J Joint stock companies definition of 62 L Labor organization definition of "® Legal effect of excluding from the operation of the act certain classes of fraternal beneficial organizations and societies 71 Levy upon — personal property ^^" real property 158 Lien to what extent is the tax a 154 814 Index. [References are to pages.] Limitation of time for correction of returns 148 upon allowance for interest 128 Lodge system definition of ''■ actually sustained within the year — meaning of 125 deduction for 124 meaning of 125 not compensated by insurance 125 what are proper subjects for deduction in case of foreign com- panies 135 M Maintenance of business and properties 122 Mandamus remedy by 1*2 Manner of ascertaining net income of domestic companies 117 foreign companies 118 ti J.'.=;vv%-.';:. 138 Regulations of the secretary of the treasury with reference to the col- lection, remission, and refund of the federal corporation tax 169 Regnlations of Treasury Department 184, 186, 196, 198, 199, 202, 203, 204, 205, 206, 211, 212, 213, 217, 219, 220, 221, 222, 223, 224, 226, 226, 227, 228, 231, 239, 240, 243 Religious corporations definition of 73 Remedy by action against officer 173 by appeal to commissioner of internal revenue 171 by injunction 172 ' by mandamus 172 Rentals ' • proper charges for 124 Representative capacity income received by company in 117 Return are they public records 143 by whom made 137 corrected returns 139 false 138 fraudulent 138 incomplete 138 penalty for erron<'OUH, false, or fraudulent 143 penalty for failure to make 137 Power of eommissioner of internal revenue to make, amend, or correct ' 42 power of commissioner of internal revenue to require corrected.. 138 refusal to make 138 ref^ulation rnnc«'rnin{j 190 rejection of incomplete 13S statutory limitation of time for correction of 143 trnnHniisHion «f 137 Index. 319 [BeferenceB are tu pages.] Revenue district 137 Rules for determining whether a foreign corporation is engaged in business in United States 82 Rules of the secretary of the treasury with reference to the collection, remission, and refund of the federal corporation tax 169 Bales of statutory construction 43 S Sale of capital assets income from 113 personal property 156 real estate 1 58 Scope of the Act 51 Secretary of the treasury powers of, in collection of tax 163 rules and regulations of, in connection with collection, remission, and refund of tax 169 Special excise tax regulation concerning 184 State corporations not liable to tax 220 Statutory enumeration of deductions from gross income by foreign com- panies 134 definition of amount of assessment 148 limitation of time for correction of returns 143 list of deductions to be made from gross income 120, 134 method for collection of tax 155 method of calculating tax on income of foreign companies 132 protection against disclosures of contents of returns 146 Statutes relative to collection of internal revenue taxes 283 Stegel V. Thurman, decision in 213 320 Index. [References are to pages.] Stock held in other companies income from, dividends on 115 Subject-matter of the tax 51 Supreme Court of the United States opinions of 239, 240, 24S T Taxes collection of ^^' deductiona for I'l enumeration of statutory methods for collecting 166 foreign '^' is it a lien 15^ meaning of 1"' what may lawfully be charged against gross income by foreign companies ^^^ Tax returns by whom made ®' contents of ^" from banks and financial institutions 9* from insurance companies 93 from manufacturing corporations 9S from mercantile corporations 99 from miscellanooua nirporations 10^ from transportation corporations 96 general provision in relation thereto 84 inventories in connection with 8n verification of "Z where to be made 91 Text of corporation tax enactment l"^'*' '1 line witliin wliich assessment must be made 148 TranBmisHJon of the return 137 Trancportation corporationn rr-fiirriM by '*" form of return by 0*^- 272 Index. 321 I References are to pages. J Treasurer to make return 137 Treasury department regulations 174, 186, 196, 198, 199, 202, 203, 204, 205, 206, 211, 212, 213, 214, 219, 220, 221, 222, 223, 224, 225, 226, 227, 228, :231, 239, 240.243 Tucker Act text of 296 U Unearned premiums 120 United States business of foreign companies transacted within 133 moaning of business transacted within 13-'5 meaning of capital invested within 134 I United States Revised Statutes relative to collection of internal rev- enue 283 United States Supreme Court opinions of 239, 240, 243 V Verification of return 92 W Witnesses how compelled to testify and produce books 142 what courts have jurisdiction to punish 142 Fed. Corp. Tax — 21 UC SOUTHERN REGIONAL LIBRARY FACILITY iiiiniiiiiiiiinwniiiiiliiir AA 000 729 627 :il .1 liliiiitii ti Hlliffl! ^! it liii!!: i- iililtliiiiii iiii : j|!:!iii):!i.';!i iliii!!i!l!i!i; iiil